PTCQB104N23FMNK2RZ28-2022-12-31-T01

Santander UK at a glance

Our business model is focused on building customer loyalty

Our Purpose is to help people and businesses prosper

We help our customers at moments that matter most

We champion British businesses and help them to grow sustainably

Our customer focus helps us to develop more loyal and lasting relationships

Our competitive advantages:

–Leading scale challenger bank

–Strong balance sheet

–International expertise for UK companies

We provide high quality, seamless service across our branch, digital and telephony channels


14 million	c19,000	449
active UK customers	Full time equivalent employees	Branches

£187.1bn	5th
prime retail mortgages	Largest commercial lender(1)

We live our values of Simple, Personal and Fair through great behaviours and our people leaders

A significant part of the Santander UK Group Holdings plc group

The Company and its subsidiaries represent almost all the business and operations of its immediate parent Santander UK Group Holdings plc, comprising

approximately 99% of its immediate parent group's consolidated profit from continuing operations before tax for the year ended 31 December 2022 and

approximately 98% of its consolidated net assets at 31 December 2022. More information on the Santander UK Group Holdings plc group, including the role of the

Company as a ring-fenced bank, can be found in the Santander UK Group Holdings plc 2022 Annual Report, which does not form part of this report.

(1) Santander UK industry analysis of latest available bank and building society reports as at January 2022. Commercial lender: UK commercial lending stock, Corporate and/or Commercial Banking divisions (excludes

investment banking).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 2

Market overview

Five major forces continue to shape the UK banking market

Increased market disruption and strong competition

What we have seen

The market in which we operate is highly competitive. We expect such competition to intensify in response to increasing entry of FinTech and BigTech firms in the

banking sector as well as the growth of digital currencies and cryptocurrencies. Traditional UK banks have largely refocused on core business areas and improving

their digital offerings.

Our response and looking ahead

We remain cognisant of the evolving competitive environment and continue to develop offerings to rival competitors and seek partnerships to develop new

propositions. Banco Santander's PagoNxt offering incorporates simple and accessible digital payment solutions. This is a key area for growth alongside OpenBank,

their 100% digital bank. We expect these to be rolled out across Europe in the future. Neo-banks continue to gain market share, competing with traditional UK

banks. Nevertheless, financial sustainability remains unproven for most. Those that have started to highlight emerging signs of profitability have tended to mirror

more traditional banking models. Nevertheless, digital-only providers continue to disaggregate the traditional vertically integrated banking business model by

targeting the most profitable elements with innovative new propositions and attracting significant valuations (for example buy-now-pay-later). Large

international peers have also entered the UK market through new digital-only brands with limited product offerings; however may provide a competitive offering

over the longer term.

Climate change

What we have seen

Climate change is one of the biggest challenges facing society and our industry has a critical role to help tackle this. Clear disclosure is essential to help markets

and other stakeholders assess our climate performance.

Our response and looking ahead

Climate change is one of three pillars of our Sustainability and Responsible Banking Strategy; with the goal of supporting the transition to a low carbon economy as

both a lender and an employer. We are working to meet the expectations set by the Bank of England, PRA and FCA. We are implementing the recommendations of

the Task Force on Climate-related Financial Disclosures (TCFD), and taking action to meet the expectations set by the PRA, BoE and FCA. This requires wide-ranging

collaboration both within the bank and externally to develop the tools and methodologies needed. As such, we have adopted a unified approach across the

Santander UK Group Holdings plc group and therefore present TCFD disclosures on that basis in the Santander UK Group Holdings plc group Annual Report.

Changing customer behaviour and distribution

What we have seen

Customer interactions continued to shift to digital and remote services. Our enhanced digital capability attracted a further 370,000 digital customers in 2022, with

92% of current account and 99% of credit card openings made through digital channels.In mortgages, intermediary share of distribution continues to increase,

whilst other products are now distributed largely through digital channels. 76% of our refinanced mortgages were retained online in 2022.

Our response and looking ahead

We invest in ensuring access to financial services for our customers, including those less confident in using technology for managing their finances.While customer

footfall has fallen in recent years, we continue to appreciate the value of the human touch delivered through our branch network. We are mindful of the needs of

our most vulnerable customers, responding with 'access to cash' solutions and providing mechanisms for help from a trusted third party. We continue to develop

offerings to deliver growth through customer loyalty and customer experience. We are committed to creating products and services catered to our customers

needs. In October 2022 we launched my Home Manager, designed to assist mortgage customers aspects of managing their home.

Demanding regulatory agenda

What we have seen

n 2022 the regulatory policy and change agenda remained intense. The UK Government announced the outcome of the Future Regulatory Framework review and

has introduced legislation to Parliament to implement this, combined with a number of regulatory consultations aligned with the proposals.

Our response and looking ahead

This year we implemented the PRA’s operational resilience and outsourcing expectations, and this remains a key focus area for the bank moving forward, up to the

2025 deadline. The PRA has also published its consultation on the implementation of Basel 3.1 which will impact capital requirements.The FCA announced the

introduction of the Consumer Duty with tight implementation timelines, requiring significant focus across business units to ensure that we are compliant with the

Duty, which has a first implementation date of 31 July 2023. We continue to engage with regulators on other key issues, such as APP fraud and the challenges

around the rising cost of living and impact of interest rates rises. We await the Government’s forthcoming consultation on ring fencing. We anticipate further

intensive regulatory activity in 2023 and will continue to work with industry, trade bodies, regulators, and Government to support the appropriate regulation of the

UK’s financial services industry.

Uncertain economic environment

What we have seen

In 2022, inflationary conditions moved from a perceived transitory condition to a likely more longer-term and persistent high inflation environment, following the

conflict in Ukraine. This has caused further increases in the cost of living for our retail customers, particularly those on lower incomes. Market expectations for

Bank Rate also changed significantly with the Monetary Policy Committee (MPC) raising the rate from 10bps at the end of 2021 to 350bps by the end of 2022. The

volatility in Q3 2022 caused mortgage rates to rise sharply.

Our response and looking ahead

Our business is correlated to the performance of the economy. Our purpose is to help people and businesses prosper, so we are committed to support our

customers with the rising cost of living.Our focus has been to provide targeted and practical support, including advice on household budgeting and a toolkit for

SMEs to help them through the ongoing inflationary pressures. The outlook remains uncertain as inflation has eroded real disposable income with the prospects of

a recession ahead. We expect Bank Rate to continue to rise, peaking in H1 2023. Higher base rates are likely to dampen demand for housing, causing a fall in house

prices back to 2021 levels. We reached out to over 2 million customers most likely to be impacted by the cost of living crisis and remain committed to helping our

customers at moments that matter most.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 3

Our business model

Our purpose is to help people and businesses prosper

Our resources

People - Bringing the skills, expertise and drive to deliver enhanced customer loyalty and experience

Infrastructure - Branch and online presence, operating centres and innovative technology

Banco Santander family - Technology, shared management experience and brand benefits as part of well-diversified global bank

Financial - Strong capital, liquidity and a prudent approach to risk

Our competitive advantage

Leading scale challenger bank in the UK - Scale in our core banking businesses combined with an innovative mindset

Strong balance sheet - Focused on prime secured lending consistent strength under stress

International expertise for UK companies - 20 trade corridors to help UK companies expand into overseas markets

What we do

We provide financial products and services - Mortgages, consumer finance, unsecured loans, credit cards, banking and savings accounts, investment and

insurance products for individuals and services for companies

How we do it

– Build strong customer relationships

– Offer a differentiated proposition

– Take a prudent approach to risk

– Do things The Santander Way

Our culture is built on doing things The Santander Way

Simple - Our products are easy to understand and we offer a service which is convenient, no matter when or how our customers want to engage with us.

Personal - We treat our customers as valued individuals, with a professional service they can trust. We support our colleagues to achieve their ambitions.

Fair - We are open, honest and treat others as we would like to be treated. We earn our investors a sustainable return and do our part to support our communities.

Our purpose is to help people and businesses prosper

Our strategic priorities

Our strategic priorities focus on customer loyalty and experience, simplification, improved efficiency and sustainable growth, while aiming to be the best bank for

all our stakeholders.

Our strategic priorities

Customers - Deliver growth through customer loyalty and outstanding customer experience

Shareholders - Simplify and digitise the business for improved efficiency and returns

People - Engage, motivate and develop a talented and diverse team

Communities - Be a responsible and sustainable business

Our performance and key performance indicators

The directors of the Company’s immediate parent, Santander UK Group Holdings plc, manage the operations of the Santander UK Group Holdings plc group (which

includes the Santander UK group) on a business division basis. Key performance indicators are not set, monitored or managed at the Santander UK group level. As a

result, the Company’s Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the

development, performance or position of the Company.

The development, performance and position of the business of the Santander UK group is set out in the Financial review.

The key performance indicators of the Santander UK Group Holdings plc group can be found in its 2022 Annual Report, which does not form part of this report.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 4

Risk management overview

Top risks

Highlighted below are our Top risks in 2022 and associated management actions. Many of these risks are likely to remain in focus in 2023.

Inflationary & supply chain pressures - New

We introduced this as a Top risk following the onset of the conflict in Ukraine, which exacerbated already elevated inflation levels. This covers potential impacts on

our customers from cost of living increases and rising interest rates; on our corporate customers from business cost increases and supply chain pressures. It also

covers remaining Covid-19 and Brexit related risk issues, post pandemic and formal exit from the EU, which are now no longer separate Top risks. We have taken

actions to adjust affordability criteria in our retail lending decisions, increase customer support capacity, and ensure close and continuous monitoring of our credit

portfolios for any indications of stress in our customer base.

Climate change

We continue to enhance our data strategy and reporting reflecting the strategic importance of climate change risk. We continue to progress our climate change

implementation plan, including integrating associated risks into our Risk Framework, formulating a risk appetite, and progressing associated initiatives.

Financial Crime

In December 2022, we accepted an FCA penalty of £108m relating to historical AML control shortcomings as described under Conduct & Regulatory below.

Developments related to the implementation of Russian sanctions have added further complexity to mitigating compliance risks and maintaining operational

resilience in our Financial Crime Centre of Excellence. We continue to enhance our financial crime risk management capabilities, through implementation of our

Financial Crime Transformation and Remediation programme, enhancing controls, and providing additional analytics capacity and subject matter expertise.

Fraud - New

We recognised this as a Top risk, reflecting significant industry wide increases in Fraud levels and losses, which are impacting our customers. Fraud losses now

consistently form a significant proportion of our operational losses. We have designed new fraud prevention tools to complement our existing prevention and

detection systems and controls. We continue to deploy dynamic 'scam warning' in our online banking payment process, to enhance fraud prevention controls for

high-risk digital payments.

The importance of IT risk management and control continued to be re-iterated by some outages to customer services during the year, although there has been a

continued trend downwards in such incidents from H2 2021. To address these issues, we have finalised a multi-year IT Transformation plan, with Board approval,

with the aim of securing risk reduction benefits which will accrue during the plan period. We consider that our IT associated risks are decreasing as a result of the

ongoing implementation of our transformation plan.

Cyber risk management

In 2022, we experienced no notable data or cyber security incidents, although we responded to a number of third-party incidents, mainly ransomware attacks.

Externally, the cyber risk landscape stabilised, however the threat remains at unprecedented levels due to the ongoing conflict in Ukraine. We continue to review

and enhance our controls based on the latest intelligence, and invest in the right skills and resources. We also actively work with our peers in the Cyber Defence

Alliance to share threat intelligence expertise, and experiences, to help identify common cyber-attack features and effective mitigation strategies.

People

In 2022, we continued to focus our overall wellbeing and inclusion strategy on supporting colleagues through transformation and change. In line with our peers,

we are experiencing a competitive recruitment market and responding with enabler plans to reduce time-to-hire and open vacancies, as well as maintaining

capacity and capability to deliver our business plans. Cost of living is also a key focus area where we have intervened with pay rises to support our colleagues

across the business. We have managed a gradual return of colleagues to office environments, along with hybrid working as well as the people risks associated

with a phased relocation of our Head Office to Unity Place in Milton Keynes.

Conduct & Regulatory

We continue to face a challenging regulatory agenda with significant ongoing FCA and PRA interaction on a range of industry issues, as well as the ECB and

Payments Services regulators. These issues include the FCA's Consumer Duty, which requires considerable management and focus of resources. Final rules were

published in July 2022, with the first implementation date set at 31 July 2023 and the final date of July 2024. In December 2022 the FCA announced that

Santander UK accepted a penalty of £108m for historical AML control shortcomings between December 2012 and October 2017.

Managing Complex Change

We have a challenging change agenda including continued aspirations for transformation and growth. We have well-established change control processes, as well

as a strong oversight framework and related risk-based prioritisation. This enables us to address operational and capacity challenges and facilitate timely delivery.

In 2022, change included a reduction of our property footprint, and a specific focus on migration to cloud, further digitalisation, and management of obsolescence.

Ensuring change does not result in adverse impacts on our risk profile underpins our strategic decisions and is robustly managed.

Data management

Data management, including data privacy, is a Top risk reflecting its role in supporting our business plans and strategy, as well as the rising cyber threat landscape

and the importance of controls over personal data. In 2022, we continued to monitor data management risk through the enhanced governance structures and

processes put in place by our Chief Data Officer. We are implementing a central data programme, with clear deliverables that will improve our data management

capabilities in line with our approved data strategy.

Third Party Risk Management (TPRM)

We are progressing with a programme of work to enhance controls and governance arrangements. During 2022, we continued to evolve our processes, including

implementation of a new TPRM process and amending contracts with suppliers. Our Procurement transformation also continues to operationalise our updated

TPRM policies and processes.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 5

Ring-Fencing

We have retained Ring-fencing as a Top risk to maintain our focus on ongoing governance and compliance, as we continue to assess and refine the quality and

maturity of controls. Further review may be needed, depending on the outcomes of HM Treasury's proposed consultations on the ring-fencing regime, due to take

place in 2023.

Building and maintaining capital strength and Pension risk

We saw sustained resilience and improvement in our Regulatory capital and Pension fund metrics throughout 2022 with detailed analysis set out in the Risk

review. Pension risk has now been removed as a Top risk as a result of those improvements in metrics and actions taken to reduce residual risk and enhance

resiliency, given increased market volatility in 2022.

Emerging risks

Highlighted below are our emerging risks in 2022 and our associated management actions. All of these risks will likely be in focus in 2023, given that they continue

to evolve and intersect with our Top risks.

Uncertain macroeconomic and geopolitical environment

In the past few years, a number of broader, more complex and uncertain risks have evolved which may present future headwinds. These include geopolitical

tensions between regions across the world, in particular the current conflict in the Ukraine. This has impacted global energy prices and supply chains which added

to inflationary pressures, as well as stretching household finances. These risks accelerate trends towards deglobalisation, and a reduction of variety of goods and

services, causing prices to increase over the medium to long-term.

These factors are also playing into increased localised political risk across the globe, including in the UK with a second new Prime Minister in 2022. In February

2023, the First Minister of Scotland resigned, with future implications for the Union with the UK remaining uncertain. We are closely following these political

developments and the potential for any material impacts which we may need to reflect in our business plans.

Rapid technological change and customer behaviour

Our multi-year transformation programme with a focus on investment in digitalisation and automation, is aimed at designing compelling propositions for targeted

customer segments, reshaping customer interactions and simplifying and digitising the business at scale for improved efficiency and returns.

Our overall approach reflects the continued acceleration of strong trends towards customer digital adoption via mobile and online banking, whilst also ensuring

that we remain competitive in a market which is experiencing an increase in digital-led market entrants. We are cognisant of cyber, cloud technology and

operational resilience issues which we take into account in our development strategy.

Intense market competition

Enhancing our digital proposition remains key in supporting our customers' needs, retaining and growing our customer loyalty base, and addressing the

commercial challenges of a highly competitive mortgage market, where surplus deposits in ring-fenced banks remain a key driver of market pricing. As well as the

elevated competition between incumbent banks, new entrants backed by other large multi-national banks are also launching in the UK offering competitive

incentives to compete in the growing digital market, as well as savings, lending and investment markets.

Demanding regulatory agenda

We remain vigilant in taking a customer-focused approach in developing strategy, products, services and policies that support fair customer outcomes and market

integrity. Like all UK banks, we will continue to face a demanding and complex regulatory agenda in 2023 and beyond focused on consumer outcomes, customer

vulnerability, competition, climate change and Consumer Duty.

The PRA's operational resilience and outsourcing expectations remains a key focus for the bank moving forward, as well as implementation of Basel 3.1 which will

impact capital requirements. We also continue with regulatory engagement on other key issues such as APP fraud and the impacts of the rising cost of living and

interest rate rises.

Looking ahead we await the government's forthcoming consultation on ring-fencing, as well as working with industry, trade bodies, regulators and the

government to support the appropriate regulation of UK financial services.

Extended Government involvement in banking & markets

Following Government policy interventions during the Covid-19 pandemic, including UK Government guaranteed loans and dividend restrictions, there are some

indications that this trend will continue moving forwards. The increase in environmental, social and governance factors is likely to direct banks’ lending decisions

further, with the risks of higher capital requirements as an incentive to channel lending to certain sectors, and potentially restrict or avoid others. Banks may also

be called upon to contribute more to the exchequer, due to stretched public finances, via increased taxation rates, or windfall taxes, as evidenced by recent actions

in Spain. Product pricing and actions will also remain under intense scrutiny by regulators and the Government, during the current period of higher inflation and

mortgage rates. These issues have the potential to significantly impact our business plans, costs and revenues.

Central Bank Digital Currencies & Crypto assets

Depending upon how these are implemented, there is a risk of a significant transfer of commercial bank deposits into these Central Bank Digital Currencies over

time, increasing wholesale funding requirements and costs, and reducing the 'stickiness' of deposits in a stress. There are also broader potential impacts on

regulatory frameworks, and monetary and fiscal policy. We continue to monitor these developments as they evolve. We are also addressing the risk of crypto asset

exposure through our client onboarding policies and procedures, which are part of our Financial Crime framework.

Disruption of UK macroeconomic factors

In the last quarter of 2022 and early 2023, UK house price growth slowed, following shocks to the macroeconomic environment arising from the conflict in

Ukraine, which exacerbated inflationary pressures, and triggered significant rises in the cost of living and interest rates globally. After a steady increase of financial

pressures on customers, the financial markets and economic environment saw substantial dislocation in H2 2022, which fundamentally changed macro-economic

expectations for 2023 and beyond. We have been actively monitoring customer behaviour and to date our customers are showing resilience in adapting to the

changing environment.

In 2022, we significantly developed our regulatory models, focusing on capital adequacy, to comply with new regulatory technical standards for banks. We expect

this trend to continue over the next two years in line with supervisory expectations.

We recognise that Model risks have increased in the current environment of both higher inflation and interest rates, which is inconsistent with the period upon

which the models were developed. We have fed back our response to the PRA on how we meet policy and procedure requirements under the Model Risk

consultation paper (CP6/22), including the independent review of judgemental adjustments.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 6

There are also significant macroeconomic risks attached to the transition process of decarbonising industrial sectors, although we have very limited direct exposure

to those in our Corporate and Commercial Banking clients' businesses. There are also costs and risks associated with reducing UK housing emissions and 'greening'

commercial property which could impact our retail customers and corporate clients.

Eurozone/Sovereign Bank Contagion

We previously considered this risk as part of the uncertain macroeconomic and geopolitical environment, but have now identified it separately, given

developments in 2022. Energy and commodity price shocks have increased risks to post-pandemic growth and financial conditions in the Euro area and globally.

Euro area sovereigns, corporates and households face higher interest rates and cost pressures that could test debt sustainability for more highly indebted entities.

The most relevant risks for Santander UK could be reflected in wider credit spreads which could increase wholesale funding costs. Credible funding plans and

liability strategies to support our aspired business growth will be key, which are the subject of regular review, challenge and discussion at our ALCO.

Financial overview

Development and performance of our business in 2022

Information on the development and performance of our business in the year is set out in the ‘Income statement review’ section of the Financial review.

Our position at 31 December 2022

Information on our position at the end of the year is set out in the ‘Balance sheet review’ section of the Financial review.

Sustainability review

We recognise that financial institutions have an important role to play in addressing sector-specific challenges such as financial inclusion and financial crime, as

well as broader systemic issues such as climate change.

We strive to create value for all our stakeholders, by delivering on our commitment to be a more responsible bank. This section is designed to be read together

with our Environmental, Social and Governance (ESG) Supplement.

Customers

Cost of living

2022 saw a sharp increase in the cost of living. We recognise that our customers may be feeling financial pressure brought on by these rising costs and higher

mortgage interest rates.

In response, we updated the financial support pages on our website to offer financial health checks, budget planning tools and tips on cutting spending and

navigating rising energy costs. We also communicated with more than two million customers most likely to be impacted to highlight the support available. Where

appropriate, we give links to PayPlan, a free and independent debt advice provider.

Financial inclusion

Financial inclusion is an important issue; starkly illustrated by the 1.5 million people in the UK without a bank account and 13.1 million people with low financial

capability. Our Financial Inclusion strategy is designed to help people improve their financial skills, gain access to financial services and develop financial resilience.

The strategy has three pillars: financial education and knowledge; an inclusive portfolio of products; and, services and customer care.

Meeting our customers' changing needs

Responding to trends in customer behaviour, we changed our branch opening hours in 2022 and increased telephone support available.

Ongoing non-financial support for SMEs

Santander Breakthrough continues to develop new tools, resources and programmes to help small and medium-sized enterprises (SMEs) with non-financial

support that meets their needs when they need it most. The economic environment was challenging for SMEs and throughout 2022 we increased on-demand

resources and skills development programmes available via santanderbreakthrough.co.uk. We ensure there is a balance of information for every business,

whether they are looking to expand domestically or internationally, develop new ways of working or manage the rising costs of doing business.

Shareholders

Part of a global bank

We are a subsidiary of Banco Santander SA and our ordinary shares are all held by Banco Santander group companies and are not listed. Santander UK plc's

preference shares are listed on the London Stock Exchange and we also have other equity instruments in the form of AT1 securities.

Consistent shareholder returns

Our operations are consistently profitable and we have paid a dividend every year since 2008. Dividends are paid in line with our dividend policy following review

and approval by the Board. This ensures that our capital strength and resilience is maintained.

Investor engagement

Our Investor Relations team actively engages with institutional investors globally, working alongside our funding and capital teams for new issuances and building

and maintaining relationships with fixed income investors and analysts.

We engaged with investors through in-person and virtual meetings, roadshows conferences, events and via regulatory announcements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 7

People

Culture

We are part of a global company, united by a common culture, The Santander Way. This encompasses our purpose to help people and businesses prosper, our aim,

to be the best open financial services platform, acting responsibly and earning the trust of our people, customers, shareholders and communities, our Simple,

Personal and Fair values, our risk culture, which stresses that risk management is everyone’s job, and our behaviours.

Inclusion and belonging

We aim to be a place where all of our people feel they belong and are supported to succeed. We’re committed to being a truly inclusive organisation, one that

reflects the customers and communities we serve. This commitment is backed up by our Everyday Inclusion strategy which prioritises the themes of

intersectionality, respect, balanced representation, leadership, advocacy, allyship, transparency and accountability.

Wellbeing

Wellbeing is essential to helping our employees thrive. Our comprehensive approach involves supporting mental, physical, social and financial wellbeing. Our

internal Wellbeing Hub provides information on wellbeing topics and brings together all the support options we offer. The Hub has been accessed 160,000 times

in two years.

Fair pay and transparency

In 2022, we took action to relieve cost of living pressures on our people. This included an exceptional salary increase of 4% for 60% of our workforce. This covered

11,000 colleagues in lower pay bands and was in addition to our usual annual pay review. This was part of the annual review of our reward framework, which

checks that all salary reviews and changes to reward policies do not have an adverse impact on particular employee groups.

We are transparent about pay and benefits and are proud to have been an accredited Real Living Wage employer since 2015. All salary ranges and pay progression

arrangements are visible to all colleagues. We voluntarily publish our Ethnicity Pay Gap within our annual Everyday Inclusion and Pay Gap Report. We also

voluntarily disclose our CEO pay ratio in the Remuneration Implementation Report within this Annual Report.

Communities

Financial education

Financial education is one of the pillars of our Financial Inclusion strategy. We believe it is crucial to provide a solid financial education to all children and young

people, ultimately ensuring financial education for all. This is why we have a goal to become a leader in financial education by 2025. More information on our

approach to financial inclusion is provided in the better communities section of our ESG Supplement.

The importance of financial education in the UK has been highlighted by the 2021 Strategy for Financial Wellbeing developed by the Money and Pensions Service,

an arms-length Government body. The strategy’s goal is to ensure an additional 2 million children and young people get a meaningful financial education by 2030,

growing from 4.8 million to 6.8 million.

We have worked with experts who told us the best way to deliver financial education is to teach financial concepts to people when they are young. This helps them

to make better decisions about their money and protect their finances later in life. As a result, we support financial education being compulsory in UK primary

schools and for resources to be easily accessible for all teachers, parents and students across the UK. In 2022, we provided financial education to 1,292,724 young

people.

Santander Foundation

In 2022 the Santander Foundation awarded £1.85m to 13 charities as part of its Financial and Digital Empowerment Fund. These new partners will receive grants

ranging from £125,000 to £150,000 over the next three years to deliver services that will empower people with skills, support and confidence needed to improve

digital and financial capabilities.

Santander Universities

In 2022 we launched a new scholarship, skills and entrepreneurship programme designed to fuel the success of new generations of university students from

underrepresented groups. Through the programme we aim to remove barriers to entry into higher education for these groups, level the currently uneven playing

field and build essential skills for the future to ensure employment outcomes match peers from outside these groups. To achieve these aims, we will continue

working with our established university partners to increase opportunities for underrepresented students, whether through our scholarships, living wage

internships that help students focus on their future, or specialist entrepreneur centres to help turn students’ passion projects into businesses. In 2022 we provided

more than 8,000 scholarships and awards. At the heart of the initiative is a £1m scholarship scheme that will help 100 students from under-represented groups

with annual grants of £10,000 over three years at our 75 university partners.

Macmillan Cancer Support 2022-2024

There are currently three million people living with cancer in the UK and one in two of us will receive a cancer diagnosis in our lifetimes. In June 2022, we launched

a new strategic charitable partnership with Macmillan Cancer Support. The partnership aims to improve financial inclusion and support to help people to cope with

financial challenges they face after receiving a cancer diagnosis. Since the launch, we have been working with Macmillan to review our processes, services and

customer feedback to identify areas for improvement. We are developing a referral programme to connect our customers with Macmillan’s support services. In

addition to these strategic workstreams, we have raised over £455,000 including matched donations from the Santander Foundation.

Ukraine support

Since the conflict in Ukraine in February 2022, we have been working to support the humanitarian relief effort. Santander UK (including customers, colleagues and

the Santander UK Foundation) supported a Banco Santander initiative to aid Ukraine with Santander UK contributing over £455,000 to the Red Cross and UNHCR. In

addition, our colleagues can still benefit from 70 hours of matched volunteering time, which was originally doubled from 35 hours during Covid-19, but has been

kept open due to the new crisis.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 8

Climate and Ethics

Responsible lending

As part of the Banco Santander group, we comply with the Equator Principles to factor social, ethical, and environmental impacts into our risk analysis and decision

making for qualifying financial transactions.

Our Reputational Risk policy and Environmental, Social and Climate Change (ESCC) policy covers oil and gas, power generation and transmission, mining and

metals, and soft commodities. It also covers projects or activities within certain sectors located in areas classified as Ramsar Sites, World Heritage Sites or Category

I, II, III or IV sites defined by the International Union for Conservation of Nature.

Our ESCC policy also prohibits project-related financing for new coal-fired power plant (CFPP) worldwide and we will only work with new clients with CFPPs to

provide specific financing for renewable energy projects. In these exceptions, we expect the client to have a credible plan with verifiable targets that show the

client will reduce its revenues from coal-powered generation to 10% or below by 2030. Currently, we have no exposure to CFPPs.

At 31 December 2022, Santander UK's exposure to fossil fuel sectors was only 0.4% of our total non-financial corporate lending. In line with Banco Santander's

2050 net zero commitment, by 2030 we will eliminate all exposure to thermal coal mining and not provide financial services to power generation clients with

more than 10% of revenue from thermal coal. For more on Banco Santander's commitment and approach to carbon-intensive sectors, please see Banco

Santander's Climate Finance Report 2021-2022.

We review all relationships and transactions with identified ESCC or reputational risks, including human rights, to ensure they are within our risk appetite. Key

decisions can be escalated to the Reputational Risk Forum and, if needed, the Board.

Green finance

Banco Santander's Sustainable Finance Classification System (SFCS) defines what investments can be considered green or social financing. We have applied the

SFCS to our lending and identified the following as green financing: renewable energy and other green energy financing; mortgages on properties with A- or B-

rated energy performance certificates (EPC); and, financing for electric vehicles, hybrid and PHEV with emissions below 50g CO2/km.

The SFCS uses harmonised definitions that provide consistency in tracking, reporting and managing sustainable finance across Banco Santander group. For more

on our green finance ambition and performance, see TCFD in the Sustainability and Responsible Banking section in the Santander UK Group Holdings plc Annual

Report.

Economic crime

Our Anti-Financial Crime strategy seeks to deter, detect and disrupt financial crime. All colleagues receive mandatory economic crime training that highlights

issues and risks across all types of financial crime. We continue to enhance our award-winning Anti-Financial Crime Academy (AFCA) to deliver targeted, role-

specific training. This includes specialist Academies for operational capabilities and business lines performing key anti-financial crime controls, as well as formal

training and competence measurement to ensure employees show the required anti-financial crime skills. We have completed our annual Learning Needs Analysis

which provides a key input for determining our 2023 anti-financial crime training plan and strategy. By the end of 2022, 60,474

AFCA modules covering all AFC disciplines have been completed by 16,078 individuals across Santander UK.

To enhance recognition for those taking AFCA training, we are working with a leading industry body, the International Compliance Association (ICA), to obtain

accreditation for AFCA curriculum modules. This will provide an AFCA-ICA certification to employees passing AFCA modules.

We maintain strong processes for anti-bribery and corruption and facilitation of tax evasion, in particular risk management measures for relationships with third

parties. In 2022, we reaffirmed our senior executive commitment against facilitation of tax evasion by issuing our pledge to all colleagues. We continue to work

with external partners to understand and develop best practice integrity standards and we remain a Transparency International UK Business Integrity Forum Gold

Member.

Economic crime also includes protecting our customers from fraud. Further information can be found in our ESG Supplement.

Streamlined Energy and Carbon Reporting

In 2022, we used 102,882,982 kWh of energy, a 14% reduction against 2021 (119,562,413 kWh). Greenhouse gas emissions (market-based) were 5,695

tCO2e,10% down from 2021 (6,321 tCO2e). Emissions per employee equate to 0.31 tCO2e in 2022, a decrease from 0.35 tCO2e in 2021. The basis of reporting of

SECR information can be found in the TCFD section under Environmental Performance of the Santander UK Group Holdings plc group Annual Report.


	2022	2021	2020
Scope 1 tCO2e	4,512	6,074	5,937
Scope 2 tCO2e - Location-based	15,571	18,860	22,014
Scope 2 tCO2e - Market-based	0.4	—	—
Scope 3 tCO2e - business travel only	1,183	247	515
Total emissions per employee (tCO2e/FTE)	0.31	0.35	0.31

With the easing of Covid-19 travel restrictions, business travel increased in 2022. This resulted in higher Scope 3 emissions compared to 2021. The total distance

travelled and related emissions remain significantly below pre-pandemic levels. Our total emissions fell in 2022 due to significant reductions in our gas and

electricity consumption. This was largely due to the rationalisation of our office network.

We continue to actively manage energy performance across all sites, identifying opportunities to enhance efficiency and optimise energy use. Ongoing energy

saving refurbishments include new LED lighting, HVAC upgrades and replacement of fan coil units. Go Green, our environmental engagement initiative for

employees gives them practical energy saving tips which help to reduce our energy consumption

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 9

Section 172: Stakeholder voice

The Directors are committed to fulfilling their responsibilities under Section 172 of the Companies Act 2006 (s172), ensuring that they take into account the likely

impact of any decision in the long-term, as well as the interests of our stakeholders. The Board has identified our customers, employees, regulators, communities

and investors as our key stakeholder groups on the basis of their importance in ensuring the continuing success of the Company. Balancing the interests of these

five stakeholder groups alongside the interests of the Company is key to ensuring that we operate as a sustainable and responsible business, in line with our

strategy.

To support the Board and its Committees in their considerations, in 2022 the Corporate Governance Office provided training on how to write good board papers to

circa 300 senior members of management. This training included a specific focus on the directors' duties arising from s172 Companies Act 2006 and how

management's preparation of their papers plays a key role in ensuring that the Directors can discharge their responsibilities in a fully informed manner. In addition,

the proforma paper, which management is required to use for their Board papers, now includes a section on stakeholder considerations. Details of the key issues

that we took into consideration in relation to each stakeholder group in 2022 are set out below. The Board delegates a number of matters to its Committees. and

more details and examples of stakeholder considerations taken in 2022 can be found in our Committee Chairs reports, particularly the Board Responsible Banking

Committee Chairs’ Report, in the Santander UK Group Holdings plc 2022 Annual Report which does not form part of this report.


Customers	Shareholders	People	Communities	Regulators
Customer outcomes	Financial performance	Culture, conduct and behaviours	Financial inclusion and empowerment	Meeting regulatory rules and expectations
Fraud protection	Return on equity	Cost of living crisis	Community engagement and support	Proactively and constructively engaging with the regulators
Vulnerable customers	Alignment of strategy with our parent company	Return to the office	Universities programme	Responding to regulatory requests
Cost of living crisis	Meeting sustainability expectations	Remuneration
Supporting customers' sustainability ambitions		Employee value proposition
New Consumer Duty		Move to Milton Keynes

Non-financial information statement

This section is produced to comply with Sections 414CA and 414CB of the Companies Act 2006. The information listed is incorporated by cross-reference.

Additional non-financial information can be found in our 2022 ESG Supplement, which does not form part of this Annual Report.


Reporting requirement	Policies and standards	Information necessary to understand our business and its impact	Page
Environmental matters	Environmental Policy	Top risks Sustainability: Climate and Ethics Sustainability: Environmental, Social and Climate Change (ESCC) Streamlined Energy and Carbon Reporting (SECR) For Climate disclosures, see the Sustainability and Responsible Banking section of the Santander UK Group Holdings plc group Annual Report.	5 9 9 9
Employees	People Policies Whistleblowing Policy Ethical Code of Conduct Policy	Sustainability: People, Fair Pay & Transparency Chair's report on Corporate governance: Whistleblowing Directors’ report: Ethical Code of Conduct	8 24 35
Human rights	Human Rights Policy	Sustainability: Responsible lending	9
Social matters	Social Ethical Policy	Sustainability: Communities Climate and Ethics	8 9
Anti-corruption and anti-bribery	Anti-Bribery & Corruption Policy Ethical Code of Conduct Policy	Sustainability: Economic crime Risk review: Financial crime risk Directors’ report: Ethical Code of Conduct	9 116 35
Principal risks and impact of business activity		Risk review	37
Description of business model		Business model	4
Non-financial key performance indicators		The KPIs of the Santander UK Group Holdings plc group can be found in its 2022 Annual Report which does not form part of this report.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 10

Sustainability and Responsible Banking

Banco Santander has set out commitments to be a net zero bank by 2050. We are implementing the recommendations of the Task Force on Climate-related

Financial Disclosures (TCFD), and taking action to meet the expectations set by the PRA, BoE and FCA. This requires wide-ranging collaboration both within the bank

and externally to develop the tools and methodologies needed. As such, we have adopted a unified approach across the Santander UK Group Holdings plc group

and therefore present TCFD disclosures on that basis in the Santander UK Group Holdings plc group Annual Report.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 11


Financial review
	Contents
	Income statement review	13
	Summarised Consolidated Income Statement	13
	Profit before tax by segment	14
	Balance sheet review	15
	Customer balances	15
	Treasury	16
	Key capital metrics	16
	Key funding and liquidity metrics	16
	Alternative Performance Measures (APMs)	16

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 12

Income statement review

SUMMARISED CONSOLIDATED INCOME STATEMENT


	2022	2021
	£m	£m
Net interest income	4,425	3,949
Non-interest income(1)	531	550
Total operating income	4,956	4,499
Operating expenses before credit impairment (charges)/write-backs, provisions and charges	(2,343)	(2,510)
Credit impairment (charges)/write-backs	(320)	233
Provisions for other liabilities and charges	(419)	(377)
Total operating credit impairment (charges)/write-backs, provisions and charges	(739)	(144)
Profit from continuing operations before tax	1,874	1,845
Tax on profit from continuing operations	(480)	(492)
Profit from continuing operations after tax	1,394	1,353
Profit/(loss) from discontinued operations after tax	—	31
Profit after tax	1,394	1,384

Attributable to:
Equity holders of the parent	1,394	1,365
Non-controlling interests	—	19
Profit after tax	1,394	1,384

(1)Comprises 'Net fee and commission income' and 'Other operating income'.

A more detailed Consolidated Income Statement is contained in the Consolidated Financial Statements.

2022 compared to 2021

Profit from continuing operations after tax up 3%.

–Net interest income up 12% up 14bps largely due to the impact of base rate increases.

–Non-interest income down 3%, due to the £71m gain on sale of our UK head office in 2021.

–Operating expenses before credit impairment (charges) / write-backs, provisions and charges down 7% largely due to lower transformation programme spend

following significant restructuring in 2021. This programme has embedded lower operational costs and improved the efficiency of the business which should

help to mitigate the impact of inflation.

–Credit impairment charges of £320m driven by the deterioration in the economic environment, including higher interest rates, lower GDP, and lower house

prices, as well as the risk that higher inflation could impact lending repayments. These charges followed write-backs of £233m in 2021. Loans entering arrears

remained low. Arrears stock on mortgages remains low with 0.62% greater than 90 days past due (2021: 0.79%)(2). In Corporate and Commercial Banking, we

have seen a small number of single name defaults emerge in Q4-22

–Provisions for other liabilities and charges up 11%, largely related to the £108m penalty for shortcomings in our AML controls between 31 December 2012 and

18 October 2017. We also continued to see a rise in scams with increased fraud charges of £153m in 2022 (2021: £74m). These were partially offset by lower

transformation programme charges following significant restructuring in 2021.

Discontinued operations relate to the CIB segment which was moved to SLB under a Part VII banking business transfer scheme, completed on 11 October 2021.

(1) Arrears over 90 days past due: credit cards 0.49% (2021: 0.45%), UPLs 0.61% (2021: 0.51%), overdrafts 2.24% (2021: 2.10%), Consumer Finance 0.44% (2021: 0.36%).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 13

PROFIT BEFORE TAX BY SEGMENT(2)

Continuing operations

The segmental information in this Annual Report reflects the reporting structure in place at the reporting date in accordance with the segmental information in

Note 2 to the Consolidated Financial Statements.


	Retail Banking	Consumer Finance	Corporate & Commercial Banking	Corporate Centre	Total
2022	£m	£m	£m	£m	£m
Net interest income	3,671	180	580	(6)	4,425
Non-interest income/(expense)(1)	209	195	146	(19)	531
Total operating income	3,880	375	726	(25)	4,956
Operating expenses before credit impairment (charges)/write-backs, provisions and charges	(1,682)	(144)	(342)	(175)	(2,343)
Credit impairment (charges)/write-backs	(262)	(27)	(31)	—	(320)
Provisions for other liabilities and charges	(394)	(6)	(8)	(11)	(419)
Total operating credit impairment (charges)/write-backs, provisions and charges	(656)	(33)	(39)	(11)	(739)
Profit from continuing operations before tax	1,542	198	345	(211)	1,874

2021
Net interest income/(expense)	3,356	233	397	(37)	3,949
Non-interest income(1)	205	178	112	55	550
Total operating income/(expense)	3,561	411	509	18	4,499
Operating expenses before credit impairment (charges)/write-backs, provisions and charges	(1,701)	(163)	(365)	(281)	(2,510)
Credit impairment (charges)/write-backs	98	33	90	12	233
Provisions for other liabilities and charges	(185)	4	(34)	(162)	(377)
Total operating credit impairment (charges)/write-backs, provisions and charges	(87)	37	56	(150)	(144)
Profit from continuing operations before tax	1,773	285	200	(413)	1,845

(1)Comprises 'Net fee and commission income' and 'Other operating income'.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 14

Balance sheet review

CUSTOMER BALANCES

This section analyses customer loans and customer deposits at a consolidated level and by business segment. The customer balances below exclude Joint

ventures, as they carry low credit risk and therefore have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the

customer's account, and cash collateral. A reconciliation between the customer balances below and the total assets as presented in the Consolidated Balance

Sheet is set out in the Risk review.

Consolidated


	2022	2021
	£bn	£bn
Customer loans	215.7	207.3
Other assets(1)	69.5	79.8
Total assets	285.2	287.1
Customer deposits	189.9	186.2
Total wholesale funding	62.9	65.2
Other liabilities	18.0	19.6
Total liabilities	270.8	271.0
Shareholders' equity	14.4	16.1
Non-controlling interest	—	—
Total liabilities and equity	285.2	287.1

(1) At 31 December 2022, includes £49m of property assets classified as held for sale.

Further analysis of credit risk on customer loans is set out in the Credit risk section of the Risk review.

2022 compared to 2021

–Customer loans increased £8.4bn, with £9.6bn of net mortgage lending.

–Customer deposits increased £3.7bn, following successful eSaver and ISA campaigns in H2-22.

–Other assets and other liabilities decreased, primarily reflecting our approach to liquidity management in 2022.

–Total wholesale funding decreased, with total term funding of £57.8bn (2021: £60.1bn).

–Shareholders' equity decreased, largely due to cash flow hedging of our debt issuance and pension remeasurement.

Customer loans by segment


	2022	2021
	£bn	£bn
Retail Banking	191.8	183.0
Consumer Finance	5.4	5.0
CCB1	18.5	19.3
Corporate Centre1	—	—
Total	215.7	207.3

(1) CCB customer loans includes £4.5bn of CRE loans (2021: £4.4bn). In Q4-22 we transferred £1.5bn (2021: £2.3bn) of Social Housing loans to our CCB segment from Corporate Centre to reflect the way these are

managed, and restated comparatives accordingly.

Customer deposits by segment


	2022	2021
	£bn	£bn
Retail Banking	161.8	157.0
CCB1	24.8	26.5
Corporate Centre1	3.3	2.8
Total	189.9	186.2

(1) In Q4-22 we transferred £0.4bn of non-core liabilities (2021: £0.9bn) to our CCB segment from Corporate Centre to reflect the way these are managed, and restated comparatives accordingly.

Retail Banking customer deposits by portfolio


	2022	2021
	£bn	£bn
Current accounts	76.6	80.7
Savings accounts	67.0	57.8
Business banking accounts	12.2	13.1
Other retail products	6.0	5.4
Retail Banking customer deposits	161.8	157.0

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 15

Treasury

KEY CAPITAL METRICS


	2022		2021
	£bn	%	£bn	%
Capital
CET1 capital	10.8	15.4	10.8	16.1
Total qualifying regulatory capital	14.3	20.4	14.8	21.9

2022 compared to 2021

Capital ratios well above regulatory requirements

–The CET1 capital ratio decreased 70bps to 15.4%. This was largely due to regulatory changes that took effect on 1 January 2022 and a special dividend paid in

December 2022. The regulatory changes included the reintroduction of the full CET1 software asset deduction, and implementation of new definition of default

regulatory guidance. The impact of increased RWAs and the special dividend were partially offset by post dividend retained earnings. We remain strongly

capitalised with significant headroom to minimum requirements and MDA

–Total capital ratio decreased by 150bps to 20.4%, due to lower CET1 capital ratio as outlined above as well as the reduction in Additional Tier 1 and Tier 2 capital

securities recognised following the end of the CRR Grandfathering period on 1 January 2022.

–We paid £1.0bn interim dividends, £300m of which was a special dividend (2021: £1.3bn). These were paid following review and approval by the Board in line

with our dividend policy.

KEY FUNDING AND LIQUIDITY METRICS


	2022	2021
	£bn	£bn
Total wholesale funding and AT1	64.9	67.4
of which TFSME	25.0	31.9
of which with a residual maturity of less than one year	11.0	10.2
LCR	157%	168%
RFB DolSub LCR	152%	166%

2022 compared to 2021

Strong funding across a range of diverse products

–Total wholesale funding decreased, with £6.9bn TFSME repayment. Funding costs improved with maturities refinanced at lower cost.

Alternative Performance Measures (APMs)

In addition to the financial information prepared under IFRS, this Annual Report contains non-IFRS financial measures that constitute APMs, as defined in European

Securities and Markets Authority (ESMA) guidelines. The financial measures contained in this Annual Report that qualify as APMs have been calculated using the

financial information of the Santander UK group but are not defined or detailed in the applicable financial information framework or under IFRS.

We use these APMs when planning, monitoring and evaluating our performance. We consider these APMs to be useful metrics for management and investors to

facilitate operating performance comparisons from period to period. Whilst we believe that these APMs are useful in evaluating our business, this information

should be considered as supplemental in nature and is not meant as a substitute for IFRS measures.

A description of the Santander UK group’s APMs and their calculation, is set out below.


APM	Description and calculation
Non-interest income	Net fee and commission income plus other operating income.
Stage 3 ratio	The sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 16


Governance




Our governance	Contents
The UK Corporate Governance Code 2018 (the Code) sets out the framework for premium listed companies in the UK. Although the Company does not have premium listed shares on the London Stock Exchange, compliance with the Code is appropriate for a Company of our size and systemic importance to the UK economy. This Governance section details how the Company has applied and complied with the principles and provisions of the Code. Any principles and provisions of the Code that are not complied with are detailed in the Directors' Report.
	Governance	17
	Corporate Governance report	18
	Chair's report on corporate governance	18
	Directors' Remuneration report	25
	Remuneration policy report	25
	Remuneration implementation report	28
	Directors' report	32

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 17

Our Board and governance structure

Maintaining high standards of corporate

governance is an essential element to ensure the

long-term sustainable success of the Company.

In addition to the UK Corporate Governance Code

2018 (the Code) (the standard against which we

measure ourselves), we also have internal

governance practices and rules, principally:

–The UK Group Framework, which defines

clearly our responsibilities and relationship

with Banco Santander SA, our ultimate

shareholder, taking account of our fiduciary

and regulatory responsibilities. This gives us

the autonomy to discharge our responsibilities

in the UK in line with best practice as an

independent board while giving Banco

Santander SA the oversight it needs. Clarity of

roles and responsibilities is key to ensuring

proper accountability for decisions and

outcomes.

–The Corporate Governance Framework, which

is designed to assist the Board of Directors in

discharging their responsibilities and ensuring

an appropriate scheme of delegation

throughout the Santander UK group.

The Corporate Governance Framework is

reviewed regularly by the Board to confirm that

governance arrangements remain effective. The

corporate governance structure is supported by

the internal control and risk management

systems. An important principle, applied

throughout the Corporate Governance

Framework, is that delegation of executive

authority is to individual office holders, who may

delegate aspects of their authority to others, as

appropriate. Executive Committees have been

established to support individuals in discharging

their responsibilities.

The role and responsibilities of the Board

The Board is collectively responsible for

promoting the success of Santander UK for the

benefit of its stakeholders, taking into account

the likely impact of their decisions in the long-

term, as well as the interests of our other

stakeholders and to its contribution to the wider

society.

The Board’s schedule and activities are planned to

make sure that Directors have regard to the

matters necessary to promote the success of the

Company, including the broader implications of

their decisions for the Company’s stakeholders

including its shareholder. Details of how the

Board has achieved this are set out in the Section

172: Stakeholder Voice in the Strategic report.

Our statement of compliance with the Code can

be found in the Directors' Report.

The key decisions and matters reserved for the

Board's approval, such as the long-term strategy

and priorities, are set out in the Corporate

Governance Framework. The Board is supported

by its Committees which make decisions and

recommendations on matters delegated to them

under the Corporate Governance Framework.

This enables the Board to spend a greater

proportion of its time on strategic, forward-

looking matters.

Board Committees

The Committees play an essential role in

supporting the Board, giving focused oversight of

key areas and aspects of the business and their

roles and responsibilities are set out in their

Terms of Reference which are available at

aboutsantander.co.uk and which do not form part

of this Annual Report. The Terms of Reference

are regularly reviewed by each Committee to

make sure they remain appropriate.

Each Committee comprises Non-Executive

Directors (NEDs) and a Chair. Except for the Board

Nomination and Board Risk Committees which

have one Banco Santander Group appointed Non-

Executive Director (GNED), all Board Committees

are composed of Independent Non-Executive

Directors (INEDs) only. Having assessed this in

light of the Code recommendations we are

satisfied that the Committees will continue to be

able to discharge their duties professionally,

effectively and efficiently. As the Santander UK

Group Holdings plc and Santander UK plc

Committees meet substantively simultaneously,

they also continue to have the opportunity to

benefit from the broader INED group's skills and

experience.

The Board and Board Committees of Santander

UK plc also met independently from the Board

and Board Committees of Santander UK Group

Holdings plc twice in 2022.

Board meetings in 2022

There were 11 Board meetings in 2022.

Meetings of the Company were held concurrently

with Santander UK Group Holdings plc. This

model is supported by a number of ring-fencing

safeguards to enable the Santander UK plc Board

to operate in this way including the appointment

of three ring-fenced bank Double Independent

NEDs (DINEDs) (one of whom is the senior ring-

fencing Director) and a Ring-Fenced Bank Risk

Officer.

Regular updates are provided to the Board by the

Committee Chairs, CEO, CFO, CRO and myself as

Chair. I, as Chair, also held a number of meetings

with the NEDs without the Executive Directors

(EDs) present. There is a comprehensive and

continuous agenda setting and escalation process

in place to ensure that the Board has the right

information at the right time and in the right

format to enable the Directors to make the right

decisions. As Chair, I lead the process, assisted by

the CEO and Company Secretary, and this ensures

that sufficient time is set aside for strategic

discussions and business critical items. Together

with the Committee Chairs, we ensure Board and

Committee meetings are structured to facilitate

open discussion, debate and challenge.

The NEDs also receive regular updates from

management to give context to current issues.

How governance contributes to the delivery of

our strategy

Our governance arrangements contribute to the

development and delivery of our strategy in

various ways, including by taking accountability

and responsibility, and ensuring information

flows and independent insight from the NEDs.

All Directors are collectively responsible for the

success of the Company. The NEDs exercise

objective judgement in respect of Board

decisions, and scrutinise and challenge

management constructively. They also have

responsibilities concerning the integrity of

financial information, internal controls and risk

management.

The Board is responsible for overseeing and

developing our strategy and policies, overseeing

risk and corporate governance and monitoring

progress towards meeting our objectives and

annual plans and monitoring its implementation

by the CEO, supported by his wider executive

management team. In 2022, the Board regularly

reviewed progress against its delivery of the

three year business plan. The Board is

accountable to our shareholder for the proper

conduct of the business and seeks to represent

the interests of all stakeholders.

The Board has identified the following key

stakeholders: Customers, Employees, Regulators,

Communities and Investors.

Views of the workforce at the Board

Our colleagues are a key stakeholder, central to

the delivery of our strategy, and the Board is

committed to ensuring continuous engagement

with them. Annemarie Durbin is the designated

NED responsible for ensuring that the views of

the workforce are made known to the Board. In

2022, as well as extensive reporting on people

issues to the Board, Annemarie participated in

focus groups, management forums and

development workshops. She also had regular

meetings with the Head of Culture, Inclusion and

Experience to discuss matters such as the

employee voice and engagement survey results.

With effect from 1 March 2023, Lisa Fretwell

replaced Annemarie Durbin as the designated

NED representing the views of the workforce on

the Company and Santander UK Group Holdings

plc.

Board activities

I, together with the CEO and Company Secretary,

and supported by the Directors and senior

management, make sure that the Board has an

appropriate schedule for the year. This is focused

on the opportunities to drive growth and

profitability of the business, transformation to

support the future success of the business,

business performance and risk management and

customer experience and outcomes. It includes

the Company's digital strategy, ensuring the

Company is run in a responsible and sustainable

way in the interests of its stakeholders, and

ensuring that the Company’s culture is aligned

with its purpose, values and strategy.

The Board ensures regular contact with

management and colleagues through a number

of means. These include inviting relevant

business and function heads to present to the

Board or its Committees on latest developments;

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance


Annual Report 2022			Santander UK plc 18

permitting observers as part of individual senior

managers’ development plans; scheduling

regular meetings for Committee Chairs to meet

with relevant senior managers; site visits by one

or more NEDs; and topical or technical

workshops. Senior leaders are also available to

the NEDs for advice and support.

The Board regularly monitors progress against

the strategic priorities and performance targets

of the business, and in 2022, once again held a

separate Board Strategy Day. In advance of the

Board Strategy Day, a workshop was held

focused on disruption by Fintechs and Neobanks,

which was designed to set the scene for the

discussions on how and where we want to grow

and invest, in the context of an evolving

competitive landscape. Presentations at the

Board Strategy Day considered the current macro

environment, discussing potential changes to the

Employee Value Proposition (including the future

'Ways of Working'), before the Board considered

and explored opportunities to further grow the

business. The day concluded with a presentation

by the CEO on potential investments and the

financial impact, recognising the trade off

between returns and market share/revenue

growth.

In 2022, the Board and its Committees received

deep dives on a number of areas (e.g. Consumer

Duty, Climate Change and ILAAP) and externally

facilitated workshops to consider important

topics in depth and to engage with key

stakeholders. To ensure the most effective use of

the time at Board meetings, in addition to the

delegation of certain responsibilities to the Board

Committees, held informal discussions with

Board members. The INEDs also met on several

occasions without management and once

without me present to assess my performance.

More details of the Board activities in 2022 are

set out at the end of this report.

Culture

The Board recognises the importance of culture,

as a mechanism to support the long-term

sustainable success of the Company. The Board

are responsible for setting and overseeing our

culture and values as well as monitoring progress

on its development. The Board are committed to

creating a culture of inclusivity and belonging, as

well as creating a healthy culture environment.

Throughout the year the Board has received

feedback on our culture via a number of

mechanisms including engagement with the

workforce directly and through the NED chosen

to represent the views of the workforce, as well

as receiving reports from colleague surveys

considering matters including future ways of

working and wellbeing. The Board also seeks to

ensure that workforce policies and practices are

consistent with the Company's values and

supports its long-term sustainable success.

Board responsibilities

As Chair, I have overall responsibility for the

leadership of the Board and for ensuring its

effectiveness in all aspects of its operation.

These responsibilities are formalised in the

Corporate Governance Framework.

The composition of the Board helps to ensure

that no one individual or small group of

individuals dominates the Board's decision-

making. The diversity of skills, experience and

background on the Board enables the Board to

provide constructive challenge and strategic

guidance and to offer specialist advice. There is a

clear division of responsibilities between the

leadership of the Board and the executive

leadership of the business. The responsibilities of

the Chair, CEO, SID and NEDs and all Board

Committees are agreed by the Board and set out

in writing (as part of the Corporate Governance

Framework) and are publicly available on our

website at www.aboutsantander.co.uk, which

does not form part of this Annual Report.

Board membership

At 31 December 2022, the Board of Santander UK

Group Holdings plc consisted of the Chair

(independent on appointment), three INEDs, two

EDs and two GNEDs. The Santander UK plc Board,

at 31 December 2022, consisted of the Chair

(independent on appointment), six INEDs, two

EDs and three GNEDs

Biographies of the Directors are available at

www.aboutsantander.co.uk which does not form

part of this Annual Report. A record of Directors

who served in the year is shown in the Directors'

Report. The letters of appointment for INEDs and

GNEDs are available at the Company’s registered

office and at the Annual General Meeting.

Through the Board Nomination Committee, we

make sure there is the right mix of individuals on

the Board, giving an appropriate balance of

knowledge, skills, experience and perspectives.

Our aim of ensuring orderly succession for Board

positions is supported by continuous and

proactive processes. We take into account our

strategic priorities and the main trends and

factors affecting the sustainability and success of

the business. We oversee and regularly review

the development of a diverse pipeline for

succession.

Changes to Board membership are set out in the

Directors' report. In 2022, we appointed Mike

Regnier as CEO (following Nathan Bostock's

departure on 1 April 2022) and Lisa Fretwell as an

INED, effective from 1 January 2022. These

appointees have valuable skills and experience of

financial services, digital, strategy and

transformation.

All aspects of diversity form part of our Board

succession planning process.

Board attendance

The Directors’ attendance at the Board meetings held in the year is set out below. Meetings of the Board are generally held concurrently with the Santander UK

Group Holdings plc Board, with business specific to each company identified and recorded as appropriate, reflecting the decisions taken by the Board of the

relevant entity.


		Scheduled meetings attended	Ad hoc meetings attended
Chair	William Vereker	8/8	3/3
Independent Non-Executive Directors	Annemarie Durbin	8/8	2/3
	Chris Jones	8/8	3/3
	Ed Giera	8/8	3/3
	Lisa Fretwell 1	8/8	3/3
	Mark Lewis	8/8	3/3
	Nicky Morgan	8/8	2/3
Banco Santander Group nominated Non-Executive Directors	Dirk Marzluf	8/8	1/3
	Antonio Simoes	8/8	2/3
	Pamela Walkden	8/8	3/3
Executive Directors	Nathan Bostock 2	2/2	2/2
	Duke Dayal	8/8	3/3
	Mike Regnier 3	6/6	1/1


1	Lisa Fretwell was appointed on 1 January 2022
2	Nathan Bostock resigned on 1 April 2022
3	Mike Regnier was appointed on 1 April 2022

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 19

Monitoring independence

The Board Nomination Committee monitors

whether there are relationships or circumstances

which may affect a Director's independence, and

have concluded that all NEDs are independent in

character and judgement. I, as Chair, was

independent on appointment when assessed

against the circumstances set out in Provision 10

of the Code. No INEDs have a material

relationship with the Company nor receive

additional remuneration to Directors' fees. In

addition, no INEDs serve as Directors of any

external companies or affiliates in which any

other Director is also a Director.

Monitoring Director time commitment,

interests and fees

The Board Nomination Committee is responsible

for oversight of Conflicts of Interest.

Each Director has a duty under the Companies Act

2006 to avoid a situation in which they have or

may have, a direct or indirect interest that

conflicts, or may conflict, with the interests of the

Company. This duty is in addition to the existing

duty Directors owe to the Company to disclose to

the Board any interest in a transaction or

arrangement under consideration by the

Company.

In 2022, the Board Nomination Committee

continued to review the time commitment and

Directors' potential conflicts of interest to ensure

that any such conflicts are managed

appropriately and in compliance with CRD IV and

ring-fencing requirements. In accordance with

Provision 15 of the Code, Directors are required to

seek prior approval from the Board before taking

up external appointments.

External appointments are disclosed to the Board,

before appointment, with an indication of time

involved. All directors continue to devote

sufficient time to their roles at the Company. No

significant external appointments were

undertaken by any Directors. The Articles of

Association contain provisions that allow the

Board to consider and, if it sees fit, authorise

situational conflicts.

These powers have operated effectively and the

formal system for Directors to declare their

interests and for the non-conflicted Directors to

authorise situational conflicts continues to be in

place. Any authorisations given are recorded by

the Company Secretary and Directors are asked to

certify, on an annual basis, that the information in

the register is correct.

The level of fees paid to INEDs for Board and

Board Committee chair and membership were

unchanged in 2022, although, following a review,

it was decided to pay fees for some of the director

responsibilities which had previously not been

remunerated. For more, see the Remuneration

Implementation Report.

The right information and support

The Chair, supported by the Company Secretary,

ensures that all Board members receive

appropriate and timely information. All Directors

have access to the advice of the Company

Secretary and the Company provides access, at its

expense, to the services of independent

professional advisers in order to help the

Directors discharge their role. This also applies to

Board Committees.

Board composition

Ensuring the right balance of skills, experience,

independence and knowledge on the Board is the

responsibility of the Board Nomination

Committee.

Succession Planning

The Board Nomination Committee is responsible

for ensuring plans are in place for orderly

succession to both Board and senior

management positions, and oversees the

development of a diverse pipeline for succession.

Board and Committees' evaluation

The annual evaluation, which is typically

facilitated externally at least once every three

years, highlights areas of further development to

enable the Board to continuously improve its

performance.

I, as Chair of the Board, with the support of the

Board Nomination Committee, lead the Board in

considering and responding to the annual review

of the Board and Committees' effectiveness,

including the performance of individual Directors.

In 2022, I asked the Company Secretary to

undertake an internally facilitated review of the

effectiveness of the Board and Board

Committees.

In addition, in 2022, the Board continued to

monitor progress against actions for the 2021

externally facilitated review of Board

effectiveness.

Director induction and training

The Company Secretary supports the Chair in

designing individual inductions for NEDs, which

include site visits and cover topics like strategy,

balance sheet and capital, key risks and current

issues including the legal and regulatory

landscape.

Directors who take on new roles or change roles

in the year (such as becoming a member of a new

Board Committee) attend induction or handover

meetings as appropriate. Committee Chairs, with

the Committee secretaries, agree Committee

specific training, as appropriate. Directors are also

given the opportunity to undertake further

training so that they are fully comfortable with

their role on the Board and to enable them to

contribute to the long-term success of the

Company.

Group structure and ring-fencing governance

arrangements

The substantive business of the Santander UK

group continues to be conducted by Santander UK

plc, our principal ring-fenced bank (RFB). Ring-

fenced banks operate within governance rules

defined and overseen by the PRA who have

granted Santander UK plc certain ring-fencing

governance rule modifications, subject to various

safeguards. This allows for certain overlaps of the

Board and senior management of Santander UK

Group Holdings plc and Santander UK plc,

recognising our ownership structure and chosen

ring-fencing business model.

At 31 December 2022, the three DINEDs of

Santander UK plc were Annemarie Durbin, Mark

Lewis and Nicky Morgan. In addition, Annemarie

Durbin acts as the SRD of Santander UK plc.

Appointment and retirement of Directors

The Company's Articles of Association require

each Director to retire every year at the Annual

General Meeting and any Director may offer

themselves for re-election by members. For

more, see the Directors’ report.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 20


Summary of Board activities in 2022 The Board aims to consider the views of all impacted stakeholders, whilst acting in the best interests of the Company and its members as a whole, as set out in Section 172: Stakeholder Voice in the Strategic report. Activities in 2022 included:
Theme	Action taken by the Board and outcomes
Strategy including One Europe and Banco Santander	–Following on from the Board Strategy Day, considered and challenged management’s proposals to enhance our proposition across the Everyday Banking and Homes businesses. –Reviewed our customer proposition and experience, including a deep dive on our Net Promoter Score (NPS) and initiatives to improve the NPS trend, and customer interactions strategy, including changes to the branch operating model. –Reviewed and challenged our marketing and brand strategy and positioning, with a view to developing a coherent brand narrative aligned with our ambition to be a ‘digital bank with a human touch’. –Considered specific M&A market opportunities to accelerate growth. –Reviewed initiatives and opportunities to collaborate and leverage resources and capability across the Europe region and the Banco Santander group, including a common payments platform and, banking application (OneApp). –Considered disruption in the financial services market including the impact of neobanks and fintechs and digital currency and blockchain technology.
Business, Customer and Transformation	–Reviewed, challenged, and approved the 3-year business plan (2023-2025) and the annual budget, including assumptions underpinning the plan given the rapidly evolving macroeconomic environment and investment to support a resilient and sustainable operating environment and associated risk assessments. –Reviewed, challenged and remained apprised of the performance of the business divisions and functions, strategic business opportunities, developments with customer experience and the Company's transformation programme. –Considered financial crime, including approval of risk appetite and oversight of programmes to accelerate controls enhancement and regulatory engagement, as well as back book remediation. –Considered and endorsed the IT transformation programme including clear milestones and investment to align IT infrastructure and systems with business requirements and bring IT risk within Board Risk Appetite.
Regulation, Balance Sheet and Capital	–Reviewed, challenged and approved the ICAAP, ILAAP, adequacy and effectiveness of stress-testing and capital management, AT1 payments and ordinary and preference share dividend payments in line with PRA guidance. –Submitted to the Bank of England results of the annual cyclical and solvency stress test submissions. –Submitted a self-assessment of resolvability to the PRA in line with the Bank of England Resolvability Assessment Framework. –Considered the future regulatory landscape and implications, including approval of the Consumer Duty implementation plan. – A number of Board members also participated in workshops delivered to the Board Audit Committee on the evolution of the IFRS 9 approach and supporting models.
Risk and control	–Received regular enterprise-wide risk updates from the CRO, together with updates on specific risks, such as third-party outsourcing, IT, data management, financial crime, fraud, climate change and inflation. The Board closely monitored overall operational risk given the ongoing execution of the extensive transformation agenda. –Approved/adopted changes to the Risk Framework as part of the annual review, including the introduction of a new minimum standard to ensure each business area and risk type considers risks posed by climate change. –Received annual reports on whistleblowing and cyber security, considering the effectiveness of such arrangements. –Reviewed and approved relevant submissions related to the Operational Resilience Programme. –Approved the submission to the BoE of results from the Climate Biennial Exploratory Scenario Stress tests for climate risks.
People and Culture	–Received updates on issues including talent management & succession planning, gender pay gap and diversity & inclusion. – Utilised regular reports on culture, including employee feedback to identify cultural priorities and alignment with the Company's long term strategic direction. – Considered colleagues' ways of working and opportunities to optimise the real estate portfolio. – Considered succession planning across all key control, support functions and business functions.
Governance and Responsible Banking	– Reviewed, challenged and approved the Annual Report. – Received regular verbal updates of Board Committee activity from their respective Committee Chairs. – Approved a revised Banco Santander Subsidiary Governance Model for subsidiaries, and certain Corporate Frameworks. – Approved the education and social mobility strategies. – Approved the recommendations and resulting action plan for the 2021 externally facilitated Board evaluation, and the incremental recommendations arising from the internally facilitated Board evaluation in late 2022. – Approved policies including a new Board level Conflicts of Interest Policy, Board Diversity & Inclusion Policy, Policy for the Suitability, Selection and Succession of Board members and Policy on Regulatory Documents on the recommendation of the Board Nomination Committee. – A number of Board members also participated in workshops delivered to the Board Responsible Banking Committee to discuss the Company's climate strategy and supporting business initiatives; and consider the impact of initiatives implemented so far and next steps in fraud prevention.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 21

Summary of Board Committee activities in 2022

Our Board Committees conduct their business concurrently with the Santander UK Group Holdings plc Board Committees to ensure alignment of practices, policies

and procedures. The following reports detail the governance arrangements, practices and activities of both committees. More information can be found in each of

the Committee Chair's Reports in the Santander UK Group Holdings plc 2022 Annual Report.

Board Nomination Committee

Committee composition


	Scheduled meetings	Ad hoc meetings
William Vereker (Chair)	7/7	2/2
Annemarie Durbin	7/7	2/2
Ed Giera	7/7	2/2
Pamela Walkden	7/7	1/2

Other attendees at Committee meetings in 2022

included the CEO, Chief People Officer, Director,

Performance & Reward, and Director, Culture &

Capability.

The Committees are responsible for, amongst

other things:

–Identifying, nominating and recommending

candidates for appointment to the Board.

–Regularly reviewing the structure, size and

composition of the Board and its Committees.

–Overseeing the evaluation of Board and Board

Committee performance.

–Reviewing corporate and internal governance

matters.

Key activities in the year

Succession planning

The Committees lead a formal, rigorous and

transparent process for the identification,

nomination and recommendation of candidates

for appointment to the Board and senior

management positions.

Part of this process is ensuring that there are

succession plans in place for both Board and key

management positions encompassing internal

and external candidates, and that there is a skills,

experiences and diversity matrix which maps

each Director's attributes against those which are

most relevant for the Board, taking into account

the future strategic direction of the Company and

its needs. As well as tracking the Board's

strengths, this matrix is used to identify gaps in its

desired collective skills profile.

While appointments are based on the merit of

the individual candidates and objective criteria,

we also aim to promote diversity, in its broadest

sense, to complement and strengthen the overall

Board and its Committees' skills, knowledge and

experience. Any appointment also takes account

of all legal and regulatory requirements.

In 2022, a significant proportion of the

Committees' time was devoted to succession

planning, and in particular identifying successors

for Chris Jones, Chair of the Audit Committee, and

Ed Giera, Senior Independent Director and Chair

of the Risk Committee. Both will step down by

2024 after serving as Directors for nine years. To

ensure a thorough handover, the Committees

were keen to start the selection process early.

Hedley May, an external search consultant with

whom the Company and individual Directors have

no other relationship, were engaged to assist

with the search and selection process. A

preferred candidate to succeed Chris Jones as the

Board Audit Committees Chair has been identified

(subject to regulatory approval) but as the

appointment process remains ongoing we will

report on it more fully in next year’s Annual

report, together with details of the induction

programme arranged for the new director.

The Committees also reviewed the additional

roles that the NEDs take on, such as the

Whistleblowers’ Champion and Workforce

Engagement representative to reallocate some of

these when the current incumbents retire. Nicky

Morgan was appointed to the new role of

Consumer Duty Champion for Santander UK plc.

Board effectiveness

Following the detailed and comprehensive

external evaluation by Boardroom Review

Limited, in 2022 an internal review of the Board

and its Committees was conducted by the

Company Secretary, assisted by the Head of

Internal Governance. Interviews were held with

Board members and the Executive Committee

members were asked to complete a survey on

the Board’s performance.

The review concluded that the Board and its

Committees continue to operate effectively, with

notable improvements now that recently

appointed Directors, including the CEO and I, have

settled into our roles and established strong

relationships with the Banco Santander group.

Additional strengths identified were the fostering

of an open and transparent atmosphere and the

blend of skills and experience on the Board. The

review also identified some opportunities for

improvement including:

–Oversight of ESG and Responsible Banking -

given the increasing importance of these

matters, the Board should ensure enough time

is allocated to discuss them across the year.

–Agenda planning, Board time and Board

materials - there is still room for improvement

in these areas and the Chair and Company

Secretary will work to enhance the scheduling

and operation of Board vs Board Committee

meetings.

–Board Committee composition – undertake a

review of the Board Committee composition to

ensure knowledge is spread among Directors

while meeting regulatory requirements.

–Emerging market themes and competitor

benchmarking – ensuring the Board remain

appraised of market activity.

–Strengthening our alignment with the Banco

Santander group – fostered through the

attendance of Banco Santander group directors

and executives at UK meetings as appropriate,

including the Board Strategy Day, and regular

Board visits to Madrid.

The Board fully considered the recommendations

from the internal evaluation and agreed an action

plan which will be regularly reviewed by the

Committees in 2023.

In 2022, I also conducted individual Directors’

assessments and the SID undertook an

assessment of my performance.

Diversity, inclusion and engagement with

stakeholders

During the year, the Committees considered

updates to our Board Diversity and Inclusion

Policy. The Board aims to maintain at least two

female members and aims to have 40% female

representation by 2025, previously having a

minimum of 33%, and overall aim of 50% female

representation on the Board by 2030. We are also

committed to maintaining at least one member

from an ethnic minority background. Currently,

one of our Directors is from an ethnic minority,

and 33% of the Board are female.

Our commitment to the HM Treasury Women in

Finance Charter continues, with the aim to create

gender balance by setting a target of 50%

(+/-10%) women in senior roles (excluding Board

members) by the end of 2025. At 31 December

2022, 28% of Executive Committee members

were female, 34% of Executive Committee

members' direct reports were female and our

senior manager female population (mid to senior

manager roles) was 33%.

Our representation of Asian, Black and other

Minority Ethnic colleagues in senior roles

(excluding Board members) increased in 2022,

broadly in line with our internal growth target to

achieve our ambition of 14% (+/-2%) by 2025.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 22

Board Risk Committee

Committee composition


	Scheduled meetings	Ad hoc meetings
Ed Giera (Chair)	10/10	1/1*
Chris Jones	10/10	1/1*
Annemarie Durbin	10/10	0/0
Mark Lewis	10/10	0/0
Nicky Morgan	10/10	1/1*
Lisa Fretwell	10/10	0/0
Pamela Walkden	10/10	0/0

Other attendees at Committee meetings in 2022

included the Board Chair, CEO, CFO, Chief Internal

Auditor, CRO and External Auditors.

The Committee is authorised by the Board to

–Advise the Board on the enterprise wide risk

profile, Risk Appetite and strategy.

–Review the enterprise wide risk profile through

business updates from the First Line of

Defence and regular reports on each key risk

type from the Second Line of Defence.

–Provide advice, oversight and challenge to

embed and maintain a supportive risk culture.

–Review the Risk Framework and recommend it

to the Board for approval.

–Review and approve the key risk type and risk

activity frameworks identified in the Risk

Framework.

–Review the capability to identify and manage

new risks and risk types.

–Consider and review all risks and issues

escalated by the Chief Risk Officer, and their

associated action plans.

–Oversee and challenge the day-to-day risk

management actions and oversight

arrangements and adherence to risk

frameworks and policies.

–Oversee the adequacy of the governance

arrangements we have in place.

The Committee undertook a thorough

assessment of the Company's emerging and top

risks, including financial, operational, and

compliance controls. Our top risks and emerging

risks are discussed in the Risk Review section of

this report. The process for identifying,

evaluating, and managing the Company's

emerging and top risks is integrated into the

overall risk governance framework. Regularly, the

Committee reviews and discusses a consolidated

enterprise-wide risk report to ensure that they

are satisfied with the overall risk profile, risk

accountabilities, and mitigating measures.

Board Audit Committee

Committee composition


	Scheduled meetings	Ad hoc meetings
Chris Jones (Chair)	10/10	0/0
Ed Giera	10/10	0/0
Lisa Fretwell	10/10	0/0
Annemarie Durbin	10/10	0/0
Nicky Morgan	10/10	0/0
Mark Lewis	04/04	0/0

Other attendees at Committee meetings in 2022

included the Board Chair, CEO, CFO, Chief Internal

Auditor, CRO, Financial Controller, Director of

Financial Reporting and the external auditor.

The Committee is authorised by the Board to

provide oversight of:

–Integrity of the financial statements of the

Company and any formal announcements

relating to its financial performance, including

underlying significant financial reporting

judgements and estimates.

–Internal financial control effectiveness.

–The relationship with our external auditors

including their independence and objectivity,

audit scope and effectiveness of the audit

process in respect of their statutory audit of

the annual financial statements.

–Internal Audit function effectiveness.

–Recovery and Resolution planning.

–Whistleblowing arrangements.

Key activities in the year

Internal Audit

–Considered the 2023 Audit Plan and annual

report for recommendation to the Board.

–Monitored progress against the 2022 Audit

Plan.

Financial reporting

Significant financial reporting issues including

judgements and estimates

The use of assumptions or estimates and the

application of management judgement is an

essential part of financial reporting. This is

considered by the Committee on at least a

quarterly basis. The External Auditors also

consider these areas as part of their audit of the

annual financial statements. More information on

the External Auditors' work is set out in their audit

report.

In 2022, we focused on the following significant

reporting matters in relation to financial

accounting and disclosures:

Credit impairment charges

–Noted that applying management judgements

on IFRS 9 ECL provisioning was difficult given

the unusual and unique circumstances due to

the cost of living crisis, and the reduction of

Covid-related risks.

Provisions and Contingent Liabilities

–Continued to scrutinise the level and adequacy

of customer remediation, litigation and other

regulatory provisions and challenged the

reasonableness of management’s assumptions

throughout the year.

Defined benefit pension schemes

–Reviewed management's approach to illiquid

assets valuation where there continues to be

inherent uncertainty as their values are based

on unobservable market inputs. Reviewed the

proposal to continue to use the unaudited flash

valuations provided by our private equity

advisors, following review of the testing

carried out against final audited valuations,

and the conclusion that this is management’s

best estimate of the value.

Other Areas

–Reviewed the outcome of management’s

annual impairment assessments for goodwill

and the cost of Santander UK Group Holdings

plc's investment in the Company and noted the

increase in headroom in the year.

Oversight of external auditors

External Auditors

PwC were appointed in 2016 and their

independence was considered and monitored

throughout the year. We were satisfied that PwC

continued to meet the independence

requirements. Ian Godsmark became lead audit

engagement partner from June 2022 following

the resignation of Laura Needham from PwC.

Based on a formalised assessment, the

Committee satisfied itself as to the rigour and

quality of PwC’s audit process.

Non-audit fees

We have a robust policy on non-audit services

provided by our external auditors. Non-audit

services were under continuous review

throughout 2022 to determine that they were

permitted by reference to their nature, assessing

potential threats and safeguards to auditor

independence as well as the overall ratio of audit

to non-audit fees.

All assignments require advance approval, either

by the Chair (or in his absence his alternate),

under delegated authority for amounts under

£250,000 plus VAT or, if larger, by the

Committee. This process is in addition to the

requirement for all non-audit fees to be approved

by the Banco Santander Audit Committee.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 23

Internal Audit

The Committee has approved the Internal Audit

Charter and receives regular updates on the

operational effectiveness of the Internal Audit

function to confirm that it maintains its

independence and to ensure its quality,

experience and resourcing is appropriate. This is

supplemented by regular interactions between

the Chief Internal Auditor and the Committee

Chair. We also receive feedback on interactions

between Internal Audit, management and our

external auditors.

A review is conducted every five years to evaluate

the Internal Audit function in respect of its

conformance with the standards of the Chartered

Institute of Internal Auditors (CIIA), as well as its

performance and effectiveness compared to

industry peers and good practice. The next review

is due in 2023 and a thorough process to select

an external provider to carry out the review has

been undertaken.

Whistleblowing

The Committee oversees Santander UK's

whistleblowing arrangements including

continuous refinement of our processes to align

with evolving best practice. Santander UK

recognises the importance of creating an

environment where colleagues feel safe and able

to Speak Up. Speaking Up is a core behaviour at

Santander UK and there are a number of ways

colleagues can do this, including raising a concern

via Santander UK's Whistleblowing Team.

The Disclosure Committee reports on whether

the Annual Report is fair, balanced, and

understandable and whether it provides the

information necessary for readers to assess

Santander UK's position and performance,

business model and strategy.

Effectiveness

As part of the internally facilitated Board

evaluation carried out during the year, the

Committee's performance was assessed and it

was concluded that the Committee continues to

perform effectively.

Board Responsible Banking Committee

Committee composition


	Scheduled meetings	Ad hoc meetings
Nicky Morgan (Chair)	4/4	0/0
Annemarie Durbin	4/4	0/0
Lisa Fretwell	4/4	0/0
Ed Giera	4/4	0/0
Chris Jones	4/4	0/0
Mark Lewis	4/4	0/0

Other attendees at Committee meetings in 2022

included the CEO, Director of Corporate

Communications and Responsible Banking, Chief

People Officer, CRO, Director of Compliance, Chief

Customer Officer, Everyday Banking, and Chief

Customer Officer, Homes.

The Committee is authorised by the Board to

–Oversee the operation of the business and

subsidiaries to ensure they act in a responsible

way, promoting their long-term success having

due regard to the interests of the Company's

stakeholders.

–Support management in shaping and driving

the responsible banking agenda of the

business across a broad spectrum of areas

including customers, culture, diversity and

inclusion, conduct, communities and climate

change and the environment (the Board Risk

Committee is responsible for overseeing the

risks associated with climate change).

Board Remuneration Committee

Committee composition


	Scheduled meetings	Ad hoc meetings
Annemarie Durbin (Chair)	6/6	2/2
Ed Giera	6/6	2/2
Chris Jones	6/6	1/2
Mark Lewis	6/6	2/2

Other attendees at the Committee meetings in

2022 included the CEO, Chief People Officer,

Performance and Reward Director, Head of

Performance and Reward and the Committees'

Independent Adviser. The CRO and Director of

Compliance (DoC) join the meetings regularly to

give updates and recommendations on risk

performance and potential remuneration risk

adjustments.

The Committee is authorised by the Board to

–Set the overarching principles and parameters

of remuneration policy across Santander UK.

We do so in consultation with the RFB

Committee to ensure that the RFB is able to

comply with its legal and regulatory

obligations, including its ring-fencing

obligations.

–Oversee implementation of remuneration

policies, including considering and approving

the remuneration arrangements (including

bonuses) for EDs and senior executives. We

approve individual remuneration awards and

also changes to senior executive incentive

plans.

–Approve the framework by which colleagues

are designated as Material Risk Takers (MRT)

and oversee MRT remuneration arrangements,

including bonuses.

Details of the structure of our remuneration

arrangements and the activities of the

Remuneration Committee in the year are

provided in the Remuneration Committee Chair's

Report, Remuneration Policy and Implementation

Reports.

William Vereker

Chair

1 March 2023

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Chair’s report on corporate governance continued


Annual Report 2022			Santander UK plc 24

Basis of preparation

This report has been prepared on behalf of the

Board by the Board Remuneration Committee.

We comply with the statutory reporting

obligations for large private companies.

Furthermore, we applied the UK Corporate

Governance Code 2018 (the Code) and complied

with the Provisions other than where stated in

the Directors' Report. In addition, we comply with

other listed disclosure requirements to the extent

considered appropriate taking into account our

ownership structure.

Accordingly, several voluntary disclosures

relating to remuneration are presented in this

report.

Remuneration policy for Executive Directors

(EDs)

Our remuneration policy, which applies to EDs, is

outlined below. Remuneration is structured in

two elements: fixed and variable pay. Fixed pay is

set at market competitive levels appropriate for

the role. Variable pay rewards the delivery of

internal financial targets, key strategic priorities

and individual performance, subject to risk

adjustment.

Remuneration policy applicable to Executive Directors in the year



Fixed pay	Principle and description	Policy
Base salary	–To attract and retain EDs of sufficient calibre and with the skills to deliver our strategy, taking into account the demands and complexity of the role.	–Base salaries are normally reviewed annually. In reviewing base salaries the Committee considers a number of factors, including: –the skills required and responsibilities of the role alongside the market value of those attributes; –the requirement for base salaries to be set at a level to avoid inappropriate risk taking; –base salary increases across the colleague population; and –prevailing market and economic conditions.
Pension arrangements	–To provide a discrete element of the package to contribute towards retirement.	–All EDs receive a cash allowance in lieu of pension in line with the wider workforce average, currently 9% of salary.
Other benefits	–To offer a competitive package and to support employee wellbeing.	–Including but not limited to: private medical insurance for EDs and their dependants, life assurance, health screening, and relocation allowances where relevant. –Access to Santander UK’s all-employee share schemes on the same terms as all UK employees.


Variable pay	Principle and description	Policy
Variable pay plans	–The Variable Pay Plan aims to motivate EDs to achieve and exceed annual internal targets within Santander UK’s Risk Appetite and aligned with our business strategy and values. –Multi-year deferral and delivery in Banco Santander SA shares aligns EDs’ interests to the long-term interests of Santander UK. Further performance testing also applies for the CEO. –Part of the award is deferred according to the requirements of the PRA Rulebook (Remuneration Part). –The long-term Transformation Incentive Plan recognises the collective achievement of key financial and non-financial targets associated with the bank's ongoing transformation.	–Bonus awards under the Variable Pay Plan are discretionary and determined by reference to performance against a scorecard of financial and non- financial goals, as well as individual performance. –40% of any bonus awarded is paid upfront after the performance year ends, and delivered at least half in shares. –60% of the bonus awarded is deferred and delivered in equal tranches over years three to seven, with each tranche delivered at least half in shares. –For the CEO, the first three of five deferred award tranches are subject to further performance testing, which may reduce or increase the payout. –The Transformation Incentive is based on performance assessed over a three year period with further deferral into cash and share based awards in line with regulatory requirements. –Share based awards are subject to a minimum twelve-month retention period following vesting. –Malus and clawback provisions apply to variable pay for up to ten years following the grant of an award. –The structure of variable pay awards means EDs acquire a meaningful shareholding in Banco Santander SA which may extend for a significant period post-employment. In addition, the CEO is subject to a Shareholding Policy, which ensures alignment with the long-term interests of Banco Santander shareholders. The requirement under the policy is set at two times the incumbent’s net salary upon appointment. A formal post- employment shareholding requirement is therefore not in place.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration policy report


Annual Report 2022			Santander UK plc 25

Our remuneration policy continues to meet

regulatory requirements. Santander UK applies a

2:1 variable to fixed pay cap in line with approvals

granted to Banco Santander SA by its

shareholders. For control function roles, a lower

ratio of 1:1 is normally applied.

Executive remuneration policies

and principles

Our core values of Simple, Personal and Fair drive

our remuneration policy. We focus on delivering a

reward framework that is easily understood,

tailored to individual roles, competitive and fair.

The key drivers of our Remuneration Policy

Alignment to culture

–To design policies aligned to the long-term

success of the business, which support the

delivery of our strategy and reinforce our

values.

–To base variable pay on a balanced scorecard

of quantitative and qualitative metrics which

reflect our strategic priorities across

Customers, Shareholders, People and

Communities. This ensures that our day-to-day

activities align with Santander UK’s strategic

priorities which focus on customer loyalty and

experience, simplification, improved efficiency

and sustainable growth while aiming to be the

best bank for all our stakeholders.

Simplicity

–To ensure our approach to remuneration is

transparent and easily understood.

–To operate clear structures to support each

colleague to link their contribution to the

success of the organisation.

Risk

–To apply a consistent approach to reward for

all our employees which upholds our prudent

approach to Risk Appetite set as part of a

Santander UK-wide framework. Risk

adjustment occurs at an individual and bonus

pool level.

–To provide a package that is balanced between

fixed and variable pay, and short-term and

long-term horizons, which aligns to our

strategy whilst promoting prudent risk

management.

–To ensure remuneration is compliant with

applicable regulations and legislation.

Fairness

–To take into account an assessment of the EDs'

performance against objectives set at the start

of the year covering a range of financial, non-

financial, quantitative and qualitative criteria.

–To set robust and stretching internal targets

and reward exceptional performance.

–To attract, retain and motivate employees of

the highest calibre by providing total

remuneration which reflects individual and

Company performance, is competitive, reflects

the responsibilities of the role and drives the

organisation’s growth and transformation.

–To consider wider employee pay and

conditions when determining pay of our

Executives.

Clarity

–The Committee reviews remuneration

reporting on an annual basis against principles

of best practice and developments in corporate

governance, including the Code. Our reporting

is designed to be transparent to promote

effective stakeholder engagement, whilst

reflective of our structure.

Predictability

–The Committee annually reviews the variable

pay opportunity for individuals and the basis of

the bonus pool calculation. Due to commercial

sensitivity, these are not disclosed as per the

provisions of the Code. Directors’ remuneration

is within the variable pay cap as approved by

Banco Santander SA shareholders and set out

above.

On recruitment

When appointing a new ED, base salary is set at a

market competitive level appropriate for the role,

taking into consideration a range of factors

including role scope and responsibilities, internal

and external peer groups, relevant experience,

and affordability.

Unless determined otherwise, any new ED will

receive a pension allowance in line with the wider

workforce average, currently 9% of salary.

Benefits available will typically be aligned to the

wider employee population.

Remuneration will be established in line with the

Remuneration Policy, as set out in the EDs’

remuneration structure table in this report.

Relocation support and international mobility

benefits may also be given. Where provided,

relocation assistance will normally be a capped

amount for a limited time. In cases of

international mobility, the Committee will have

discretion to offer benefits and pension provisions

which reflect home country market practice and

align to relevant legislation.

Buy-out awards

Compensation may be provided to EDs recruited

externally for the forfeiture of any awards on

leaving their previous employer. The Committee

retains discretion to make such compensation as

deemed appropriate to secure the relevant

individual’s employment and will ensure any such

payments align with both the long-term interests

of Santander UK and the prevailing regulatory

framework.

Such payments will be in line with the awards

foregone as a result of leaving the previous

employer taking into account value, form of

awards, vesting dates and the extent to which

performance conditions applied to the original

awards.

Service agreements

The key terms and conditions of employment are

set out in individual service agreements. These

agreements include a notice period of six months

from both the ED and the Company.

The agreement reserves a right for the Company

to terminate employment immediately with a

payment in lieu equal to the ED's fixed pay for the

notice period. In the event of termination for

gross misconduct, neither notice nor payment in

lieu of notice is required.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration policy report continued


Annual Report 2022			Santander UK plc 26

Termination payments

The remuneration impact of an ED leaving the

Company, including treatment of variable pay

and/or any termination payment will reflect the

terms of the service agreements, relevant

scheme rules, regulatory requirements and the

Committee’s policy relevant to the reason for

leaving.

Outstanding variable pay awards will generally

lapse on termination, other than where an

individual is considered a ‘good leaver’. Where an

ED is a good leaver, eligibility to variable pay

awards will normally subsist until the relevant

scheduled payment dates and will remain subject

to performance where relevant.

The Committee determines whether an ED is a

good leaver. Usual good leaver circumstances

include but are not limited to: injury, ill-health,

disability, redundancy, retirement and death. The

Committee may, at its discretion, determine an

ED a good leaver in any other circumstances.

A framework is in place to guide the Committee

to determine the discretionary circumstances

when good leaver status is appropriate. Other

than a payment in the event of redundancy, there

are generally no other payments upon

termination of employment for EDs.

In the event of a change in control, any

outstanding variable pay awards will be treated

in line with the relevant scheme rules, taking into

account applicable regulatory requirements.

Risk and Performance adjustment

We continue to meet the regulatory

requirements in respect of risk and performance

adjustment. All variable remuneration is subject

to adjustment for current and future risks

through our Additional Risk Adjustment Standard

which is linked to our Board approved Risk

Appetite.

The Standard provides both a formula-based

assessment against Santander UK’s Risk Appetite

and an additional qualitative risk event

assessment that can reduce the bonus pool or

individual awards to nil at the Committee’s

discretion.

Our Individual Remuneration Adjustment

Standard provides a framework for the process,

governance and standards relevant for decisions

in relation to individual performance adjustments

following an incident, including the application of

malus and clawback.

Performance adjustments may include, but are

not limited to:

–reducing an award for the current year;

–reducing the amount of any unvested deferred

variable remuneration;

–requiring an award which has not yet been

paid to be forfeited; and

–requiring repayment on demand (on a net

basis) of any cash and share awards received

at any time for a period of up to ten years

following the date of award.

The Committee has full discretion to prevent

vesting of all or part of an amount of deferred

remuneration and/or to freeze an award during

an ongoing investigation in a number of

circumstances, including:

–colleague misbehaviour, misconduct or

material error;

–material downturn in the performance of

Santander UK or a relevant business unit; and

–Santander UK or a relevant business unit

suffering a material failure of risk

management.

When determining variable pay awards for

individuals performing roles across Santander UK

plc and Santander UK Group Holdings plc, the

Santander UK Group Holdings plc Board

Remuneration Committee will apply any

necessary discretion based on factors related to

UK group entities outside of Santander UK plc.

This discretion is subject to validation by the

Santander UK plc Board Remuneration

Committee.

The Committee seeks input from the Chair of the

Board, Chair of the Board Risk Committee, Chair

of the Board Audit Committee, Chief Risk Officer,

Director of Compliance, Chief People Officer and

Chief Internal Auditor when determining whether

any performance or risk adjustments are

required.

Policy for all employees

Our performance and reward approach across the

Company supports our business strategy,

rewards strong performance and reinforces our

values within the approved risk management

framework. The general principles of the

Remuneration Policy broadly apply across all

colleagues where appropriate, and are designed

to facilitate recruitment, motivation and retention

whilst driving performance.

The composition of remuneration packages for

EDs is aligned with the broader colleague

population, comprising salary, benefits,

workforce aligned pension provisions and

eligibility for discretionary variable pay

dependent on role and responsibility.

The Committee annually approves the operation

of variable reward schemes for all our colleagues

to ensure they reward appropriate behaviour and

do not incentivise activities which are outside risk

appetite.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration policy report continued


Annual Report 2022			Santander UK plc 27

Introduction

This section of the report outlines how our

Remuneration Policy was implemented for 2022.

Variable Pay Plan

To incentivise and reward EDs for achieving

superior and sustained performance, our

Directors participate in an annual variable

incentive plan. A balance of financial and non-

financial performance metrics are selected

annually by the Committee and are aligned with

our strategy as measured over the financial year.

Multi-year deferral and delivery in Banco

Santander SA shares ensure that EDs’ interests

are aligned to the long-term interests of the

business. Further long-term performance testing

also applies for the CEO.

Both upfront and deferred awards are made at

least half in shares or share-linked instruments.

The deferred element is delivered over seven

years. Effective 2022 and for the CEO only, the

first three deferred tranches of awards are

subject to further performance testing against

long-term metrics. Awards delivered in shares or

share-linked instruments are subject to an

additional one-year retention period from the

point of delivery.

The 2022 Variable Pay Plan pool was determined

based on a range of metrics using a balanced

scorecard approach as follows:

Quantitative assessment

A quantitative assessment is undertaken against

a balanced scorecard of financial and non-

financial metrics that are key to Santander UK’s

2022 strategy. Performance metrics are reviewed

annually to ensure continued alignment with

strategy and, for 2022 a simplified scorecard

comprised:

–Customers (Net Promoter Score, Loyal

Customers and Total Customers)

–Shareholders

–ROTE

–RORWA (where an accelerator could apply

subject to ROTE and Capital generation)

–Sustainability (Financial Empowerment)

–People (Employee Engagement and a Diversity

and Inclusion multiplier).

A profit underpin applies which requires Profit

after Tax to remain positive in order to pay any

award, with a reduced pool should profit reduce

substantially from the prior year.

Qualitative assessment

A qualitative assessment adds context to the

quantitative assessment and ensures a balanced

view of performance is taken. Performance is

assessed across metrics including but not limited

to: customers (conduct risk), profitability (results

and costs) and responsible banking.

Banco Santander Group Multiplier

The Committee has the discretion to adjust the

pool upwards or downwards to reflect overall

Banco Santander performance if appropriate.

Regional Adjustment

A Regional Adjustment was introduced in 2021,

to reflect the UK's contribution to performance of

the Banco Santander group's European Region

(comprising Spain, Portugal, Poland and the UK).

Exceptional Adjustment

Exceptional adjustments allow for unexpected

factors or additional internal targets not covered

by the quantitative or qualitative assessments to

be reflected in variable pay outcomes.

UK-focused risk adjustment

The UK-focused risk adjustment is linked to

Santander UK’s Risk Appetite and provides both a

formula-based assessment against Risk Appetite

and an additional qualitative risk event

assessment overlay. Consideration is given to risk

appetite limit breaches including but not limited

to: customers, conduct, operational, reputational

and financial crime risk. This can result in a

downward risk adjustment of up to 100% of the

bonus pool or individual awards at the discretion

of the Committee.

The Committee reviews and approves

remuneration governance and frameworks on an

annual basis to ensure continued compliance

with the relevant regulatory rules, including for

ring-fencing.

Individual assessment

The allocation of the pool is based on an

individual's performance, taking into account a

range of factors. Specifically an individual's

performance is assessed 50% against the delivery

of priorities (the 'What'), 40% against the

behaviours exhibited to deliver these priorities

(the 'How') and 10% on Risk.

Deferred long-term awards

Effective 2022, performance testing applies to a

portion of the deferred awards for the CEO. Prior

to 2022, this applied to all EDs. Any outstanding

deferred awards granted to EDs prior to 2022 will

remain subject to performance testing.

Performance testing applies to the first three

deferred tranches of the 2022 awards (36% of

the total award) which are payable in 2026, 2027

and 2028. Performance is measured over a three-

year period 2023 to 2025.

The performance measures for 2022 awards are

relative TSR, ROTE and ESG metrics. Following

the performance assessment, the level of awards

will be adjusted accordingly.

To drive performance, these measures can now

both reduce and increase the overall value of the

deferred awards.

Transformation Incentive Plan

This is a one-off long-term incentive plan which is

designed to recognise the achievement of

financial targets and an enhanced customer

experience, whilst maintaining appropriate

conduct controls and risk management, over the

course of our transformation period.

Awards under the plan will be assessed over the

period 1 January 2021 to 31 December 2023.

Awards are granted half in cash and half in share-

based units (linked to the Banco Santander SA

share price), and will vest in accordance with

regulatory requirements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration implementation report


Annual Report 2022			Santander UK plc 28

2022 Business Performance and Impact

on Remuneration

In the context of continued economic uncertainty

and high inflation, our priority remains supporting

our customers and people. Despite this

challenging operating environment, the hard

work of our colleagues has helped us to deliver a

strong set of results. Strong profit performance

was driven by net mortgage lending. Both our

customer deposits and customer loans grew as

part of our prudent balance sheet management.

We retained our 14 million customers

throughout the year and for the first time the

number of digital customers accounts for half our

customer base.

Our ongoing transformation programme has

realised considerable savings which has helped

mitigate the impact of rising inflation whilst

allowing us to continue to improve our customer

experience and deliver against our strategic

priorities of being a responsible and sustainable

business.

Whilst the Committee acknowledged this strong

performance, it also recognised the seriousness

of the penalty imposed by the FCA in December

2022 relating to historical anti-money laundering

controls between 2012 and 2017 and the

importance of reflecting this, alongside other

factors, in determining variable pay awards. The

failings and penalty were therefore taken into

account as part of the quantitative and qualitative

steps in the 2022 bonus pool determination, with

a further discretionary adjustment applied.

Context for decision making

The Committee ensures that broader

remuneration policies and practices for

employees across the Santander UK group are

taken into account when setting policy for

executive remuneration. The Committee reviews

remuneration trends across the Santander UK

group including the outcome of any pay

negotiations with our recognised trade unions

and considers the relationship between executive

remuneration and that of other Santander UK

group employees, as well as remuneration in the

wider UK market when making decisions on

executive pay.

A particular focus of the Committee during the

year has been the impact of the cost of living

crisis on our colleagues. Several management

initiatives designed to support our people,

particularly the lowest paid, were endorsed by

the Committee during the year. In addition, a

review of all cost of living initiatives was

undertaken at year end to ensure that the

approach taken was both fair and effective. The

cost of living crisis was considered carefully by

the Committee when determining EDs' 2022

variable pay awards and remuneration for 2023.

The Committee oversees broader workforce

remuneration policies and practices, the

implementation of remuneration and related

employment policies across Santander UK and

the salary and variable pay awards for all

Material Risk Takers. It also approves the design

of any material performance-related pay plans.

As part of the monitoring of pay, the following is

considered:

–Santander UK’s engagement with its

recognised trade unions on pay and benefits

matters for all colleagues;

–Annual pay reviews for the general employee

population;

–Santander UK group-wide pension and other

benefit provisions;

–The design of and overall spend on variable

incentive arrangements; and

–An assessment of conduct across the business.

The Committee is focused on ensuring that

colleagues are not subject to undue pressures or

inappropriately incentivised. This is monitored

using existing employee engagement indicators

including engagement surveys.

The Committee always considers the broader

stakeholder environment when setting policy or

reaching decisions on executive pay.

Summary of remuneration arrangements for

the Chief Executive Officers

Nathan Bostock stepped down as CEO effective 1

April 2022 to take up a position within Banco

Santander. As such, he retains the right to

deferred variable pay awards and was eligible for

a pro-rated bonus to reflect time served in 2022.

During the year, Santander UK welcomed Mike

Regnier who was appointed CEO on 1 April 2022.

Details of Mike’s remuneration are disclosed in

the Executive Directors’ remuneration table

below.


Executive Directors’ remuneration Total remuneration of each ED for the years ended 31 December 2022 and 2021.

	Mike Regnier (3)		Nathan Bostock (4)		Duke Dayal (5)
	2022	2021	2022	2021	2022	2021
	£000	£000	£000	£000	£000	£000
Salary and fees	1,123	-	420	1,680	1,000	958
Taxable benefits (1)	2	-	154	45	522	523
Pension	101	-	38	151	88	86
Total fixed pay	1,226	-	612	1,876	1,610	1,567
Bonus (paid and deferred) (2)	1,139	-	398	1,864	1,901	1,567
Total variable pay	1,139	-	398	1,864	1,901	1,567
Total remuneration (6)	2,365	-	1,010	3,740	3,511	3,134


(1)	Taxable benefits for the Executive Directors comprise a range of benefits including, but not limited to, private health care, life cover and car benefit. Included in the 2021 and 2022 figures for Duke Dayal is a relocation allowance of £500,000 p.a..
(2)	The 2021 Variable Pay Plan awards made to Nathan Bostock and Duke Dayal have been restated to account for 36% of the awards being subject to long-term metrics. Performance against these metrics can decrease the award to 0% and may not increase the award value. Previously the value of the Variable Pay Plan awards have been disclosed in full which has resulted in an overstatement post the application of performance conditions. The value of the 2021 Variable Pay Plan subject to long-term performance conditions (currently Nathan Bostock: £1,048,680 and Duke Dayal: £715,748) will be disclosed at the close of the performance period. Effective 2022, 36% of the CEO's 2022 Variable Pay Plan award will be subject to long-term performance metrics assessed over three years. No other executive, aside from the CEO, will be subject to long- term performance metrics. Performance against these metrics can increase the value of this element by up to 25% of original value, or decrease the award to 0%. The value of both the current and former CEOs' 2022 Variable Pay Plan awards not subject to performance conditions, i.e. 64%, are disclosed above. The value subject to further performance conditions (currently Mike Regnier: £640,588 and Nathan Bostock: £223,864) will be disclosed at the close of the performance period upon vesting.
(3)	Mike Regnier was appointed as CEO on 1 April 2022. Upon appointment, Mike Regnier was awarded guaranteed variable remuneration of £660,648 to compensate for remuneration forgone from his previous employer. This has not been included in the Total Remuneration value above.
(4)	Nathan Bostock stepped down as CEO on 1 April 2022. The figures above reflect remuneration received whilst serving as a Board Director. No further payments are due.
(5)	An additional one-off award was delivered to Duke Dayal in recognition of his contribution to regulatory projects during his service with Santander Holdings USA prior to joining the Company, and subject to Santander UK plc corporate and individual performance conditions during 2021. The value of the award is £294,532, and is included in the bonus value for 2021.
(6)	Tony Prestedge was appointed as an Executive Director on 16 December 2020 and stepped down on 28 July 2021. In 2022, Tony Prestedge received payments in lieu of notice totalling £172,856. No further payments are due.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration implementation report continued


Annual Report 2022			Santander UK plc 29

Stakeholder views

During 2022, Santander UK continued to engage

with key stakeholders on remuneration related

matters including its main regulators, the PRA

and FCA.

Regular engagement takes place with our

shareholder to ensure there is alignment with

remuneration constructs across the wider Banco

Santander group while meeting all regulatory

requirements and expectations. The outcome of

these discussions drives our bonus pool

construct.

In addition to her role as RFB Committee Chair,

Annemarie Durbin performs the designated NED

role, with responsibility to further enhance the

employee voice in the boardroom on matters

associated with organisational culture. This is set

out in further detail in the Chair's report on

Corporate Governance.

Frequent colleague pulse surveys were

conducted throughout 2022. This 'Your Say'

function has enabled colleagues to share

thoughts and ideas more frequently and

anonymously all year round. Alongside other

virtual listening forums, this gives a more

frequent gauge of employee sentiment.

Additionally, discussions are conducted with

union representatives during the annual pay

review cycle and on relevant employee reward

matters on a more frequent basis.

CEO pay ratio

Santander UK is committed to delivering fair pay

which attracts, retains and motivates colleagues

of the highest calibre across all grades. In line

with this commitment, the Committee has

oversight of compensation across the

organisation, including pay ratios, and considers

this when determining reward outcomes. We

continue to voluntarily disclose the ratio of the

CEO’s total remuneration to that of colleagues.

The CEO's pay mix is weighted more heavily

towards variable pay to incentivise the

achievement of stretching internal targets and

long-term value creation. This can lead to

greater variability in total remuneration. In

contrast, the typical pay mix of our less senior

colleagues places more emphasis on fixed pay, to

ensure earnings offer security and certainty, and

to meet our commitment to colleague financial

wellbeing.

Changes in the ratio are therefore influenced by

the differences in remuneration structure, rather

than an increase in pay disparity. The ratio has

decreased from 96:1 (re-stated and explained in

footnote 4 below) in 2021 to 84:1 in 2022. The

reduction in pay ratio is attributable to a number

of different factors. These include an increase in

average total remuneration amongst the

employee population, and a reduction in the CEO

remuneration package year-to-year. In assessing

the pay ratio, the Committee is confident that the

Company's policy on remuneration is fair and

consistent with our all-employee pay policies.

Advice and support provided to the

Committee

As permitted by its Terms of Reference, the

Committee has engaged the advice and support

of Deloitte LLP (Deloitte) as independent

remuneration consultants at the expense of the

Company. Total fees (excluding VAT) for advice

and support provided to the Committee in 2022

were £176,600 (2021: £199,050). Deloitte was

first appointed as Adviser to the Committee

following a formal tender process conducted in

2015. Following a further tender process in

2022, Deloitte was reappointed as the

Committees' advisor. Deloitte's independence

and effectiveness will continue to be reviewed

annually. Deloitte is a founding member of the

Remuneration Consultants Group and voluntarily

operates under the Code of Conduct in relation to

executive remuneration consulting in the UK.

The Committee is satisfied that the Deloitte

engagement partner and team that provides

remuneration advice to the Committee do not

have connections with Santander UK that may

impair their independence, following review in

2022.

In 2022, Deloitte also provided unrelated tax,

advisory, risk, assurance and consulting services

to Santander UK.

By Committee invitation, the Chair, CEO and

designated representatives from business

functions attend meetings as appropriate to

advise on HR, Risk, Legal and Regulatory matters

in support of the Committee's work. Attendees

included the Chief People Officer, Performance &

Reward Director, CRO and Company Secretary.


CEO pay ratio

	Methodology (1)	25th percentile	Median	75th percentile
2022 CEO pay ratio (5)	Option A	119:1	84:1	49:1
2021 CEO pay ratio (4)	Option A	140:1	96:1	54:1
2020 CEO pay ratio	Option A	88:1	64:1	37:1
	CEO remuneration (3)	25th percentile (2)	Median (2)	75th percentile (2)
2022 CEO pay ratio	£	£	£	£
Total salary	£1,543,366	£23,644	£32,833	£51,199
Total remuneration	£3,374,795	£28,361	£40,294	£69,416


(1)	Employee pay is calculated based on the 'Option A' methodology. We have chosen Option A as it gives the most reliable and accurate result by calculating a comparable single figure for each employee.
(2)	Employee pay data is based on full time equivalent pay for Santander UK plc employees. This excludes a small number of employees in the rest of the Santander UK group. Including those employees results in a ratio consistent with the above. For each employee, total remuneration is calculated based on fixed pay accrued in the 2022 financial year, and variable pay is either based on actual bonuses in respect of the 2022 year (where these are available) or modelled target bonuses where actuals are not yet available.
(3)	The CEO's total remuneration is aligned to that disclosed in the Executive Directors' remuneration table on the previous page.
(4)	The 2021 ratios are re-stated above. These were originally calculated based on fixed pay accrued within the 2021 year, in addition to target bonuses for eligible colleagues. The 2021 ratios have now been recalculated using 2021 fixed pay and bonuses paid in 2022 in respect of 2021 for all employees. The CEO's 2021 total remuneration has been restated to account for a component of that award being subject to long-term metrics, in line with the approach to the Executive Directors’ remuneration table.
(5)	The values used for the current and former CEOs' 2022 Variable Pay Plan awards are the same as those stated in the Executive Directors’ remuneration table i.e. the component which is not subject to performance conditions is used for the CEO pay ratio calculation above. The calculation also excludes the award of guaranteed variable remuneration of £660,648 made to Mike Regnier upon joining, to compensate for remuneration foregone from his previous employer.


Relative importance of spend on pay

2022	2021	Change
£m	£m	%
Profit from continuing operations before tax	1,874	1,845	2
Total employee costs	1,159	1,183	(2)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration implementation report continued


Annual Report 2022			Santander UK plc 30

Chair and Non-Executive Director remuneration

The Chair’s fee is reviewed and approved by the

Committee. The fees paid to NEDs are reviewed

and approved by the CEO and the Chair. Fees are

reviewed annually taking into account the market

rate and time commitment for the role. The Chair

is paid an all-inclusive base fee. NEDs are paid a

base fee, with a supplement for serving on or

chairing a Board Committee.

All NEDs and the Chair serve under letters of

appointment and either party can terminate on

three months’ written notice, except in the case

of the Chair where 12 months’ written notice is

required.

Neither the Chair nor the NEDs have the right to

compensation on the early termination of their

appointment beyond payments in lieu of notice at

the option of Santander UK. In addition, neither

the Chair nor the NEDs are eligible for pension

scheme membership or incentive arrangements


Chair and Board Committee member fees

	1 January 2022	1 January 2021
	£000	£000
Chair (inclusive of membership fee)	675	675
Board member	95	95
Additional responsibilities
Senior Independent Director	45	45
Chair of Board Risk Committee	65	65
Chair of Board Audit Committee	60	60
Chair of Board Responsible Banking Committee	60	60
Chair of Board Remuneration Committee	60	60
Membership of Board Risk Committee	30	30
Membership of Board Audit Committee	25	25
Membership of Board Responsible Banking Committee	25	25
Membership of Board Remuneration Committee	25	25
Chair of Litigation and Contentious Regulatory Board Sub-Committee	8	—
Senior Ringfencing Director	8	8
Designated NED to represent views of the workforce	8	8


	2022 Fees	2021 Fees	2022 Expenses	2021 Expenses	2022 Benefits	2021 Benefits	2022 Total	2021 Total
Non-Executive Directors	£000	£000	£000	£000	£000	£000	£000	£000
Chair
William Vereker (1)	675	675	—	—	2	2	677	677
Independent Non-Executive Directors
Annemarie Durbin (7)	265	265	1	—	—	—	266	265
Lisa Fretwell (2)	175	—	10	—	—	—	185	—
Ed Giera (3)	280	280	—	—	—	—	280	280
Chris Jones	239	235	2	4	—	—	241	239
Mark Lewis	183	183	8	4	—	—	191	187
Nicky Morgan (8)	211	83	6	4	—	—	217	87
Banco Santander Group nominated Non-Executive Directors (6)
Dirk Marzluf	—	—	—	—	—	—	—	—
Antonio Simoes (4)	—	—	—	—	—	—	—	—
Pamela Walkden (5)	125	31	2	—	—	—	127	31

(1)William Vereker's taxable benefit relates to private health care.

(2)Lisa Fretwell was appointed on 1 January 2022. Fees received are in respect of services from that date.

(3)Ed Giera’s 2021 fee has been restated to reflect fees earned in respect of 2021 (reduced by £7,000 to remove payments made in 2021 for services rendered as Senior Independent Director in 2020).

(4)Antonio Simoes was appointed on 30 April 2021.

(5)Pamela Walkden was appointed on 1 October 2021. Fees received are in respect of services from that date.

(6)With the exception of Pamela Walkden, none of the Banco Santander Group nominated Non-Executive Directors received any fees or expenses.

(7)Annemarie Durbin's fees include £15,000 in relation to her services as Chair of Cater Allen Ltd.

(8)Nicky Morgan was appointed on 10 August 2021. Fees received are in respect of services from that date.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Remuneration implementation report continued


Annual Report 2022			Santander UK plc 31

Introduction

The Directors submit their report together with

the financial statements for the year ended 31

December 2022. The information in the Directors’

Report is unaudited, except where indicated.

Corporate structure, Subsidiaries and Branches

Santander UK plc is a subsidiary of Banco

Santander SA, a Spanish retail and commercial

bank with a market share in ten core countries in

Europe and the Americas.

Santander UK was formed from two former

building societies, Abbey National and Alliance &

Leicester, together with the branch network and

savings business of Bradford & Bingley, and has

operated under a single brand since 2010.

Santander UK plc is a wholly-owned subsidiary of

Banco Santander SA and all of its ordinary shares

are unlisted and held by Santander UK Group

Holdings plc, which is a wholly owned subsidiary

of Banco Santander SA.

The Company’s preference shares are listed on

the London Stock Exchange and both the

Company and Santander UK Group Holdings plc

have other equity instruments in the form of AT1

securities listed on various securities exchange

markets, including the London Stock Exchange

and Euronext Dublin.

In addition, the Company and Santander UK

Group Holdings plc are subject to US Securities

Exchange Act reporting requirements as they

have debt securities registered in the United

States.

The Santander UK group consists of a parent

company, Santander UK plc, incorporated in

England and Wales, and a number of directly and

indirectly held subsidiaries and associates. The

Company directly or indirectly holds 100% of the

issued ordinary share capital of its principal

subsidiaries. All companies operate principally in

their country of incorporation or registration.

As a result of ring-fencing implementation in

2018, and requirements set out in the Financial

Services (Banking Reform) Act 2013, Santander

UK plc and its subsidiaries comprise of only

entities whose business is permitted under the

Act as a ring-fenced bank. For more information,

see Note 19.

Results and dividends

For details of the results for the year, see the

Income Statement in the Consolidated Financial

Statements. For more on dividends, see Note 10.

Details of Santander UK’s activities and business

performance in 2022, together with an indication

of the outlook, are set out in the Strategic report

and the Financial review.

Events after the balance sheet date

There have been no material post balance sheet

events, except as set out in Note 43.

Directors

Biographies of the Directors are available on the

Company website. Details of their emoluments

and interests in shares are outlined in the

Directors’ Remuneration Implementation report.

For more on changes to the composition of the

Board, see the Chair’s report on Corporate

Governance.

Appointment and retirement of Directors

All Directors are appointed and retire in

accordance with the Company’s Articles of

Association, the UK Companies Act 2006 and the

UK Group Framework. The Directors are required

to retire every year at the Annual General

meeting and may offer themselves for re-

election.

Lisa Fretwell was appointed to the Board on 1

January 2022 as an INED and Mike Regnier joined

the Board on 1 April 2022, as an Executive

Director and CEO. Nathan Bostock resigned as an

Executive Director and CEO on 1 April 2022.

Directors’ indemnities

Directors’ and Officers’ liability insurance cover

was in place throughout the year, in addition to a

deed of indemnity to provide cover to the

Directors for liabilities to the maximum extent

permitted by law. These remain in force for the

duration of the Directors’ period of office from the

date of appointment until such time as any

limitation periods for bringing claims against the

Directors have expired. The Directors, including

former Directors who resigned in the year,

benefit from these deeds of indemnity which

constitute qualifying third party indemnity

provisions for the purposes of the Companies Act

2006. Deeds for existing Directors are available

for inspection at the Company’s registered office.

The Company has also granted an indemnity

which constitutes ‘qualifying third party

indemnity provisions’ to the Directors of its

subsidiary and affiliated companies, including

former Directors who resigned in the year and

since the year-end. Qualifying pension scheme

indemnities were also granted to the Trustees of

the Santander UK group’s pension schemes.

Employees

We continue to ensure that Santander UK’s

remuneration policies are consistent with its

strategic objectives and are designed with its

long-term success in mind.

Communication

Santander UK aims to involve and inform

employees on matters that affect them. The

intranet is a focal point for communications and

the ‘AskHR’ website connects employees to all

the information they need about working for

Santander UK. We also use face-to-face

communication, such as team meetings and

roadshows for updates.

Santander UK regularly considers employees’

opinions and asks for their views on a range of

issues through regular engagement and surveys.

For more information, on colleague engagement

and initiatives, see the Strategic Report.

Employee Designated Non-Executive Director

Annemarie Durbin is the Santander UK Employee

Designated NED representing the views of

employees in the Boardroom. For more

information see the Section 172: Stakeholder

Voice section.

Consultation with Employees

Santander UK has a successful history of working

in partnership with its recognised trade unions,

Advance and the Communication Workers Union

(CWU), who collectively negotiate on behalf of

approximately 99.5% of our UK workforce. Both

trade unions are affiliated to the Trades Union

Congress. We consult Advance and the CWU on

significant proposals including those relating to

change across the business at both national and

local levels.

Employee share ownership

Santander UK continues to operate two all-

employee, HMRC approved share schemes: a

Save-As-You-Earn (Sharesave) Scheme and a

Share Incentive Plan (SIP). Those employees who

are designated as Material Risk Takers receive

part of their annual bonus awards in Banco

Santander SA shares/share linked instruments.

Details of the plans and the related costs and

obligations can be found in the Share-based

payments and compensation sections in Notes 1

and 36.

Disability

Santander UK is committed to equality of

employment, access and quality of service for

disabled people and complies with the UK

Equality Act 2010 throughout its business

operations. Santander UK has processes in place

to help train, develop, retain and promote

employees with disabilities. We are a Disability

Confident Employer achieving the 'Leader' level.

We are committed to giving full and fair

consideration to employment applications by

disabled people, having regard to their particular

aptitudes and abilities, and for continuing the

employment of employees who have become

disabled by arranging appropriate training and

making reasonable adjustment in the workplace.

Engagement with stakeholders and employees

Santander UK recognises the importance of

fostering relationships with its principal

stakeholders and that this is key to the long-term

success of our business. We understand the

importance of acting fairly and responsibly

between members of the Company. For more

information, see Section 172: Stakeholder Voice.

Streamlined Energy & Carbon Reporting (SECR)

For details on our energy use, carbon emissions

and efficiency measures implemented in 2022,

including Scope 1, 2 and 3 data, see the SECR

section in the Sustainability Review.

Political contributions

In 2022 and 2021, no contributions were made

for political purposes and no political expenditure

was incurred by the Company.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Directors' report


Annual Report 2022			Santander UK plc 32

Share capital

Details about the structure of the Company’s

capital can be found in Note 32.

For details of employee share schemes and how

rights are exercisable, see Note 36.

The powers of the Directors in relation to share

capital are set out in the Company’s Articles of

Association. These are available for inspection on

request.

Financial instruments

The financial risk management objectives and

policies of Santander UK and the policy for

hedging, along with details of Santander UK's

exposure to credit risk, market risk and liquidity

risk are set out in the Risk review.

Research and development

Santander UK has a comprehensive product

approval process and policy. New products,

campaigns and business initiatives are reviewed

by Santander UK’s Proposition Approval Forum.

Supervision and regulation

The Company is authorised by the PRA and

regulated by the FCA and the PRA (dual

regulated). Some of its subsidiaries and joint

venture companies are also authorised by the FCA

and the PRA (dual regulated) or the PRA or the

FCA (solo regulated).

While Santander UK operates primarily in the UK,

it is also subject to the laws and regulations of

other jurisdictions in which it operates or has

listed debt securities such as the US.

Internal controls

Risk management and internal controls

The Board and its Committees are responsible for

reviewing and ensuring the effectiveness of

management’s system of risk management and

internal controls.

We have carried out a robust assessment of the

principal and emerging risks facing Santander UK

including those that would threaten its business

model, future performance, solvency or liquidity.

Details of our principal risks, our procedures to

identify emerging risks, and how these are being

managed or mitigated are set out in the Risk

review. A summary of our Top and Emerging

Risks is also set out in the Strategic report.

Management’s report on internal control over

financial reporting

Internal control over financial reporting is a

component of an overall system of internal

control. Santander UK’s internal control over

financial reporting is designed to provide

reasonable assurance regarding the reliability of

financial reporting and the preparation of

financial statements for external purposes in

accordance with UK-adopted international

accounting standards (IAS) and International

Financial Reporting Standards (IFRS) as issued by

the International Accounting Standards Board

(IASB). Santander UK’s internal control over

financial reporting includes:

–Policies and procedures that pertain to the

maintenance of records that in reasonable

detail accurately and fairly reflect the

transactions and dispositions of assets.

–Controls providing reasonable assurance that

transactions are recorded as necessary to

permit the preparation of financial statements

in accordance with UK-adopted IAS and IFRS,

and that receipts and expenditures are being

made only in accordance with authorisations of

management.

–Controls providing reasonable assurance

regarding prevention or timely detection of

unauthorised acquisition, use or disposition of

assets that could have a material effect on the

financial statements.

Because of its inherent limitations, internal

control over financial reporting may not prevent

or detect misstatements. In addition, projections

of any evaluation of effectiveness to future

periods are subject to the risk that controls may

become inadequate because of changes in

conditions, or because the degree of compliance

with policies or procedures may deteriorate.

Management is responsible for establishing and

maintaining adequate internal control over the

financial reporting of Santander UK. Management

assessed the effectiveness of Santander UK’s

internal control over financial reporting at 31

December 2022 based on the criteria established

in the Internal Control – Integrated Framework

issued by the Committee of Sponsoring

Organisations of the Treadway Commission

(COSO) in May 2013.

As a registrant under the US Securities Exchange

Act of 1934, Santander UK's management is

responsible for establishing and maintaining an

adequate system of internal control over financial

reporting in order to ensure the accuracy and

reliability of Santander UK's Financial Statements

and the Form 20-F submitted to the SEC.

In line with COSO and SEC requirements,

controls recognised as Sarbanes-Oxley applicable

are subject to annual testing and certification by

management including an attestation by the CEO

and the CFO that they are operating effectively

and that the internal control over financial

reporting can be relied on.

All Sarbanes-Oxley control weaknesses identified

are captured, assessed and included in the year-

end assessment of the reliability of the Internal

Control environment. They are reported on an

ongoing basis to the Board Audit Committee to

ensure the control environment is continuously

improved.

Based on this assessment, management

concluded, at 31 December 2022, that Santander

UK’s internal control over financial reporting was

effective.

Disclosure controls and procedures over

financial reporting

Santander UK’s management has evaluated, with

the participation of its CEO and CFO, the

effectiveness of its disclosure controls at 31

December 2022. There are inherent limitations to

the effectiveness of any system of disclosure

controls and procedures, including the possibility

of human error, and the circumvention or

overriding of the controls and procedures.

Accordingly, even effective disclosure controls

and procedures can only provide reasonable

assurance of achieving their control objectives.

Based upon this evaluation, the CEO and the CFO

have concluded that, at 31 December 2022 ,

Santander UK’s disclosure controls and

procedures were effective to provide reasonable

assurance that information required to be

disclosed by Santander UK in the reports that it

files and submits under the US Securities

Exchange Act of 1934 is recorded, processed,

summarised and reported within the time periods

specified in the applicable rules and forms, and

that it is accumulated and communicated to

Santander UK’s management, including the CEO

and CFO, as appropriate, to allow timely decisions

regarding disclosure.

Statements of Compliance

The UK Corporate Governance Code 2018 (the

Code)

Santander UK complies with the Code wherever

applicable in order to achieve the best standards

of corporate governance. The Code applied to the

financial year ended 31 December 2022 and the

Board confirms that it applied the principles and

complied with those provisions of the Code

throughout the year, except as follows:

–Provision 17: The Company does not comply

with the requirement for the Board Nomination

Committee (BNC) membership to comprise a

majority of INEDs, following the appointment

of Pamela Walkden, as a GNED in October

2021. Whilst Pamela Walkden is not an INED,

her credentials and experience were felt to be

invaluable to the BNC. We have assessed the

implications and believe that the approach we

follow is appropriate for our size and

ownership structure.

–Provision 25: The Board Risk Committee (BRC),

since the appointment of Pamela Walkden as a

GNED in October 2021, has not been composed

of only INEDs. We have assessed the

implications and believe that the approach we

follow is appropriate for our size and

ownership structure, recognising the

experience and expertise that the GNED brings

to BRC.

–Provision 36: The Board Remuneration

Committee has not developed a policy for post-

employment shareholding requirements.

However, the structure of variable pay for EDs

and other senior executives ensures that they

acquire a meaningful shareholding in Banco

Santander SA which is held over a period of up

to eight years and which extends for a

significant period post employment. For details,

see the Remuneration Policy Report.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Directors' report continued


Annual Report 2022			Santander UK plc 33

–Provisions 40 and 41: Due to commercial

sensitivity, we have opted not to provide all of

the disclosures required by Provision 41. The

details not provided relate to (1) the extent to

which discretion has been applied to

remuneration outcomes and the reasons why

and (2) a description, with examples, of how

the Board Remuneration Committee has

addressed the factors in Provision 40

(specifically predictability as we do not provide

the range of possible values of rewards to

individual directors). Specific engagement does

not take place with the workforce to explain

how executive remuneration aligns with wider

company pay policy. However, an explanation is

available for employees in the Directors’

Remuneration Report. Details of the structure

of our remuneration arrangements and key

considerations of the Committee in the year are

included in the Board Remuneration Policy and

Implementation Reports.

The Code is publicly available on the Financial

Reporting Council website at www.frc.org.uk.

UK Finance Disclosure Code for Financial

Reporting

Santander UK’s financial statements for the year

ended 31 December 2022 have been prepared in

compliance with the principles of the UK Finance

Disclosure Code for Financial Reporting.

Going concern

The going concern of Santander UK is reliant on

preserving a sufficient level of capital and

adequately funding the balance sheet. In making

their going concern assessment in connection

with preparing the financial statements, the

Directors considered a wide range of information

similar to that considered as part of their

assessment of longer-term viability including

Santander UK’s business and strategic plans, top

and emerging risks, including those associated

with climate change, capital position and liquidity

and funding profile, stress scenarios, and

contingent liabilities, and the reasonably possible

changes in trading performance arising from

potential economic, market and product

developments. The Directors' assessment

included consideration of the potential impacts

arising from higher living costs.

Having assessed this information and the

principal risks and uncertainties, the Directors are

satisfied that the Santander UK group has

adequate resources to continue operations for a

period of at least 12 months from the date of this

report and therefore consider it appropriate to

adopt the going concern basis of accounting in

preparing the financial statements.

Viability

In accordance with Provision 31 of the UK

Corporate Governance Code 2018, the Directors

must make a statement in this Annual Report

regarding the viability of Santander UK, including

an explanation of how they assessed the

prospects of Santander UK and the period of time

for which they have made the assessment,

including why they consider that period to be

appropriate.

Considerations

In making their assessment, the Directors

considered a wide range of information including

Santander UK's:

–Three-year business plan and other longer-

term business and strategic plans

–Risk profile and risk management practices,

including the processes by which risks are

identified and mitigated, including updates on

climate change risk and progress towards

embedding them into Santander UK's Risk

Framework

–Top and emerging risks, with a focus on those

which the Directors believe could cause

Santander UK’s future financial performance or

financial condition to differ materially from

current expectations or could adversely impact

its ability to meet regulatory requirements

–Capital position and liquidity and funding

profile, and projections over the relevant period

–Viability under specific internal and regulatory

stress scenarios, as explained further below,

including scenarios which might affect

operational resiliency, and

–Contingent liabilities and the reasonably

possible changes in trading performance

arising from potential economic, market and

product developments.

The Directors’ assessment also takes account of

the potential impacts on Santander UK’s

performance, capital position, and liquidity and

funding profile, including those arising from

higher living costs (driven by high inflation and

rising interest rates) which are stretching

household finances and could lead to higher

levels of debt and defaults.

For capital, liquidity and funding purposes,

Santander UK operates on a standalone basis and

is subject to regular and rigorous monitoring by

external parties. In addition, for capital purposes,

the Company operates as part of the ring‑fenced

bank sub group Capital Support Deed. For

liquidity and funding purposes, the Company

operates as part of the Domestic Liquidity sub-

group.

Assessment

The viability of Santander UK is reliant on

preserving a sufficient level of capital and

adequately funding the balance sheet.

Santander UK’s business activities and financial

position, together with the factors likely to affect

its future development and performance, are set

out in the Financial review. Santander UK’s

objectives, policies and processes for managing

the financial risks to which it is exposed are

described in the Risk review.

Threats to the achievement of Santander UK’s

plans are controlled and managed in line with

Santander UK’s Risk Framework and within the

risk appetite approved by the Board. The risk

profile, including an assessment of top and

emerging risks, is reported regularly to the Board

Risk Committee and the Board. Risks are selected

on the basis of their ability to impact viability over

the time frame of the assessment but most risks

extend beyond this period.

Stress testing

Santander UK participates in regulatory stress

tests usually carried out annually by the BoE as

well as being part of the biennial stress testing of

Banco Santander carried out by the EBA. In 2022,

we also participated in the BoE’s Climate Biennial

Exploratory Scenario. Internal stress testing

encompasses a series of extreme but plausible

scenarios covering a wide range of outcomes, risk

factors, time horizons and market conditions.

We also conduct reverse stress testing, in which

we identify and assess scenarios that could cause

Santander UK's business model to become

unviable.

The Directors review the outputs of stress testing

as part of the approval processes for the ICAAP,

the ILAAP, Risk Appetite and regulatory stress

tests. For more on stress testing and reverse

stress testing, see Risk review.

Time horizon

While a five-year plan is prepared for regulatory

purposes and our stress testing encompasses

scenarios some of which also extend out to that

time period, using a longer time horizon

increases uncertainty.

After taking account of Santander UK’s current

position and principal risks and uncertainties, the

Directors consider that a period of three years

from the balance sheet date is the most

appropriate time frame from which a reasonable

assessment of viability can be made.

This period is consistent with the period covered

by Santander UK’s three-year business plan and is

representative of the time horizon to consider the

impact of anticipated regulatory changes in the

financial services industry.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Directors' report continued


Annual Report 2022			Santander UK plc 34

Statement

Based on their assessment of longer-term

viability, the Directors have a reasonable

expectation that Santander UK will be able to

continue in operation and meet its liabilities as

they fall due over the next three years.

Ethical Code of Conduct

Santander UK is committed to ensuring we hold

ourselves to high ethical standards. This means

adhering to laws, regulations, policies including

our Ethical Code of Conduct and also carrying out

business in a responsible way. High standards of

professional and personal conduct helps

Santander identify, manage and respond to risks,

creates a positive, collaborative working

environment and it ensures positive customer

interactions and outcomes.

The Santander Way determines how we deliver

on our purpose, to help people and businesses

prosper. How we deliver that purpose is as

important as the end result. Our conduct and our

culture matters. Our aim is to be the best open

financial services platform by acting responsibly

and earning the lasting loyalty of our colleagues,

customers and communities.

How we do business is intrinsically linked to our

behaviours and values and supports our aim.

Santander UK’s Ethical Code of Conduct sets the

standards expected of all colleagues and forms

part of the terms and conditions of employment.

It makes clear our corporate values, our

expectations regarding corporate behaviours and

general principles and standards we expect with

regard to customers, colleagues, conflicts of

interest, data, media and our approach to

sustainability.

There are numerous policies, processes, support

and guidance that help colleagues meet these

expectations and do the right thing to ensure

Santander UK remains a Simple, Personal and Fair

bank for its colleagues, customers, shareholders

and the communities it serves.

The Ethical Code of Conduct applies to all

colleagues including permanent and temporary

colleagues as well as EDs and NEDs. The SEC

requires companies to disclose whether they

have a code of ethics that applies to the CEO and

senior financial officers which promotes honest

and ethical conduct, full, fair, accurate, timely and

understandable disclosures, compliance with

applicable governmental laws, rules and

regulations, prompt internal reporting of

violations, and accountability for adherence to a

code of ethics.

Santander UK meets these requirements through

its Ethical Code of Conduct and supporting

policies, including but not limited to the Anti-

Bribery and Corruption Policy, the

Whistleblowing Policy, the FCA’s Principles for

Businesses, and the FCA’s Statements of Principle

and Code of Practice for Approved Persons, with

which the CEO and senior financial officers

comply.

Copies of these documents are available on

application to Santander UK plc, 2 Triton Square,

Regent’s Place, London NW1 3AN.

Statement of Directors’ responsibilities

The Directors are responsible for preparing the

Annual Report and the financial statements in

accordance with applicable law and regulations.

Company law requires the Directors to prepare

financial statements for each financial year.

Under that law, the Directors have prepared the

Santander UK group and Company financial

statements in accordance with UK-adopted IAS. In

preparing the Santander UK group and Company

financial statements, the Directors have also

elected to comply with IFRSs as issued by the

IASB.

Under company law, the Directors must not

approve the financial statements unless they are

satisfied that they give a true and fair view of the

state of affairs of the Santander UK group and the

Company and of the profit or loss of the

Santander UK group and the Company for that

period.

In preparing the financial statements, the

Directors are required to:

–Select suitable accounting policies and then

apply them consistently

–State whether applicable UK-adopted IAS and

IFRSs as issued by the IASB have been followed,

subject to any material departures disclosed

and explained in the financial statements

–Make judgements and accounting estimates

that are reasonable and prudent, and

–Prepare the financial statements on the going

concern basis unless it is inappropriate to

presume that the Santander UK group and the

Company will continue in business.

The Directors are responsible for safeguarding

the assets of the Santander UK group and the

Company and hence for taking reasonable steps

for the prevention and detection of fraud and

other irregularities.

The Directors are also responsible for keeping

adequate accounting records that are sufficient to

show and explain the Santander UK group’s and

the Company’s transactions and disclose with

reasonable accuracy at any time the financial

position of the Santander UK group and the

Company, and enable them to ensure that the

financial statements comply with the Companies

Act 2006.

The Directors are responsible for the

maintenance and integrity of Santander UK’s

website. Legislation in the UK governing the

preparation and dissemination of financial

statements may differ from legislation in other

jurisdictions.

The Directors are responsible for presenting and

marking up the consolidated financial statements

in compliance with the requirements set out in

the Delegated Regulation 2019/815 on European

Single Electronic Format.

Having taken into account all the matters

considered by the Board and brought to its

attention during the year, the Directors are

satisfied that the Annual Report taken as a whole

is fair, balanced and understandable, and

provides the information necessary to assess

Santander UK’s position and performance,

business model and strategy.

Directors' confirmations

Each of the Directors confirms that, to the best of

their knowledge:

–The Santander UK group and Company financial

statements, which have been prepared in

accordance with UK-adopted IAS and IFRSs as

issued by the IASB, give a true and fair view of

the assets, liabilities and financial position of

the Santander UK group and the Company, and

of the profit of the Santander UK group, and

–The management report, which is incorporated

into the Directors’ report, includes a fair review

of the development and performance of the

business and the position of the Santander UK

group and the Company, together with a

description of the principal risks and

uncertainties they face.

Disclosure of information to Auditors

Each of the Directors at the date of approval of

this report confirms that:

–So far as the Director is aware, there is no

relevant audit information of which Santander

UK’s auditor is unaware

–The Director has taken all steps that they ought

to have taken as a Director to make himself or

herself aware of any relevant audit information

and to establish that Santander UK’s auditor is

aware of that information.

This confirmation is given and should be

interpreted in accordance with the provisions of

Section 418 of the UK Companies Act 2006.

Auditor

PricewaterhouseCoopers LLP will continue in the

office of auditor. A resolution to reappoint them

will be proposed at the Company’s forthcoming

Annual General Meeting.

By Order of the Board

John Mills

Company Secretary

1 March 2023

2 Triton Square, Regent’s Place,

London NW1 3AN

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Directors' report continued


Annual Report 2022			Santander UK plc 35


Risk review
The Risk review consists of unaudited financial information unless otherwise stated. The audited financial information is an integral part of our Consolidated Financial Statements. We aim to continually enhance our disclosures and their usefulness to readers in the light of developing market practice and areas of focus. As a result, our disclosures go beyond the minimum required by accounting standards and other regulatory requirements.	Contents

	Risk governance	37
	Introduction	37
	Risk Framework	37
	Risk Appetite	41
	Stress Testing	42
	How risk is distributed across our business	42
	Credit risk	43
	Risk management	43
	Santander UK group level	61
	Retail Banking	76
	Consumer Finance	85
	Corporate & Commercial Banking	87
	Corporate Centre	92
	Market risk	94
	Liquidity risk	97
	Capital risk	105
	Pension risk	108
	Operational risk & resilience	110
	Conduct and regulatory risk	113
	Financial crime risk	115
	Other key risks	117
	Model risk	117
	Legal risk	117
	Strategic and business risk	118
	Reputational risk	118

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 36

Risk governance

INTRODUCTION

Santander UK Group Holdings plc is the immediate parent company of Santander UK plc. The two companies operate on the basis of a unified business strategy

with some overlap in membership, albeit the principal business activities of the Santander UK Group Holdings plc group are carried out by Santander UK plc and its

subsidiaries. The Santander UK Group Holdings plc Risk Frameworks have been adopted by the Company and its subsidiaries to ensure consistent application.

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, withstand stresses, 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.

RISK FRAMEWORK

How we define risk (unaudited

Risk is any uncertainty about us being able to achieve our business objectives. It covers both financial and non-financial risks (NFRs). NFR is a broad term usually

defined by exclusion, i.e. any risks other than the traditional financial risks of Credit, Market, Liquidity, Capital and Pension, and Strategic and business risk. Risk can

be split into a set of risk types, each of which could affect our results and our financial resources. Enterprise risk is the aggregate view of all the risk types described

below:

Key risk types


Risk types	Description
Credit	The risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we have provided credit, or for whom we have assumed a financial obligation.
Market	Non-traded market risk – the risk of loss of income, economic or market value due to changes to interest rates in the non-trading book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through a change to revenues, assets, liabilities and off-balance sheet exposures in the non-trading book. Traded market risk – the risk of changes in market factors that affect the value of positions in the trading book.
Liquidity	The risk that we do not have sufficient liquid financial resources available to meet our obligations as they fall due, or we can only secure such resources at excessive cost.
Capital	The risk that we do not have an adequate amount or quality of capital to meet our internal business objectives, regulatory requirements and market expectations.
Pension	The risk caused by our statutory, contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to an agreed Recovery Plan or for some other reason.
Operational risk & resilience	The risk of loss or adverse impact due to inadequate or failed internal processes, people and systems, or external events. We give a particular focus to Cyber, Fraud, IT, People and Third Party risks, which we mitigate through our management of operational risk.
Conduct and regulatory	Conduct risk – the risk that our decisions and behaviours lead to detriment or poor outcomes for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk – the risk of financial or reputational loss, or imposition or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations.
Financial crime	The risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax evasion, bribery and corruption. Failure to meet our legal and regulatory obligations could result in criminal or civil penalties against Santander UK or individuals, as well as affecting our customers and the communities we serve.
Other risk types	Model risk – the risk that the predictions of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately. Legal risk – the risk of an impact arising from legal deficiencies in contracts; failure to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to discharge duties or responsibilities created by law or regulation. Strategic and business risk – the risk of loss or underperformance against planned objectives; damage from strategic decisions or their poor implementation that impact the long-term interests of our key stakeholders or from an inability to adapt to external developments. Reputational risk – the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors or any other interested party.

In January 2023, the Legal risk framework, in agreement with the General Counsel, was retired following a structural change when the Chief Legal and Regulatory

Officer (CLRO) left the organisation and the Legal function moved to the CFO Division (Line 1). As the Risk Types are owned by Risk control units (Line 2 in our three

lines of defence model, as set out in 'Risk organisational structure' section that follows), and the CFO Division is a Risk management unit (Line 1), it was decided to

retire the Legal risk type and framework. Where appropriate, elements of the existing Legal risk framework will be subsumed into the other relevant risk

frameworks. Within the Risk Framework, the roles and responsibilities of CFO have been expanded to include the oversight of the General Counsel and Legal

function, overseeing the provision of legal support to Santander UK, and management of relationships with third party law firms.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 37

Top and emerging risks

Several of our risk types also have Top risks associated with them. We regularly review the Top risks that could impact our business, customers and shareholders,

and they are monitored at each meeting of the ERCC and BRC. The Top risks we actively monitored in 2022 are set out in the relevant section of this Risk review and

summarised in the Top risks section of the Risk management overview in the Strategic report. Our Top risks included risks arising from Inflationary and supply

chain pressures, Climate change, Financial crime, Fraud, IT, Cyber, People and Conduct and regulatory.

We also regularly review emerging risks that could impact our business, customers and shareholders, including regular review and discussion at the ERCC and BRC.

The identification of emerging risks is co-ordinated by the Risk Division. A key part of the process is continual scanning of the external environment, focusing on

emerging risk drivers such as broader geo-political, environmental and social risks, technology change, customer behaviour, market competition, regulation,

government, digital assets and disruption of UK macroeconomic factors. Emerging risks actively monitored in 2022 are set out in the relevant section of this Risk

review and summarised in the ‘Emerging risks’ section of the 'Risk management overview in the Strategic report.

In 2022 we added Eurozone/Sovereign Bank Contagion to the emerging risks we monitor and transitioned Inflationary and supply chain pressures to Top risks. For

more, see the Risk management overview in the Strategic report.

Key elements

Our Risk Framework sets out how we manage and control risk. In 2021, we enhanced some of the standards to provide more details and clarity on the relationship

between, and roles of, Banco Santander SA and Santander UK, climate related risk drivers whether physical or transition-led, and the development of risk

methodologies and quantitative models.

How we approach risk – our culture and principles

The complexity and importance of the financial services industry demands a strong risk culture. We have systems, controls and safeguards in place to manage and

control the risks we face, but it is also crucial that everyone takes personal responsibility for managing risk. Our risk culture plays a key role in our aim to be the

best bank for our customers, shareholders, people and communities by acting responsibly. It is vital that all our people understand this. To achieve this, our people

have a strong, shared understanding of what risk is, and what their role is in helping to control it. We express this in our Risk Culture Statement:

Risk Culture Statement

Santander UK will only take risks that it understands and will always remain prudent in identifying, assessing, managing and reporting all risks. We proactively

encourage our people to take personal responsibility for doing the right thing and to challenge without fear. We ensure decisions and actions take account of the best

interests of all our stakeholders and are in line with The Santander Way.

The Board reviews and approves our Risk Culture Statement every year. Senior executives are responsible for promoting our risk culture from the top. They drive

cultural change and increased accountability across the business. We reinforce our Risk Culture Statement and embed our risk culture in all our business units

through our Risk Framework, Risk Certifications and other initiatives. This includes highlighting that:

–It is everyone’s personal responsibility to play their part in managing risk

–We must Identify, Assess, Manage and Report risk quickly and accurately

–We make risk part of how we assess our people’s performance and how we recruit, develop and reward them

–Our internal control system is essential to ensure we manage and control risk in line with our principles, standards, Risk Appetite and policies.

We use Risk Certifications to confirm how we manage and control risks in line with our Risk Framework and within our Risk Appetite. As an example, every year,

each member of our Executive Committee confirms that they have managed risk effectively in line with the Risk Framework in the part of the business for which

they are responsible. Their certification lists any exceptions and the agreed actions to be taken to correct them. This is a tangible sign of the personal responsibility

that is such a key part of our risk culture.

Our risk culture programme – I AM Risk

Our I AM Risk approach aims to make sure our people:


–Identify risks and opportunities –Assess their probability and impact –Manage the risks and suggest alternatives –Report, challenge, review, learn and ‘speak up’.

I AM Risk is how we make risk management part of everyone’s life as a Santander UK employee from how we recruit them and manage their performance to how

we develop and reward them. It is also how we encourage people to take personal responsibility for risk to speak up and to come up with ideas. We use I AM Risk in

our risk certifications, policies, frameworks and governance, and risk-related communications. We also include it in reward arrangements and in mandatory

training. To support general awareness, our learning websites include videos and factsheets.

As part of I AM Risk, we include mandatory risk objectives for all our people in our performance management processes. The Executive Committee leads our

culture initiatives under the CEO’s sponsorship and we use monthly staff surveys to give insight into our culture.

Our risk governance structure

We are committed to the highest standards of corporate governance in every part of our business, including risk management. For details of our governance,

including the Board and its Committees, see the ‘Governance’ section of this Annual Report. The Board delegates certain responsibilities to Board Level Committees

as needed and where appropriate. Our risk governance structure strengthens our ability to identify, assess, manage and report risks, as follows:

–Committees: A number of Board and Executive committees are responsible for specific parts of our Risk Framework

–Key senior management roles: A number of senior roles have specific responsibilities for risk management

–Risk organisational structure: We have the ‘three lines of defence’ model built into the way we run our business.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 38

Committees

The Board and Board Level Committee responsibilities for risk are:


Board Level Committee	Main risk responsibilities
The Board	–Has overall responsibility for business execution and for managing risk
The Board	–Reviews and approves the Risk Framework and Risk Appetite
Board Risk Committee (BRC)	–Assesses the Risk Framework and recommends it to the Board for approval
	–Advises the Board on our overall Risk Appetite, tolerance and strategy
	–Oversees our exposure to risk and our strategy and advises the Board on both
	–Reviews the effectiveness of our risk management systems and internal controls
	–Receives regular updates on financial crime compliance and risks including money laundering, bribery and corruption and sanctions compliance and monitors KPIs in line with approved Board risk appetite
Board Responsible Banking Committee	–Responsible for culture and operational risk from conduct, compliance, competition & legal matters
	–Reviews reports from the Director of Compliance (DoC) on the adequacy and effectiveness of the compliance function
	–Ensures that adequate and effective control processes are in place to identify and manage reputational risks
	–Oversees our Sustainability and Responsible Banking programme and how it impacts on employees, communities, the environment including sustainability and climate change, reputation, brand and market positioning
Board Audit Committee	–Monitors and reviews the financial statements integrity, and any formal announcements on financial performance
	–Reviews the adequacy and effectiveness of the internal financial controls and whistleblowing arrangements
	–Monitors and reviews the effectiveness of the internal audit function
	–Oversees the independence and performance of the external auditors
Board Remuneration Committee	–Oversees implementation of remuneration policies, ensuring they promote sound and effective risk management

The Executive Level Committee responsibilities for risk are:


Executive Level Committee	Main risk responsibilities
Executive Committee (ExCo)	–Reviews business plans in line with our Risk Framework and Risk Appetite before they are sent to the Board to approve
Executive Committee (ExCo)	–Receives updates on key risk issues managed by CEO-level committees and monitors the actions taken
Senior Management Committee	–Focuses on the responsibilities of the Executive Committee Senior Management Function holders and how they are discharged
Senior Management Committee	–Reviews updates on key risk issues, customer, reputational and conduct matters
Executive Risk Control Committee (ERCC)	–Reviews Risk Appetite proposals before they are sent to the BRC and the Board to approve
	–Ensures that we comply with our Risk Framework, Risk Appetite and risk policies
	–Reviews and monitors our risk exposures and approves any corrective steps we need to take
Asset and Liability Committee (ALCO)	–Reviews liquidity risk appetite (LRA) proposals
	–Ensures we measure and control structural balance sheet risks, including capital, funding and liquidity, in line with the policies, strategies and plans set by the Board
	–Reviews and monitors key asset and liability management activities to ensure we keep our exposures within our Risk Appetite
Pensions Committee	–Reviews pension risk appetite proposals
	–Approves actuarial valuations and reviews the impact they may have on our contributions, capital and funding
	–Consults with the pension scheme trustees on the scheme’s investment strategy
Capital Committee	–Puts in place reporting systems and risk control processes to make sure capital risks are managed within our Risk Framework
Capital Committee	–Reviews capital adequacy and capital plans, including the ICAAP, before they are sent to the Board to approve
Incident Accountability Committee	–Considers, calibrates, challenges and agrees any appropriate individual remuneration adjustments
Incident Accountability Committee	–Presents recommendations to the Board Remuneration Committee
Credit Approval Committee	–Approves corporate and wholesale credit transactions which exceed levels delegated to lower level forums or individuals
Investment Approval Committee	–Approves equity type investment transactions which exceed levels delegated to lower level approval forums or individuals
Economic Crime Committee	–Ensures due reporting, consideration, oversight and informed decision making regarding compliance with financial crime laws and regulations, fraud, and best industry practice aligned to our Risk Appetite

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 39

Key senior management roles

Senior roles with specific responsibilities for risk management are:


Role	Main risk responsibilities
Chief Executive Officer	The Board delegates responsibility for our business activities and managing risk on a day-to-day basis to the CEO. The CEO proposes our strategy and business plan, puts them into practice and manages the risks involved. The CEO must also ensure we have a suitable system of controls to manage risks and report to the Board on it.
Chief Risk Officer (CRO)	Oversees and challenges risk activities, and ensures lending is made within our Risk Appetite. Accountable for control and oversight of credit, market, liquidity, capital, pension, strategic & business, operational, model, climate and enterprise risks.
Chief Financial Officer	Responsible for developing strategy, leadership and management of the CFO Division. The CFO is responsible for managing interest rate, liquidity, pension and capital risks. The CFO also aims to maximise the return on Regulatory and Economic Capital.
Chief Internal Auditor (CIA)	Designs and uses an audit system that identifies key risks and evaluates controls. The CIA also develops an audit plan to assess existing risks that involve producing audit, assurance and monitoring reports.
Money Laundering Reporting Officer (MLRO)	Responsible to the CRO for control and oversight of financial crime risk but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA.
Director of Compliance (DoC)	Responsible to the CRO for control and oversight of conduct and regulatory risk and Compliance but has regulatory responsibility to report on this risk type to Executive and Board Committees and the FCA.

Risk organisational structure

We use the ‘three lines of defence’ model to manage risk. This model is widely used in the banking industry and has a clear set of principles to put in place a

cohesive operating model across an organisation. It does this by separating risk management, risk control and risk assurance. The reporting lines to the Board with

respect to risk are as follows:

Line 1: Risk management

Business Units and Business Support Units identify, assess and manage the risks which originate and exist in their area, within our Risk Appetite. It is under

the executive responsibility of the CEO.

Line 2: Risk control

Risk Control Units are independent monitoring and control functions. They make sure Business Units and Business Support Units manage risks effectively and

within our Risk Appetite. The Risk Control units are: Financial Crime, Risk - responsible for controlling credit, liquidity, capital, market, pension, strategic and

business, operational, model and enterprise risks; and Compliance, responsible for controlling reputational and conduct and regulatory risks. It is under the

executive responsibility of the CEO, but responsible to the CRO for overseeing the first line of defence.

Line 3: Risk assurance

Internal Audit is an independent corporate function. It gives assurance on the design and effectiveness of our risk management and control processes. It is

responsible to the CIA.

Internal control system

Our Risk Framework is an overarching view of our internal control system that helps us manage risk across the business. It sets out at a high level the principles,

standards, roles and responsibilities, and governance for internal control. Our Risk Framework covers the categories below:


Category	Description
Risk Frameworks	Set out how we should manage and control risk across the business, our risk types and our risk activities.
Risk Management Responsibilities	Set out the Line 1 risk management responsibilities for Business Units and Business Support Units.
Strategic Commercial Plans	Plans produced by business areas, at least annually, which describe the forecasted objectives, volumes and risk profile of new and existing business, within the limits defined in our Risk Appetite.
Risk Appetite	See our Risk Appetite section that follows.
Delegated Authorities/Mandates	Define who can do what under the authority delegated to the CEO by the Board.
Risk Certifications	Business Units, Business Support Units or Risk Control Units set out each year how they managed/controlled risks in line with our risk frameworks and Risk Appetite, and explain any action to be taken. This helps drive personal accountability.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 40

RISK APPETITE

How we control the risks we are prepared to take

When our Board sets our strategic objectives, it is important that we are clear about the risks we are prepared to take to achieve them. We express this through our

Risk Appetite Statement, which defines the amount and kind of risk we are willing to take. Our Risk Appetite and strategy are closely linked, and our strategy must

be achievable within the limits set out in our Risk Appetite.

The principles of our Risk Appetite

Our Risk Appetite Statement lists ten principles that we use to set our Risk Appetite.

–We always aim to have enough financial resources to continue to do business in adverse but plausible stressed economic and business conditions, as well as to

survive a very severe stress that would deplete our capital reserves

–We should be able to predict how our income and losses might vary – that is, how volatile they are. That applies to all our risks and lines of business

–Our earnings and dividend payments should be stable, and in line with the return we aim to achieve

–We are an autonomous business, so we always aim to have strong capital and liquidity resources

–The way we fund our business should be based on diverse funding sources and duration. This helps us avoid relying too much on wholesale markets

–We set controls on large concentrations of risk, like single customers or specific industries

–There are some key risks we take, but for which we do not actively seek any reward, like operational, conduct and regulatory, financial crime, legal and

reputational risk. We take a risk-averse approach to these risks

–We comply with all regulations – and aim to exceed the standards they set

–Our pay and bonus schemes should support these principles and our risk culture

–We always aim to earn the trust of our people, customers, shareholders and communities.

How we describe the limits in our Risk Appetite

Our Risk Appetite sets out detailed limits across all types of risk, using metrics and qualitative statements.

Metrics

We use metrics to set limits across most risk types including a set of metrics focused on losses, capital, liquidity and concentration. We set:

–Limits for losses for our most important risks, including credit, market, operational and conduct risk

–Capital limits, reflecting both the capital that regulators expect us to hold (regulatory capital) and our own internal measure economic capital (EC)

–Liquidity limits according to a range of plausible stress scenarios for our business

–Concentration limits, to determine the maximum concentration level that we are willing to accept.

These limits apply in normal business conditions, but also when we might be experiencing a far more difficult economic environment. We refer to conditions like

this as being under stress. For more on EC and stress scenarios, see the next page.

Qualitative statements

For some types of risk we also use qualitative statements that describe in words the appetite we want to set. For example, in operational risk, we use them to

describe our risk-averse appetite for cyber risk. We also use them to prohibit or restrict exposure to certain sectors, types of customer and activities.

How we set our Risk Appetite, and stay within it

We control our Risk Appetite through our Risk Appetite Framework. Our Board approves and oversees our Risk Appetite Statement every year. This ensures it is

consistent with our strategy and reflects changes in the markets and economic environment in which we operate. Our ERCC is responsible for ensuring that our risk

profile (the level of risk we are prepared to accept) is consistent with our Risk Appetite Statement. To do this they monitor our performance against our Risk

Appetite, business plans and budgets each month.

We also use stress testing to review how our business plan performs against our Risk Appetite Statement. This shows us if we would stay within our Risk Appetite

under stress conditions. It also helps us to identify any adverse trends or inconsistencies.

We embed our Risk Appetite by setting more detailed risk limits for each business unit and key portfolios. These are set in a way so that if we stay within each

detailed limit, we will stay within our overall Risk Appetite. When we use qualitative statements to describe our appetite for a risk, we link them to lower-level key

risk indicators, so that we can monitor and report our performance against them.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 41

STRESS TESTING

Stress testing helps us understand how different events and economic conditions could affect our business plan, earnings and risk profile. This helps us plan and

manage our business.

Scenarios for stress testing

To see how we might cope with difficult conditions, we regularly develop challenging scenarios that we might face. We consult a broad range of internal

stakeholders, including Board members, when we design and choose our most important scenarios. The scenarios cover a wide range of outcomes, risk factors,

time horizons and market conditions. They are designed to test:

–The impact of shocks affecting the economy as a whole or the markets we operate in

–Key potential vulnerabilities of our business model, and the processes and systems which support it

–Potential impacts on specific risk types.

We describe each scenario using a narrative setting out how events might unfold, as well as a market and/or economic context. For example, the key economic

factors we reflect in our ICAAP scenarios include house prices, interest rates, unemployment levels, inflation, and the size of the UK economy. We also explore

sensitivities around several macro variables where there may be concerns or levels of uncertainty.

In 2021 and 2022, we completed the Bank of England’s (BoE) Climate Biennial Exploratory Scenario (CBES). The purpose of this exercise was to investigate a range

of risks that may not be directly linked to prevailing economic and financial conditions and helps us to prepare for possible future shocks. The CBES tested the

resilience of the UK financial system to the physical and transition risks associated with three different climate pathways. The key climate factors included physical

risks due to higher global temperatures, and transition risks due to the structural changes needed to transition to a low-carbon economy.

In 2022, we also developed a Climate Internal Scenario Analysis (CISA) to help understand better the potential impact of climate change on our business portfolios

and balance sheet. We generated three qualitative scenarios for climate-related risks and we also quantified potential losses from an early disorderly transition,

for example linked to the current energy crisis and conflict in Ukraine. The CISA outputs will form the basis of our 2022 ICAAP for climate risk by helping show if we

need to hold more capital for climate-related risk and help us prioritise our actions for the next five years.

How we use stress testing

We use stress testing to estimate the effect of these scenarios on our business and financial performance, including:

–Our business plan, and its assessment against our Risk Appetite

–Our capital strength, through our ICAAP

–Our liquidity position, through our ILAAP

–Our long term impacts of climate change, through the CBES and our CISA

–Impacts on other risk types.

We use a wide range of models, approaches and assumptions. These help us interpret the links between factors in markets and the economy, and our financial

performance. For example, one model looks at how changes to key macroeconomic variables like unemployment rates might affect the number of customers who

might fall into arrears on their mortgage or other loans.

Our stress testing models are subject to a formal review, independent validation and approval process. We highlight the key weaknesses and related model

assumptions in the approval process for each stress test. In some cases, we overlay expert judgement onto the results of our models. Where this is material to the

outcome of the stress test, the approving governance committee reviews it. We take a multi-layered approach to stress testing to capture risks at various levels.

This ranges from sensitivity analysis of a single factor to a portfolio, to wider exercises that cover all risks across our entire business. We use stress test outputs to

design business plans that aim to mitigate potential impacts of possible stress scenarios.

We also conduct reverse stress tests. These are tests in which we identify and assess scenarios that are most likely to cause our business model to fail.

Board oversight of stress testing

The ERCC approves the design of the scenarios in our ICAAP, ILAAP and CISA. The BRC approves the stress testing framework. The Board reviews stress test outputs

as part of the approval processes for the ICAAP, ILAAP, Bank Recovery and Resolution Directive (BRRD), our Risk Appetite and regulatory stress tests, including CBES.

Regulatory stress tests

We take part in a number of external stress testing exercises. These can include stress tests of the UK banking system conducted by the PRA and the BoE. We also

contribute to stress tests of Banco Santander conducted by the European Banking Authority (EBA).

For more on capital and liquidity stress testing, see the ‘Capital risk’ and ‘Liquidity risk’ sections.

HOW RISK IS DISTRIBUTED ACROSS OUR BUSINESS

Economic capital

As well as assessing how much regulatory capital we need to hold, we use an internal EC model to measure our risk. We use EC to get a consistent measure across

different risk types. EC also takes account of how concentrated our portfolios are, and how much diversification there is between our various businesses and risk

types. As a consequence, we can use EC for a range of risk management activities. For example, we can use it to help us compare requirements in our ICAAP or to

get a risk-adjusted comparison of income from different activities.

Regulatory capital – risk-weighted assets

We hold regulatory capital against our credit, market and operational risks. In 2022, over half of our total risk-weighted assets accounted for credit risk in Retail

Banking. This reflects our business strategy and balance sheet.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 42

Credit risk


	Overview Credit risk is the risk of financial loss due to the default or credit quality deterioration of a customer or counterparty to which we provided credit, or for whom we have assumed a financial obligation. We set out how our exposures arise and our approach to credit risk across the credit risk lifecycle. We discuss our ECL approach and the key inputs to our ECL model. We then analyse our key metrics, credit performance and forbearance.			Key metrics Stage 3 ratio improved to 1.26% (2021: 1.45%). Loss allowances increased to £1,005m (2021: £865m). Balance weighted average LTV of 69% (2021: 66%) on new mortgage lending.

CREDIT RISK MANAGEMENT

Exposures (audited)

Exposures to credit risk arise in our business segments from:


Retail Banking	Consumer Finance	Corporate & Commercial Banking	Corporate Centre
In Homes: –Residential mortgages for customers with good credit quality (prime lending). –We provide these mostly for owner- occupiers, with buy-to-let mortgages for non-professional landlords. In Everyday Banking: –Unsecured lending to individuals, such as loans, credit cards and overdrafts. –Banking services to businesses with turnover up to £6.5m per annum and simpler borrowing needs. We offer loans, credit cards and overdrafts.	–Financing for cars, vans, motorbikes and leisure vehicles through Santander Consumer (UK) plc (SCUK). –Through our joint ventures, Hyundai Capital UK Ltd and Volvo Car Financial Services UK Limited, we provide retail point of sale customer finance and wholesale finance facilities (stock finance).	–Loans, bank accounts, treasury services, invoice discounting, cash transmission, trade finance and asset finance. –We provide these to SMEs and mid- sized corporates with turnover up to £500m per annum, Commercial Real Estate and Social Housing associations.	–Asset and liability management of our balance sheet, as well as non-core and legacy portfolios in run-off. –Exposures include financial institutions (derivatives and other treasury products), structured products, and sovereign and supranational assets chosen for diversification and liquidity.

The segmental basis of presentation in this Annual Report has changed following the transfer of Social Housing loans and non-core liabilities to our CCB segment

from Corporate Centre. Comparatives have been restated accordingly. See Note 2 for more information.

Our approach to credit risk

We manage our portfolios across the credit risk lifecycle, from drawing up our risk strategy and planning, through assessment and origination, monitoring, arrears

management and debt recovery. We make sure the actual risk profile of our exposures stays in line with our business plans and within our Risk Appetite. We tailor

the way we manage risk to the type of product and regularly review our approach and refine it when we need to.

1. Risk strategy and planning (audited)

All relevant areas of the business work together to create our business plans. We aim to balance our strategy, goals, and financial and technical resources with our

Risk Appetite. To do this, we focus on economic and market conditions and forecasts, regulations, conduct matters, profitability, returns and market share.

2. Assessment and origination (audited)

Managing credit risk begins with lending responsibly. That means only lending to customers who are committed to paying us back and can afford to, even if their

circumstances change. We undertake a thorough risk assessment to make sure a customer can meet their obligations before we approve a loan. We take

proportionate steps to assess whether a customer will be able to repay the money borrowed. We do this by a series of initial affordability and credit risk

assessments. We access each customer’s credit profile and signs of how reliable they are at repaying credit. When a customer applies, we assess the data they

provide, plus data from credit reference agencies (for Retail Banking and Consumer Finance) and performance on their other Santander accounts (if they have any)

against our Credit Policy.

Retail Banking

In Homes, for secured loans, we assess affordability by reviewing the customer’s income and spending, their other credit commitments, and what would happen if

interest rates went up. Many of our decisions are automated as we use data available to us. We tailor our process and application assessment based on the

product. More complex transactions often need greater manual assessment using our credit underwriters’ skill and experience.

In Everyday Banking, similar to Homes, many of our decisions are automated and we tailor the process based on the product. We assess affordability on a

proportionate basis by reviewing the customer’s income, spending stressed for future inflation, their total credit commitments and accommodation stressed for

expected interest rates.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 43

Credit risk mitigation

The types of credit risk mitigation, including collateral, across each of our portfolios are:


Portfolio	Description
Residential mortgages	Collateral is in the form of a first legal charge over the property. Before we grant a mortgage, the property is valued either by a surveyor or using automated valuation methodologies where our confidence in the accuracy of this method is high.
Unsecured lending	There is no collateral or security tied to the loan that can be used to mitigate any potential loss if the customer does not pay us back.
Business banking services	Business banking lending is unsecured. When lending to incorporated businesses, we typically obtain personal guarantees from each director but we do not treat these as collateral. We consider the UK Government guarantee supporting losses on amounts lent under its Coronavirus Loan Schemes as collateral with 100% for Bounce Back Loan Scheme (BBLS) and 80% for Coronavirus Business Interruption Loan Scheme (CBILS).

Consumer Finance

In Consumer Finance, similar to Retail Banking, many decisions are automated and we tailor the process to the product. Residual value risk is one of our top risks.

Credit risk mitigation

The type of credit risk mitigation, including collateral, is:


Portfolio	Description
Consumer (auto) finance	Collateral is in the form of legal ownership of the vehicle for most loans, with the customer being the registered keeper. Only a very small proportion of business is underwritten as a personal loan. In these cases, there is no collateral or security tied to the loan. We use a leading vehicle valuation company to assess the LTV at the proposal stage to ensure the value of the vehicle is appropriate.

Corporate & Commercial Banking

We assign each customer a credit rating according to the internal rating threshold, using our internal rating scale (see ‘Credit quality’ in ‘Santander UK group level –

credit risk review’ section). To do this, we look at the customer’s financial history and trends in the economy, backed up by the expert judgement of a risk analyst.

We review our internal ratings on a dynamic basis and at least once a year for those clients that are rated. We also assess the underlying risk of the transaction,

taking account of any mitigating factors (see the tables below) and how it fits with our risk policies, limits and Risk Appetite.

Responsible lending, including climate change and the transition to a low carbon economy

As part of the Banco Santander group, we comply with the Equator Principles to factor social, ethical and environmental impacts into our risk analysis and decision

making for qualifying financial transactions. We are committed to supporting clients and economies in their transition to a low carbon economy, providing financial

products and/or services to business activities that are environmentally and socially responsible. Our ESCC policy sets out how we identify, assess, monitor and

manage environmental and social risks and other climate change related activities in the Oil and Gas, Power Generation and Mining and Metals sectors and those

arising from businesses engaged in soft commodities. Our ESCC policy prohibits project-related financing for new coal-fired power plants (CFPP) worldwide and

we will only work with new clients with CFPPs to provide specific financing for renewable energy projects. In line with Banco Santander's commitment, by 2030

we will eliminate all exposure to thermal coal mining and stop providing financial services to power generation clients with more than 10% of revenue from

thermal coal. More information on our approach to Responsible Lending can be found in the Sustainability and Responsible Banking section.

Credit risk mitigation

The types of credit risk mitigation, including collateral, across each of our portfolios are as follows. In addition, from time to time at a portfolio level we execute

significant risk transfer transactions, which typically reduce RWAs.


Portfolio	Description
SME and mid corporate	Includes secured and unsecured lending. We can take mortgage debentures or a first charge on commercial property as collateral. Before agreeing the loan, we get an independent professional valuation of the property. Loan agreements typically allow us to obtain revaluations during the term of the loan. We can also take guarantees, but we do not treat them as collateral unless they are supported by a tangible asset charged to us. We also lend against assets (like vehicles and equipment) and invoices for some customers. We value assets before we lend. For invoices, we review the customers' ledgers regularly and lend against debtors who meet agreed criteria.
Commercial Real Estate	We take a first charge on commercial property as collateral. The loan is subject to criteria such as the property condition, age and location, tenant quality, lease terms and length, and the sponsor’s experience and creditworthiness. Before advancing the loan and where appropriate, a bank representative visits the property, additionally we get an independent professional valuation which typically includes a site visit. Loan agreements typically allow us to obtain revaluations during the term of the loan.
Social Housing	We take a first charge on portfolios of residential real estate owned and let by UK Housing Associations as collateral, in most cases. We revalue this every three to five years (in line with industry practice), using the standard methods for property used for Social Housing.

Corporate Centre

Credit risk mitigation

The types of credit risk mitigation, including collateral, across each of our portfolios are as follows. In addition, from time to time at a portfolio level we execute

significant risk transfer transactions, which typically reduce RWAs.


Portfolio	Description
Sovereign and Supranational	In line with market practice, there is no collateral against these assets.
Structured Products	These are our High Quality Liquid Assets (HQLA) in our Eligible Liquidity Pool. They are mainly ABS and covered bonds, which hold senior positions in the creditor hierarchy. Their credit rating reflects over-collateralisation in the structure and the assets that underpin their cash flows.
Financial Institutions	We use standard legal agreements to reduce credit risk via netting and collateralisation on derivatives, repos and reverse repos, and stock borrowing/lending. We also reduce risk by clearing trades through central counterparties (CCPs) where possible.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 44

3. Monitoring (audited)

We measure and monitor changes in our credit risk profile on a regular and systematic basis against our budgets, limits and benchmarks.

Credit concentrations

A core part of our monitoring and management is a focus on credit concentrations, such as the proportion of our lending that goes to specific borrowers, groups or

industries. We set and monitor concentration limits in line with our Risk Appetite and review them on a regular basis.

–Geographical concentrations: We set exposure limits to countries and geographies, with reference to the country limits set by Banco Santander and our own Risk

Appetite. For more geographical information, see ‘Country risk exposures’.

–Industry concentrations: We also set exposure limits by industry sector. We set these limits based on the industry outlook, our strategic aims and desired level of

concentration, and relevant limits set by Banco Santander. We analyse committed exposures in the ‘Credit risk review’ section that follows.

Retail Banking

In Homes, we use IT systems and data available to us to monitor accounts. The main parts are:

–Behavioural scoring: we use statistical models that help predict whether a customer will have problems repaying, based on how they use their accounts

–Credit reference agencies: we often use data from agencies on how the borrower is handling credit from other lenders in our behaviour scoring models

–Other Santander accounts: each month, we also look at how the customer uses their other accounts with us, so we can identify problems early.

Our day-to-day retail credit risk monitoring relies on a mix of product, customer and portfolio performance measures as described above. However, changes in the

wider UK economy also impact our Homes portfolio. As part of our day-to-day risk monitoring, we use a Retail Risk Playbook tolerance framework that sets out the

most relevant macroeconomic variables to retail portfolio performance. We monitor these variables against our forecasts. If the economy deviates materially from

our forecasts, such as due to the effects of the cost of living crisis, high inflation, we formally review our retail risk management policy and strategy.

Our monitoring can also mean we change our minds about whether a product is still right for a customer. If we find evidence that a customer is in financial

difficulties, we contact them about arrears management including forbearance, which we explain in more detail below.

For secured lending, our monitoring also takes account of changes in property prices. We estimate the property’s value every three months. In most cases, we use

statistical models based on recent sales prices and valuations in that local area. Use of this model is subject to Model Risk Governance. Where a lack of data means

the model’s valuation is not available, we use the original surveyor valuation with a House Price Index (HPI) adjustment as needed.

In Everyday Banking, similar to Homes, we use IT systems and data available to us to monitor accounts, and we use the Retail Risk Playbook tolerance framework

(except for business banking services) and management judgements to ensure that portfolio quality remains within Risk Appetite. For unsecured personal lending

like credit cards and overdrafts, monitoring might lead us to raise or lower credit limits. For business banking services, we review revolving credit facilities each

year to ensure the facilities remain appropriate for the customer's financial circumstances.

Consumer Finance

In Consumer Finance, similar to Retail Banking, we use IT systems and data available to us to monitor accounts, and we use the Retail Risk Playbook tolerance

framework and management judgements to ensure that portfolio quality remains within Risk Appetite. We also check the Residual Value of our portfolio each

month, using triggers set to identify any material change in trends.

Corporate & Commercial Banking and Corporate Centre

We regularly monitor and report our credit risk by portfolio, segment, industry, location and customer. We monitor detailed analyses of our credit exposures and

risk trends each month. We also report our larger exposures and risks to the Board Risk Committee each month.

Our Watchlist

We also use a Watchlist for exposures subject to annual reviews to help identify potential problem debt early. Just because a customer is on our Watchlist does not

mean they have defaulted. It just means that their probability of default has increased, such as they have breached a covenant or lost a major contract.

We classify Watchlist cases as:

–Enhanced monitoring: for less urgent cases. We monitor these cases more often and where appropriate may consider more collateral.

–Proactive management: for more urgent or serious cases. We may take steps to restructure debt including extending the term, taking more collateral, agreeing

a lower credit limit, or seeking repayment of the loan through refinancing or other means.

We assess Watchlist cases for impairment as set out in the ‘Significant Increase in Credit Risk (SICR)’ section. When a customer is in enhanced monitoring, we do

not consider it has suffered a SICR for ECL purposes, so it remains in Stage 1 for our loss allowance calculations. When a customer is in proactive management, we

consider it has suffered a SICR, so we transfer it to Stage 2 and apply a lifetime ECL for our loss allowance calculations. We take into account any forbearance we

offer. This includes any extra security, guarantees or equity available and the potential to enhance value by asset management.

In Corporate & Commercial Banking, as part of our annual reviews, for loans nearing maturity, we look at the prospect of refinancing the loan on current market

terms and applicable credit policy. If this is unlikely, we put the case on our Watchlist.

We manage exposures not subject to annual reviews, mainly high volume and low value cases, using early warning indicators including credit reference agency

data, supported by teams of expert analysts.

In Corporate Centre, we typically monitor the credit quality of our exposures daily. We use internal and third-party data to detect any potential credit deterioration.

4. Arrears management (audited)

Retail Banking and Consumer Finance

We have several strategies to manage arrears that we can use as early as the day after a missed payment. We assess the problems a customer is having, so we can

offer them the right help to bring their account up to date as soon as possible. The strategy we use depends on the risk and the customer’s circumstances.

Corporate & Commercial Banking and Corporate Centre

We identify problem debt by close monitoring, supported by our Watchlist process for exposures subject to annual review. We aim to identify warning signs early

by monitoring customers’ financial and trading data, checking to see they do not breach covenants, and having regular dialogue with them. We tailor our strategy

to the type of customer, their circumstances and the level of risk. We try to help our customers find their own way out of financial difficulty and agree on a plan

that works for both of us. We engage our Restructuring & Recoveries team as needed on Watchlist cases and we may hand over more serious cases to them. For

exposures not subject to annual review, we have strategies to manage arrears that can be used as early as the day of the missed payment. If a case becomes more

urgent or needs specialist attention, and if it transfers to Stage 3, we transfer it to our Restructuring & Recoveries team.

For more, see the Forbearance section.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 45

5. Debt recovery (audited)

Sometimes, even when we have taken all reasonable and responsible steps to manage arrears, they are not effective. If this happens, we have to end our

agreement with the customer and try to recover the whole debt, or as much of it as we can.

Retail Banking

In Homes, we may use a debt collection agency, sell the debt, or take the customer to court. For retail mortgages, we may repossess the property as a last resort or

to protect it from damage or third-party claims. We make sure our estimated losses from repossessed properties are realistic by getting two independent

valuations and the estimated selling costs, and using them in our loss allowances calculations. Where we repossess a property, we do not take ownership. We use

agents to realise the value and settle the debt. Any surplus funds are returned to the borrower or dealt with in line with insolvency rules.

In Everyday Banking, we may use a debt collection agency, sell the debt, or take the customer to court, similar to our approach in Homes.

Consumer Finance

In Consumer Finance, similar to Retail Banking, we may use a debt collection agency, sell the debt, or take the customer to court. We may consider taking steps to

re-possess the vehicles we have financed.

Corporate & Commercial Banking and Corporate Centre

Where we look for an exit, we aim to do this, if we can, by agreeing with the borrower that they will sell some or all their assets on a voluntary basis or agreeing to

give them time to refinance their debt with another lender. Where we cannot reach an agreement, we consider recovery options. This can be through an insolvency

proceeding, enforcing over any collateral or selling debt on the secondary market. We may also consider other legal action to recover what we are owed. If there is

a shortfall, we write it off against our loss allowances. In very rare cases, we may act as mortgagee in possession of assets held as collateral against non-

performing commercial lending. In such cases, we carry the assets on our balance sheet and classify them in line with our accounting policies.

Loan modifications (audited)

We sometimes change the terms of a loan when a customer gets into financial difficulty (this is known as forbearance), or for other commercial reasons.

Forbearance (audited)

We can change the terms of a customer's loan, temporarily or permanently, to help them through temporary periods of difficulty so they can get back on to

sustainable terms. We assess what we offer to make sure the customer can afford it. Forbearance improves our customer relationships and we review our

approach regularly to make sure it is still effective. We try to offer forbearance before a customer defaults and we only foreclose or repossess as a last resort.

The main types of forbearance we offer are:


Action	Description
Term extension	We can extend the loan term, making each monthly payment smaller. We may offer this if the customer is up to date with payments but shows signs of financial difficulties. We may also offer this if the loan is about to mature and refinancing is not possible on market terms.
Interest-only	Prior to 2016, we offered retail customers temporary concessions to interest-only repayments due to financial difficulty. This concession is no longer available but any such loans that remain on interest-only repayment concession are classed as forborne. For corporate customers, we still consider interest-only concessions on a case by case basis. We only agree to this if we believe their financial problems are temporary and they are going to recover. After the interest-only period, we expect the customer to go back to making full payments of interest and capital once they are in a stronger financial position.
Other payment rescheduling, including capitalisation	For retail customers, we may add the arrears to the mortgage balance (this is known as capitalisation) if they cannot afford to increase their monthly payment to pay off their arrears in a reasonable time but have been making their monthly payments, usually for at least six months. We can also capitalise property charges due to a landlord. We pay them for the customer to avoid the lease being forfeited. We may combine this help with term extensions and, in the past, interest-only concessions. In certain cases we may also offer interest rate concessions. For corporate customers, we may lower or stop their payments until they have time to recover. We may reschedule payments to better match the customer’s cash flow – for example if the business is seasonal - or provide a temporary increase in facilities to cover peak demand ahead of their trading improving. We might do this by arrears capitalisation or drawing from an overdraft. We may also offer to provide new facilities, interest rate concessions and interest roll-up. In rare cases, we agree to forgive or reduce part of the debt.

When we agree forbearance, we consider the account has suffered a SICR, as we explain later on, and we classify it as Stage 2 or 3. If an account is already in Stage

2, we keep it in Stage 2 unless the account is deemed unlikely to pay, involves forgiving fees and interest or debt, or is being granted multiple forbearances. In

these cases, we move it into Stage 3. If an account is already in Stage 3, we keep it in Stage 3. A loan moves out of forbearance once the exit criteria below are met.

We monitor the performance of all forborne loans.

Exit from forbearance or cure

For an account in Stage 3 to exit forbearance, all the following conditions must be met:

–The account has been classed as Stage 3 for at least one year since the end of the latest forbearance strategy

–The account is not deemed unlikely to pay

–The account is no longer in arrears, and the customer has no other material debts with us which are more than 90 days in arrears.

If all the conditions are met, the account is re-classed as Stage 2 forbearance until the Stage 2 forbearance exit conditions set out below are also met.

For an account in Stage 2 to exit forbearance, all the following conditions must be met:

–The account has been classed as Stage 2 for at least two years since the end of the latest forbearance strategy

–The account has been performing, i.e. the customer is no longer in financial difficulty

–Meaningful capital and interest repayments have been made for at least 50% of the two year period

–The account is no longer in arrears, and the customer has no other material debts with us which are more than 30 days in arrears.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 46

Other forms of debt management and modifications

When a customer is not showing signs of financial difficulties, we can also change their loan terms. We do this to help them manage their financial liabilities.

Retail Banking

In Homes, apart from forbearance, we have sometimes changed the contract terms to keep a good relationship with a customer. In Homes and Everyday Banking,

we do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.

Consumer Finance

We do not classify insolvency solutions for any unsecured retail customers as forbearance. This is in line with industry guidelines.

Corporate & Commercial Banking and Corporate Centre

When customers are in financial difficulty, we can also manage debt in other ways, depending on the facts of the specific case:


Action	Description
Waiving or changing covenants	If a borrower breaks a covenant, we can either waive it or change it, taking their latest and future financial position into account. We may also add a condition on the use of any surplus cash (after operating costs) to pay down their debt to us.
Asking for more collateral or guarantees	If a borrower has unencumbered assets, we may accept more collateral in return for revised financing terms. We may also take a guarantee from companies in the same group and/or major shareholders. We only do this where we believe the guarantor can meet their commitment.
Asking for more equity	Where a borrower can no longer pay the interest on their debt, we may accept fresh equity capital from new or existing investors to change the capital structure in return for better terms on the existing debt.

Risk measurement and control

We measure and control credit risk at all stages across the credit risk lifecycle. We have a range of tools, processes and approaches.

Retail Banking and Consumer Finance

These businesses involve managing large numbers of accounts, so they produce a huge amount of data. This allows us to take a more analytical and data intense

approach to measuring risk. This is reflected in the wide range of statistical models we use across the credit risk lifecycle. We use:

–Risk strategy and planning: econometric models

–Assessment and origination: application scorecards, and attrition, pricing, loss allowance and capital models

–Monitoring: behavioural scorecards and profitability models

–Arrears management: models to estimate the proportion of cases that will result in possession (known as roll rates)

–Debt recovery: recovery models.

We assess and review our loss allowances regularly and have them independently reviewed. We look at factors such as the cash flow available to service debt. We

also use an agency to value any collateral – mainly mortgages.

Corporate & Commercial Banking and Corporate Centre

We measure the credit risk on treasury products by adding their potential future exposure to market movements over their lives to their fair value. Then we add it

to any other exposure and measure the total against our credit limits for each client. We assess our loss allowances regularly by looking at factors such as the cash

flow available to service debt and the value of collateral based on third-party professional valuations.

Key metrics (audited)

We use a number of key metrics to measure and control credit risk, as follows:


Metric	Description
Expected Credit Loss (ECL)	ECL tells us what credit risk is likely to cost us either over the next 12 months or over the lifetime of the exposure where there is evidence of a SICR since origination. We explain how we calculate ECL below.
Stages 1, 2 and 3	We assess each facility’s credit risk profile to determine which stage to allocate them to, and we monitor where there is a SICR and transfers between the Stages including monitoring of coverage ratios for each stage. We explain how we allocate a facility to Stage 1, 2 or 3 below.
Stage 3 ratio	The Stage 3 ratio is the sum of Stage 3 drawn and Stage 3 undrawn assets divided by the sum of total drawn assets and Stage 3 undrawn assets. The Stage 3 ratio is the main indicator of credit quality performance.
Expected Loss (EL)	EL is based on the CRD IV regulatory capital rules and gives us another view of credit risk. It is the product of the probability of default, exposure at default and loss given default, and we include direct and indirect costs. We base it on our risk models and our assessment of each customer’s credit quality. The rest of our Risk review, impairments, losses and loss allowances refer to calculations in accordance with IFRS, unless we specifically say they relate to CRD IV. For our IFRS impairment accounting policy, see Note 1 to the Consolidated Financial Statements.

We also assess risks from other perspectives, such as geography, business area, product and process to identify areas to focus on. We also use stress testing to

establish vulnerabilities to economic deterioration. Our business segments tailor their approach to credit risk to their customers, as we explain later on.

Recognising ECL (audited)

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 Significant Increase in Credit Risk (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 to reflect the risk of a loss being incurred even when it is unlikely.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 47

Critical judgements and accounting estimates applied in calculating ECL (audited)

The preparation of Santander UK's consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and

assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in

making estimates, actual results reported in future periods may be based on amounts which differ from those estimates. Estimates, judgements and assumptions

are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under

the circumstances. There has been no change in the inherent sensitivity of the areas of judgement in the period. Management have considered the impact of

developments in principal risks and uncertainties, as set out in the Risk review, on critical judgements and accounting estimates.

The significant judgements, apart from those involving estimation, made by management in applying Santander UK's accounting policies in these financial

statements (key judgements) and the key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying

amount of assets and liabilities within the next financial year (key estimates), which together are considered critical to Santander UK's results and financial position,

are as follows:

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 judgmental assumptions in determining the estimates. Any significant difference between the estimated amounts

and actual amounts could have a material impact on the future financial results and financial condition. The impact of the cost of living crisis has increased the

uncertainty around ECL impairment calculations and has required management to make additional judgements and accounting estimates that affect the amount

of assets and liabilities at the reporting date and the amount of income and expenses in the reporting period. The key additional judgements due to the impact of

the cost of living crisis mainly reflect the increased uncertainty around forward-looking economic data and the need for additional Judgemental Adjustments. We

consider the critical accounting estimates in calculating ECL to be:

–Forward-looking multiple economic scenario assumptions; and

–Probability weights assigned to multiple economic scenarios.

We consider the critical management judgements in calculating ECL to be:

–Determining an appropriate definition of default;

–Establishing the criteria for a significant increase in credit risk (SICR) and for corporate borrowers internal credit risk rating;

–Determining the need for any Judgemental Adjustments (JAs);

– Determining the need to assess corporate Stage 3 exposures individually.

See the sections below for more on each of these key judgements and estimates.

Multiple economic scenarios and probability weights (audited)

For all our portfolios we use five forward-looking economic scenarios. For 2022, 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 for the UK economy.

Our forecasting approach

We derive our scenarios in part by using a set of parameters in GDP fan charts published by the Office for Budget Responsibility (OBR). These fan charts reflect the

probability distribution of a deviation from the OBR’s central forecast to illustrate the uncertainty regarding the outcome of a variable, in this case GDP.

We use the 0.6 fan chart path for our Upside 1 scenario and the 0.3 path for Downside 1. For Downside 2 we impose a recession via an adjustment factor that

converges to Downside 1 in the long-run, rather than imposing a floor on the peak to trough fall which had occurred prior to the pandemic. To ensure that

Downside 2 is kept consistent with any changes to the OBR fan charts, we calculate the Downside 2 GDP by taking the percentage difference between Downside 2

and Downside 1 GDP in the original forecast and applying this difference to the new Downside 1.

Once we have established the GDP paths for each scenario, we run them through the Oxford Global Economic Model (OGEM) to derive the other macroeconomic

variables, such as unemployment and house prices. These variables are the product of the GDP growth paths we have forecast and the output of the OGEM for

these growth paths. These are then reviewed to ensure consistency with the narrative of each scenario and therefore changes to these variables may be required in

some cases. We then impose a Bank Rate profile for each scenario using expert judgement. We determine the Bank of England Bank Rate by using the base case

Bank Rate profile and adjusting this for each of the four other scenarios. To do this, we firstly consider what each of the scenarios is trying to achieve.

For the upside scenario, which has a slightly higher growth path, we assume a smaller increase in Bank Rate in 2023 with cuts beginning in 2024 in similar

increments as the base case. For Downside 2 the scenario shows monetary policy being tightened to contain inflation at a time of weakening output growth, so

here we assume the Bank of England raises rates to the same peak as in the base case to bring inflation back to its target rate, but that cuts start earlier as

economic growth falls much more markedly and the Bank of England look to aid the economy. The rising Bank Rate profiles are based on forward guidance from

the Bank of England, where increases are assumed to be gradual and incremental. For the Downside 1 scenario, this has a lower Bank Rate profile than in the base

as the Bank of England look to bolster the economy earlier despite above target inflation rates, and for Stubborn Inflation, this reflects a larger increase in Bank

Rate as inflation remains persistently above target. In this way, our scenarios reflect a range of possible outcomes that the Bank of England may follow for

different growth paths, but also assumes that the Bank of England does not slash rates due to recessionary concerns.

Our use of five scenarios is designed to reflect different possible outcomes to the base case forecast highlighting the upside and downside risks associated with the

central scenario. The downside risks for the UK economy include a further and sharper downturn in global growth, a substantial increase in inflation which raises

the cost of living, a continuation of the very low productivity growth seen in the UK, and a move to a more protectionist agenda for trade. The upside risks were

more muted at the end of 2022 and include a stronger recovery in global growth, a faster fall in inflation, coupled with a move to more open trade and further

trade agreements with other countries.

We update the baseline in our economic scenarios at least twice a year in line with our annual budgeting and three-year planning processes, or sooner if there is a

material change in current or expected economic conditions. For instance, in 2022 the base case has been updated every quarter. We refresh all our economic

scenarios each quarter to reflect the latest data and OBR fan charts if these have changed, which are then reviewed and approved by the Credit Risk Provisions

Forum (CRPF). The CRPF also assesses the probability weights at least once a quarter.

We do not use consensus forecasts as inputs to our models, but we do compare the outputs of our models against consensus views for the base case, to make sure

that we understand any significant differences and address them where needed. At the end of 2022, there were no significant differences between our base case

forecasts and the consensus views.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 48

In 2022, we were also able to do further peer benchmarking analysis of the economic scenarios using the data the PRA provided, which for Q4 2022 included the

mean weighted analysis for a selection of economic variables, including GDP, unemployment rate and HPI. This meant that we could compare our weighted

scenarios against the average of our peers to understand what differences there may be. The conclusion of this analysis demonstrated that our economic scenarios

were in line with our peers although, on a weighted basis, our house price inflation assumption reflected a more conservative view.

In 2022, we also considered any likely impact from climate change risk on our forecasting approach and concluded that no adjustment to the multiple economic

scenarios for climate change risk was required. This is because climate change effects are generally regarded to be relevant over a longer timeframe than our

forecast period of five years.

Our forecasting period for GDP is five years and then we revert to the average trend growth over three years based on the OBR’s long-run GDP forecast

assumption. The reversion to mean for all macroeconomic variables is expected to take three years after the initial five-year forecast period.

Key changes to our forecasting approach in 2022

In 2022, there were no specific changes to our forecasting approach. The OBR returned to publishing its fan charts and the latest version, published in March 2022,

have been incorporated.

Base case

For our base case, the forecasts include a 6 quarter recession with a peak to trough fall in GDP of c.2%, caused by falling real disposable incomes due to the cost of

living crisis and higher interest rates which push up housing costs. The forecasts also incorporate the policies set out in the Autumn Statement, including the

changes to the Energy Price Guarantee scheme. 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 as the advice the UK Government issues is subject to change

in this fluid environment.

Base case key macroeconomic assumptions

–House price growth: The housing market was surprisingly resilient in the first half of 2022. However, the sharp rise in mortgage rates has triggered a slowdown

in house price growth in recent months. With survey indicators pointing to a sharp reduction in demand as buyer confidence is hit by a squeeze on affordability

from higher inflation, taxes and mortgage rates, house prices are expected to continue declining in the near-term. We are forecasting a 10% year-on-year decline

in house prices by the end of 2023, with zero growth anticipated by the end of 2024. Once the Bank Rate moves towards its neutral level, house price growth

starts to pick up and by the end of the forecast period is in line with long term average earnings growth.

–GDP: The GDP forecasts for Q3 showed negative growth of -0.3% q/q and there is a high likelihood of a further contraction in Q4 which would push the UK

economy into recession. The Q3 data showed that households and businesses are reducing spending to deal with rising costs, particularly of essential goods such

as food and energy. All of this is likely, along with additional costs, to weigh on businesses with some firms falling into insolvency and there are examples of this

being reported in Q4. The economy is expected to officially be in recession by the end of 2022 and for all of 2023, with growth remaining weak in 2024. While

support from the Autumn Statement was reduced in some areas, for example with energy costs, there was some positive news for those on benefits and

receiving the state pension, with both increasing in line with September’s inflation rate of 11.1% and with the minimum wage also set to increase in April 2023.

This should help support household spending and prevent a deeper economic downturn than the c.2% decline we expect.

–Unemployment rate: Unemployment rose to 3.7% in the 3 months to October as labour demand started to soften and inactivity among early retirees fell.

However, the large increase in inactivity due to ill health or workers opting for early retirement is keeping unemployment rates low. Vacancies remain at high

levels although they are continuing to fall back as demand of goods and services declines. With the effect of rising energy costs and interest rates, it is likely that

labour demand will fall back further as some firms become insolvent and others find that demand for goods and services reduce as households restrict spending

as real earnings fall. Whilst the forecast does not assume a large rise in unemployment, the rate peaks at 5.1% by end of 2024 as labour demand and supply

conditions change, including previously inactive workers returning to the labour force.

–Bank Rate: For the Bank Rate forecast, the last actual data point for 2022 was December when the MPC increased rates by 50bps to 3.50% in line with

expectations. This was followed by another 50bps rise to 4.00% in February, with two members voting in favour of no change. Our base case assumes that in Q1

2023 there will be no additional rises. Rate cuts start in Q2 2024 as inflation starts to fall back and the MPC looks to boost flagging growth. Bank Rate ends 2024

at 3.25%, with further cuts in 2025 leaving the terminal rate at 2.50% over the medium-term.

In the medium-term, the projections assume that current demographic and productivity trends will continue, causing a reduction in the UK’s growth potential. For

instance, it is likely that the reduction in the UK workforce continues and that this will have a knock-on impact for the economy, particularly if there are shortages

of skilled workers in particular sectors. This is reflected in an average annual growth expectation of 1.6%, the OBR’s latest estimate of the UK’s long run average

growth rate. CPI inflation is forecast to be significantly above the 2% target rate in the initial forecast period but then falls to target by the end.

Key changes to our base case in 2022

The key changes to our base case assumptions in 2022 were: (i) weaker GDP growth in 2023 and 2024 which largely reflects the bigger hit to consumer spending

from the squeeze on real incomes; (ii) higher and longer above target inflation in response to rising food, fuel and utility bills; (iii) a steeper Bank Rate profile with

rates now reaching 4% in 2023, with cuts starting in 2024. This had the effect of increasing the weighted average Bank Rate profile across the five scenarios to

4.29%; and (iv) house prices are 10% lower by the end of 2023.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 49

Other scenarios

Based on this revised base case, we have reviewed our suite of scenarios to ensure that they capture the wide range of potential outcomes for the UK economy.

These include (i) reflecting persistent above target inflation over the forecast period; (ii) a slower recovery that is more akin to the ‘U’ shape of past recessions; (iii)

labour market frictions due to skills mismatches and a shrinking workforce as some discouraged workers leave altogether (for example EU workers returning to

their native countries and older UK-born workers retiring early); and (iv) the global economy recovering more swiftly from higher inflation.

To reflect these potential outcomes, we decided to continue to use the base case and four additional scenarios, which management considers provides a range

wide enough to reflect all the above potential outcomes. However, as the risks remain skewed to the downside, to reflect these outcomes sufficiently, we

concluded that only one upside scenario would be needed to reflect 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 other scenarios are:

One upside scenario

This scenario has a quicker recovery than the Baseline although remains benign. It assumes that inflation falls back more swiftly than in the base case, with a

quicker end to the Ukraine conflict which helps to reduce gas and food prices. This allows the Bank of England to cut rates bringing them back to what is more

likely to be the neutral rate, with households using some of the additional levels of saving accrued over the pandemic. This results in higher consumer and

business confidence enabling higher levels of spending with savings rates falling back as real earnings growth returns. House prices fall marginally more than the

base case, mainly due to the implied relationship between GDP and HPI used by the Oxford Economics model compared to that used by Management to construct

the base case.

Three downside scenarios

Downside 1 - This scenario is a bear case to the baseline. It assumes that peak to trough economic growth is lower and that the path out of recession is weaker. In

this scenario excess savings are not used to support growth as consumer confidence remains extremely low, with households worried over the prospect of losing

their job. House prices fall further than in the base case as more households look to downsize to lower mortgage repayments. Although inflation remains

significantly above target, due to the very poor economic conditions, the Bank of England decides to cut Bank Rate earlier than in the base case to try and bolster

growth.

Downside 2 - This scenario is similar in severity to a typical stress test scenario. It shows a marked fall in GDP, with unemployment rising to levels consistent with

the Global Financial Crisis (GFC) and house prices falling by almost a third as real incomes are squeezed by higher mortgage rates, inflation and taxes, which in turn

hits buyer affordability. The scenario also reflects ongoing strike action by various unions pushing for larger pay growth, along with dealing with potential

blackouts and the possibility of curtailed working weeks to deal with the energy supply shortage over the winter months. It further assumes that the incidence of

major risk events, for example those caused by climate change, continue to occur exposing risks to countries’ fiscal position and the means to respond to such

events. For this scenario an overlay to the unemployment rate was also made to the model output from the OGEM. This was to account for the possibility of a

recession of similar magnitude to that of 2008/09 where the unemployment rate peaked at 8.5%.

Stubborn inflation - which has replaced the Downside 3 scenario that was related to Covid-19. The scenario considers the effect on the UK economy of a

persistent inflationary environment, where inflation remains above target for much of the forecast period. This persistent inflation is created by a combination of

factors, including higher energy costs exacerbated by the conflict in Ukraine; continuous wage rises resulting in a spiral effect pushed by increasing numbers of

strikes; falling productivity; and continuing supply constraints pushing up input prices. This causes a peak to trough fall in GDP of -4% and a much higher Bank Rate

profile with a peak of 6% to combat persistently higher inflation. House prices fall c.20% which is similar to the GFC.

Key changes to our alternative scenarios in 2022

The key changes in 2022 were to Stubborn Inflation, which was changed from a pandemic scenario to one considering the effects of persistently above target

inflation; to the Bank Rate profile of the scenarios to reflect current levels; and changes to the base case, historical data for each variable, and the OGEM. We did

not make any other methodological changes to the scenarios. The combination of these different inputs will mean differences across the variables for each of the

alternative scenarios when we update them each quarter. We continue to compare the variables between each quarter and review any large changes to ensure

they are not erroneous.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 50

The table below sets out our macroeconomic assumptions for each of the five scenarios at 31 December 2022:


		Upside 1	Base case	Downside 1	Downside 2	Stubborn Inflation	Weighted
		%	%	%	%	%	%
GDP(1)	2021 (actual)	7.5	7.5	7.5	7.5	7.5	7.5
	2022	4.4	4.4	4.3	3.7	4.2	4.3
	2023	(1.0)	(1.3)	(1.9)	(6.4)	(2.7)	(2.2)
	2024	0.8	0.5	(0.3)	(0.7)	(0.9)	0.0
	2025	2.0	1.6	0.5	1.7	0.2	1.2
	2026	2.0	1.5	0.4	1.5	0.6	1.2
Bank Rate(1)	2021 (actual)	0.25	0.25	0.25	0.25	0.25	0.25
	2022	3.50	3.50	3.50	3.50	3.50	3.50
	2023	3.75	4.00	3.50	3.75	6.00	4.29
	2024	3.00	3.25	2.75	3.00	5.50	3.59
	2025	2.50	2.75	2.50	2.75	3.50	2.85
	2026	2.25	2.50	2.25	2.50	3.00	2.55
HPI(1)	2021 (actual)	8.7	8.7	8.7	8.7	8.7	8.7
	2022	7.6	7.0	7.6	7.6	7.6	7.3
	2023	(8.8)	(10.0)	(10.0)	(15.8)	(10.9)	(10.7)
	2024	(4.3)	0.0	(6.7)	(14.3)	(8.8)	(4.4)
	2025	0.6	2.0	(3.1)	(4.1)	(4.9)	(0.8)
	2026	4.1	3.0	(0.2)	4.7	(0.6)	2.0
Unemployment(1)	2021 (actual)	4.0	4.0	4.0	4.0	4.0	4.0
	2022	3.7	3.8	3.7	4.4	3.7	3.8
	2023	4.7	4.7	5.1	8.5	5.5	5.3
	2024	4.5	5.1	5.4	8.0	5.9	5.6
	2025	4.5	4.5	5.8	7.4	6.4	5.4
	2026	4.4	4.3	6.1	6.8	6.6	5.3

The table below sets out our macroeconomic assumptions for each of the five scenarios at 31 December 2021:


		Upside 1	Base case	Downside 1	Downside 2	Downside 3	Weighted
		%	%	%	%	%	%
GDP(1)	2020	(9.7)	(9.7)	(9.7)	(9.7)	(9.7)	(9.7)
	2021	7.0	6.9	6.8	6.2	5.6	6.7
	2022	4.8	4.6	4.1	(0.7)	(7.5)	2.8
	2023	2.2	1.7	0.9	0.5	3.1	1.4
	2024	1.9	1.5	0.5	1.6	1.5	1.3
	2025	2.1	1.6	0.5	1.7	1.5	1.4
Bank Rate(1)	2020	0.10	0.10	0.10	0.10	0.10	0.10
	2021	0.25	0.25	0.25	0.25	0.25	0.10
	2022	0.75	0.75	0.75	1.00	(0.50)	0.55
	2023	0.75	0.75	0.75	2.00	0.00	0.96
	2024	1.25	0.75	1.00	3.00	0.00	1.24
	2025	1.75	0.75	1.00	2.75	0.00	1.21
HPI(1)	2020	6.9	6.9	6.9	6.9	6.9	6.9
	2021	5.4	5.0	5.4	5.4	(2.5)	4.8
	2022	(0.8)	2.0	(1.8)	(8.3)	(19.6)	(2.0)
	2023	(2.0)	2.0	(4.6)	(13.1)	(9.3)	(3.1)
	2024	1.0	2.0	(3.1)	(4.8)	2.4	(0.4)
	2025	3.8	2.0	(0.7)	4.3	3.3	2.1
Unemployment(1)	2020	5.2	5.2	5.2	5.2	5.2	5.2
	2021	4.4	4.7	4.4	4.4	6.8	4.7
	2022	4.4	4.5	4.8	6.9	11.4	5.4
	2023	4.2	4.4	5.0	6.9	8.7	5.2
	2024	3.9	4.3	5.1	6.4	8.0	5.0
	2025	3.7	4.3	5.4	6.1	7.4	5.0

(1)GDP is the calendar year annual growth rate, HPI is Q4 annual growth rate and all other data points are at 31 December in the year indicated.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 51

Our macroeconomic assumptions and their evolution throughout the forecast period

Our macroeconomic assumptions and their evolution throughout the forecast period for 31 December 2022 and 31 December 2021 were:


		Upside 1	Base case	Downside 1	Downside 2	Stubborn Inflation
2022		%	%	%	%	%
House price growth	5-year average increase/decrease	(0.73)	(0.62)	(3.79)	(4.82)	(4.69)
House price growth	Peak/(trough) at (1)	(12.79)	(11.19)	(19.00)	(30.69)	(23.12)
GDP	5-year average increase/decrease	1.17	0.75	(0.17)	(0.63)	(0.45)
GDP	Cumulative growth/(fall) to peak/(trough) (2)	5.98	3.80	(0.84)	(3.12)	(2.23)
Unemployment rate	5-year end period	4.17	4.28	6.09	6.23	6.40
Unemployment rate	Peak/(trough) at (1)	4.72	5.10	6.12	8.50	6.64
Bank of England bank rate	5-year end period	2.25	2.50	2.25	2.50	3.00
Bank of England bank rate	Peak/(trough) at (1)	3.75	4.00	3.50	4.00	6.00


		Upside 1	Base case	Downside 1	Downside 2	Downside 3
2021		%	%	%	%	%
House price growth	5-year average increase/decrease	1.30	2.00	(1.78)	(3.27)	(6.00)
House price growth	Peak/(trough) at (1)	(3.07)	0.00	(9.87)	(24.03)	(32.12)
GDP	5-year average increase/decrease	2.33	1.89	0.93	0.49	(0.58)
GDP	Cumulative growth/(fall) to peak/(trough) (2)	12.19	9.83	4.75	2.48	(2.85)
Unemployment rate	5-year end period	3.60	4.30	5.65	5.95	6.80
Unemployment rate	Peak/(trough) at (1)	4.45	4.70	5.65	7.27	11.90
Bank of England bank rate	5-year end period	2.00	0.75	1.00	2.25	0.25
Bank of England bank rate	Peak/(trough) at (1)	2.00	0.75	1.00	3.00	(0.50)

(1)For GDP and house price growth it is the peak to trough change within the 5-year period; for the unemployment rate it is the peak; and for Bank Rate it is the peak or trough.

(2)This is the cumulative growth for the 5-year period.

Scenario weights

Each quarter, we undertake a full review of the probability weights we apply to the scenarios. We consider the probability of the economic scenarios occurring,

while ensuring that the scenarios capture the non-linear distribution of losses across a reasonable range. To support our initial assessment of how likely a scenario

is to occur, we 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 like the

one seen in 2020 is that extreme GDP forecasts can occur.

We continue to use the entire historical GDP data set available for the Monte Carlo analysis to smooth out the large GDP data swings that the pandemic gave. For

2022, the base case sits around the 20th percentile as growth is lower now that a further recession is predicted. Under the longer period, the Downside 2 scenario,

which has the lowest CAGR, now sits below the 10th percentile suggesting that a lower weight than the base case remains appropriate.

We also need to consider the UK economic and political environment when applying weights. Given the current cost of living crisis, we remain of the view that the

risks to UK growth are still biased to the downside and include: a substantial increase in inflation staying above target for longer, which raises the cost of living

reducing consumer demand; continuing weak investment reflecting the turbulent political global environment; further development of Covid strains that are

immune to vaccines leading to further restrictions; a larger negative impact from the EU trade deal given ongoing issues such as in NI; a continuing and significant

mismatch between vacancies and skills along with a smaller labour force; and the increasing possibility of a second Scottish referendum which may bring

disruption to any recovery in the latter years of the forecast. As such, it remains appropriate to reflect this with a 45% cumulative weighting for the downside

scenarios. In contrast to last year, Downside 3 (i.e. the stubborn inflation scenario) has a heavier weight compared to downside 1 and 2 as this scenario is more

representative of the current climate of potential stagflation.

The scenario weights we applied for 2022 and 2021 were:


	Upside 1	Base case	Downside 1	Downside 2	Stubborn Inflation	Weighted
Scenario weights	%	%	%	%	%	%
2022	5	50	15	10	20	100

	Upside 1	Base case	Downside 1	Downside 2	Downside 3	Weighted
Scenario weights	%	%	%	%	%	%
2021	5	45	25	20	5	100

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 52

Definition of default (Credit impaired) (audited)

We define a financial instrument as in default (i.e. credit impaired) for purposes of calculating ECL if it is more than three months past due, or if we have data that

suggests the customer is unlikely to pay. The data we have on customers varies across our business segments. It typically includes where:

Retail Banking and Consumer Finance

–They have been reported bankrupt or insolvent and are in arrears

–Their loan term has ended, but they still owe us money more than three months later

–They have had forbearance while in default and have failed to perform under the new arrangement terms, or have had multiple forbearance. Performing forborne

–We have suspended their fees and interest because they are in financial difficulties

–We have repossessed the property.

Corporate & Commercial Banking and Corporate Centre

–They have had a winding up notice issued, or something happens that is likely to trigger insolvency – such as another lender calls in a loan

–Something happens that makes them less likely to be able to pay us – such as they lose an important client or contract

–They have regularly missed or delayed payments, even though they have not gone over the three-month limit for default

–Their loan is unlikely to be refinanced or repaid in full on maturity

–Their loan has an excessive LTV that is unlikely to be resolved, such as by a change in planning policy, pay-downs, or increase in market value

–Loans restructured under financial difficulties, classified as forborne transactions, in last 12 months.

Where we use the advanced internal ratings-based basis for a portfolio in our capital calculations, there are differences with the default definitions for ECL

purposes. The main differences are as follows:

–Performing forborne accounts while not in default are in Stage 2 until they cure their forbearance status (measured as 12 consecutive months of successful

payments).

–Performing non-forborne accounts, which under our internal rating-based basis are subject to a 3-month cure period, for accounting purposes we classify

them in Stage 2 until they cure all SICR triggers.

The CRPF reviews and approves the definition of default each year, or more often if we change it.

Following the implementation of a new regulatory definition of default in early 2022, we updated and aligned our definitions. This increased the Stage 3 ratio by

7bps (£0.2bn). This was due to including non-performing forbearance accounts which were previously reported in Stage 2 and are now reported in Stage 3 in line

with unlikeliness to pay definitions, subject to a 12-month probation period in line with our regulatory default definition. The change in definition was a change in

estimate and therefore prior periods have not been amended.

Significant Increase in Credit risk (SICR) (audited)

Loans which have suffered a SICR since origination are subject to a lifetime ECL assessment which extends to a maximum of the contractual term of the loan, or the

behavioural term for a revolving facility. Loans which have not experienced a SICR are subject to 12-month ECL. We assess the credit risk profile of each facility to

determine which of three stages to allocate them to:

–Stage 1: when there has been no SICR since initial recognition. We apply a loss allowance equal to a 12-month ECL i.e. the proportion of lifetime expected losses

that relate to that default event expected in the next 12 months

–Stage 2: when there has been a SICR since initial recognition, but the exposure is not considered credit impaired. We apply a loss allowance equal to the lifetime

ECL i.e. the expected loss resulting from all possible defaults throughout the residual life of a facility

–Stage 3: when the exposure is considered credit impaired. We apply a loss allowance equal to the lifetime ECL. Objective evidence of credit impairment is

required. For more, see the section ‘Definition of default (Credit impaired)’ above.

We use quantitative, qualitative and backstop criteria to identify exposures that suffer a SICR. The Credit Risk Provisions Forum (CRPF) reviews and approves our

SICR thresholds periodically. The Board Audit Committee reviews and challenges their appropriateness each year, or more often if we change them.

Quantitative criteria

We use quantitative criteria to identify where an exposure has increased in credit risk. We base our criteria on whether any increase in the lifetime PD since

origination exceeds a threshold in relative and absolute terms. We base the value anticipated at origination on similar assumptions and data to the ones we use at

the reporting date, adjusted to reflect the account surviving to that date. The comparison uses either an annualised lifetime PD, where the lifetime PD is divided by

the forecast period, or the absolute change in lifetime PD since origination. Our criteria are absolute (rather than relative) increases in lifetime PD since origination.

We also apply a relative threshold of 100% (doubling the PD) across all portfolios. The criteria for 2022 were:


For 2022 and 2021
Retail Banking				Consumer Finance(2)	Corporate & Commercial Banking	Corporate Centre
Homes	Everyday Banking (1)
Homes	Personal loans	Credit cards	Overdrafts
30bps	30bps	340bps	260bps	300bps	30bps	Internal rating method

(1)For larger business banking customers we apply the same criteria that we use for Corporate & Commercial Banking.

(2)Consumer Finance use the comparison of lifetime PDs to determine Stage allocation, unlike other products which first turn the lifetime PD into an average yearly PD (annualised) and then do the comparison.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 53

Qualitative criteria

We also use qualitative criteria to identify where an exposure has increased in credit risk, independent of changes in PD. The criteria for 2022 and 2021 were:

Retail Banking

Consumer Finance

Corporate &

Commercial Banking

Corporate Centre

Homes

Everyday Banking(1)

Personal loans

Credit cards

Overdrafts

– In forbearance

– Default in last 24m

– 30 Days past due

(DPD) in last 12m

– Bankrupt

– £100+ arrears

– In Collections

– Default in last 12m

– £50+ arrears

– In forbearance

– Default in last 12m

– In Collections

– £100+ arrears

– Behaviour score

indicators

– Fees suspended

– Default in last 12m

– Debit dormant >35

days

– Any excess in month

– In forbearance

– Deceased or

Insolvent

– Court ‘Return of

goods’ order or

Police watchlist

– Agreement

terminated

– Payment holiday

– Cash Collection

– In forbearance

– Default in last 12m

– Watchlist: proactive

management

– Default at proxy

origination

– Watchlist: proactive

management

(1)For larger business banking customers we apply the same criteria that we use for Corporate & Commercial Banking.

An additional qualitative assessment was introduced as part of new Judgemental Adjustment introduced during 2022 in response to the cost of living crisis.

Exposures that were deemed more significantly impacted by cost-of-living pressures based on indebtedness and disposable income thresholds were migrated to

Stage 2. See 'Judgemental Adjustments (JAs) below for more on this.

Backstop criteria

As a backstop, we classify all exposures more than 30 or 90 DPD in at least Stage 2 or in Stage 3, respectively. This means that we do not rebut the backstop

presumptions in IFRS 9 (i.e. credit risk has significantly increased if contractual payments are more than 30 DPD) relating to either a SICR or default.

Improvement in credit risk or cure

We transfer Stage 3 exposures to Stage 2 or Stage 1 when we no longer consider them to be credit impaired. We transfer Stage 2 exposures to Stage 1 when we

no longer consider them to have suffered a SICR. Where we identified a SICR using quantitative criteria, we transfer the exposures to Stage 1 when they no longer

meet the original PD-based transfer criteria. Where we identified a SICR using qualitative criteria, the issues that led to the transfer must be cured before we

transfer the exposure to Stage 1. For a loan to exit forbearance, it must meet the conditions set out in the section ‘Forbearance’.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 54

Judgemental Adjustments (JAs) formerly known as Post Model Adjustments (PMAs) (audited)

We use a range of methods to identify whether we need a JA. These include regular review of model monitoring tools, changes in the period, trend analysis,

comparison against forecasts, and input from expert teams who manage key portfolio risks. We only recognise a JA if its expected impact is over £1m and keep it in

place until we no longer need it. This is usually when we build it into our core credit model or the conditions that impacted the historical data no longer exist.

Our Risk Provisions & Forecasting team calculates JAs to ensure they are incremental to the core credit model and to ensure the calculation is performed in a

consistent and controlled manner. We apply standard end-user computing controls to JAs expected to be in place for more than six months. Our Independent

Validations Team may also review significant JAs. The CRPF approves all new JAs and, each quarter, reviews and approves existing JAs.

–Long-term indeterminate arrears: To mitigate the risk of model underestimation, we fully provide for accounts in arrears which have neither repaid (cured) or

been written-off after a period of 2 years for unsecured portfolios or 5 years for secured portfolios. For our secured portfolios, we use expected security

valuations at the point of repossession to estimate the adjustment. At 31 December 2022 and 31 December 2021, we only needed to make an adjustment for

mortgages. When calculating the ECL uplift for this JA, management assumes a 2 year delay in the time to repossessions which reflects experience and ensure

the LTVs are impacted by our Multiple scenario forecasts for HPI. Over the medium term, as we continue to address long term arrears in the portfolio, we expect

the need for this JA will diminish. This JA increased our ECL by £13m . Had management assumed no delay in repossessions or a 3 year delay, the JA could have

been within a range of £12m to £14m.

–12+ months in arrears: To mitigate the risk of underestimating ECL, mortgage accounts which are more than 12 months past due are fully provided for after

deducting a historically observed self-cure rate. When calculating the ECL uplift for this JA, management assumes a 2 year delay in the time to repossessions

which reflects experience and ensure the LTVs are impacted by our Multiple scenario forecasts for HPI. Over the medium term, as we continue to address long

term arrears in the portfolio, we expect the need for this JA will diminish. This JA increased our ECL by £22m. Had management assumed no delay in

repossessions or a 3 year delay, the JA could have been within a range of £7m to £28m.

–Cladding risk: Following the Government's intervention to support the owners of flats where cladding rectification may be required, we released this JA.

–Mortgages affordability: This JA addresses the risk that the current PD model for mortgages is likely to underestimate a 'cost of living crisis' whereby real

disposable income is stretched with increasing living costs and debt burden as interest rates begin to rise. The JA identifies a population of customers most likely

to be under inflationary pressures, increases their PDs and moves them to Stage 2. At 31 December 2022, these accounts made up a significant amount of the

total mortgage Stage 2 population as £5.0bn mortgages were moved from Stage 1 into Stage 2 as a result. The JA increased our ECL by £9m in 2022 with a

closing ECL of £27m .

–Affordability of unsecured lending repayments: We introduced new JAs to account for the potential repayment affordability risk among those customers with

low disposable income. These JAs increased our ECL by £35m. Had management applied different sensitivities to the PD uplifts across Mortgages and Retail

unsecured affordability, the ECL impact could have been between £49m and £82m.

–UPL loss floor: This JA addresses the perceived macroeconomic insensitivity within the UPL IFRS 9 models, where historical analysis of losses shows a much

larger correlation to the International Labour Organisation (ILO) unemployment forecast than the model gives. The JA then uplifts the lifetime losses expected in

each of the five macroeconomic scenarios within the IFRS 9 model to meet the expected losses the historical analysis predicts. The JA increased our ECL by

£15m . If management had only increased PDs, the JA could have been £12m.

–Model underestimation: This JA addresses potential underestimation risk of projected modelled ECL identified by our model monitoring and back-testing from

lower PDs given the low level of macroeconomic stress and timing effects of government support schemes on emergence of defaults. At 31 December 2022,

this JA increased our ECL by £57m. Had management applied the same PD uplift on the upside 1 scenario the JA could have been £49m. Had management

applied the same PD uplift on the Downside 3 scenario as the Base case, Upside 1 and Downside 1 scenarios, the JA could have been £60m.

–Corporate lending to segments affected by supply chain: We introduced new JAs to reflect the corporate lending risks to those sectors which are susceptible

to high inflation and energy prices, higher input costs, potential for lower consumer and business demand, as well as exposure to supply chain challenges. This

JA calculates ECL depending on the customer’s risk profile in stage 1 and moves risk between stage 1 and 2 (resulting in increase in lifetime vs 12m ECL). In case

of those clients already in stage 2 the JA is calculated by stressing PD levels according to the risk profile of the customer. In total this JA increased our ECL by

£61m. The range for this JA can be between £26m to £187m depending on PD assumptions of high and severe sectors.

–Corporate lending to segments affected by Covid-19: In 2022, following a successful 18 month probation period, with no material observed defaults, we

released all corporate sector staging JAs related to Covid-19 as the risks from lockdowns have reduced.

–Corporate single large exposure: In 2020, to mitigate against the risk of a single large corporate exposure with an ECL requirement of greater than £10m

defaulting, which has not been covered by the existing model estimate or the corporate and SME JA above, we applied a JA for the risk of a company which

unexpectedly defaults. This JA has been calculated based on incurring two average historically observed single name large losses in our Corporate &

Commercial business segment. We will continue to assess this risk over the medium term based on actual experience and we will refine the estimate based on

changes in our portfolio credit quality and loan size mix. At 31 December 2021, this JA increased our ECL by £23m . Had management assumed only one average

loss was incurred the JA would decrease to £12m. The JA would increase to £35m assuming three average losses were incurred. It has been assessed and

decision made to keep this JA as it is felt there is still a need for this given we are the start of a conventional recessionary environment. It is believed that the

unprecedented support provided by the government over the last 2 to 3 years have differed stresses and accounted for the lack of any actual examples where

we would have looked to utilise this JA.

–SME debt burden: We introduced a SME debt burden JA in 2021 to take account of the potential debt burden risk of unsecured lending to our SME customers

who also took a BBL. This does not incorporate the credit risk on BBLs, as these are government guaranteed but instead considers the possible impact on

repayment of other lending with us. At 31 December 2022, this JA increased our ECL by £7m . Had management used the modelled lifetime losses for all

dragged accounts, the JA could have been £3m. Had management used a 50% coverage on all accounts, the JA could have been £15m.

–Other: This includes adjustments for other exposures in smaller portfolios that are not within models such as Buy To Let Mortgages. The year on year movement

is driven by the absence of a £32m underlay JA which corrected an overstatement of the core modelled ECL as a result of customers who took a payment holiday

artificially inflating stage 2. This was released in 2022 as the data distortion no longer impacted the modelled ECL.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 55

Climate change

In addition 2022 and 2021,we assessed the risks to asset valuations in the customer loan book from both transitional and physical risks associated with climate

change. At 31 December 2022 and 2021, we did not consider it appropriate to recognise a climate change risk related JA for the following reasons:

–The behavioural life of the loan book is less than five years. Any material transitional risks are generally regarded to be relevant over a longer timeframe than

five years and as such, the risk predominantly relates to assets yet to be written;

–There have been no observed default events or SICRs due to climate change for any part of the loan book;

–The absolute exposure to fossil fuel industries is not deemed to be material. On an individually assessed basis, clients in these industries are highly rated and

their markets remain highly liquid;

–The residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric vehicles.The residual value risk is already set

at the more cautious end of the acceptable range to capture the inherent risk of diesel obsolescence and measurement uncertainty of electric vehicles;

–ECL calculations are based on multiple forward-looking economic scenarios developed by management covering a period of 5 years, during which timeframe

climate change risks may crystallise;

–The proportion of mortgage loans subject to flood and subsidence risk is not deemed to be material. The terms of our mortgage lending also require

homeowners to buy suitable insurance which transfers the majority of the risk to asset valuations to third party insurers.


	Homes	Everyday Banking		Consumer Finance	CCB	Corporate Centre	Total
	Mortgages	Credit Cards	Other
2022	£m	£m	£m	£m	£m	£m	£m
Modelled ECL	133	112	93	65	194	—	597
Individually assessed	—	—	—	—	112	—	112
ECL before JAs	133	112	93	65	306	—	709
JAs
Long-term indeterminate arrears	13	—	—	—	—	—	13
12+ months in arrears	22	—	—	—	—	—	22
UPL loss floor	—	—	15	—	—	—	15
Model underestimation	36	2	19	—	—	—	57
Corporate single large exposure	—	—	—	—	23	—	23
Other	20	1	10	2	3	—	36
Total JAs	91	3	44	2	26	—	166
Affordability and Cost of Living JAs
Corporate lending to segments affected by supply chain	—	—	—	—	61	—	61
Mortgages affordability	27	—	—	—	—	—	27
Retail Unsecured Affordability	—	15	20	—	—	—	35
SME debt burden	—	—	7	—	—	—	7
Total Affordability and Cost of Living JAs	27	15	27	—	61	—	130
Total ECL	251	130	164	67	393	—	1,005

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 56


	Homes	Everyday Banking		Consumer Finance	CCB	Corporate Centre	Total
	Mortgages	Credit Cards	Other	Consumer Finance	CCB	Corporate Centre	Total
2021	£m	£m	£m	£m	£m	£m	£m
Modelled ECL	120	88	57	52	108		425
Individually assessed	—	—	—	—	100	—	100
ECL before JAs	120	88	57	52	208	—	525
JAs
Long-term indeterminate arrears	14	—	—	—	—	—	14
12+ months in arrears	29	—	—	—	—	—	29
Cladding Risk	15	—	—	—	—	—	15
UPL loss floor	—	—	21	—	—	—	21
Other	(20)	1	8	—	18	—	7
Total JAs	38	1	29	—	18	—	86
Covid-19 JAs
Corporate lending to segments affected by Covid-19	—	—	—	—	176	—	176
Corporate single large exposure	—	—	—	—	23	—	23
Model underestimation	14	—	14	—	—	—	28
SME debt burden	—	—	9	—	—	—	9
Total Covid-19 JAs	14	—	23	—	199	—	236
Affordability and Cost of Living JAs
Mortgages affordability	18	—	—	—	—	—	18
Total Affordability and Cost of Living JAs	18	—	—	—	—	—	18
Total ECL	190	89	109	52	425	—	865

2022 compared to 2021

JAs reduced from £340m to £296m and the proportion of JAs to total ECL decreased from 39% to 29%. The change in proportion was mainly due to an increase in

total ECL driven by the deterioration in the economic environment compared to 2021.

Internal credit risk rating for corporate borrowers (audited)

We assign each corporate borrower an internal credit rating based on our internal rating scale. To do this, we look at the customer’s financial history and trends in

the economy backed up by the expert judgement of a risk analyst. We review our internal ratings on a dynamic basis and at least once a year. The internal risk

rating is used to determine the Probability of Default for a client.

Individually assessed corporate Stage 3 exposures (audited)

We assess the ECL requirement for large single name corporate exposures on an individual basis when they meet our definition of default and are transferred into

Stage 3. This assessment takes into consideration the latest specific information about the counterparty to determine a probability weighted ECL based on a best,

worst and mid case outcome. For those loans that were in default (i.e. Stage 3), the ECL was £129m at 31 December 2022 (2021: £100m). Had management

assumed the best or worst outcome in terms of loss estimates, the ECL could have been within a range of £68m to £203m.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 57

Sensitivity of ECL allowance (audited)

The ECL allowance is sensitive to the methods, assumptions and estimates underlying its calculation. For example, management could have applied different

probability weights to the economic scenarios. In addition, the ECL for residential mortgages is significantly affected by the HPI assumptions which determine the

valuation of collateral used in the calculations.

Had management used different assumptions on probability weights and HPI, a larger or smaller ECL charge would have resulted that could have had a material

impact on the ECL allowance and profit before tax. We have incorporated judgemental adjustments (JA's) into the sensitivity analysis, and these assumptions are

set out below.

Scenario sensitivity

The tables below show the ECL allowances that would have arisen had management applied a 100% weight to each economic scenario. The allowances were

calculated using a stage allocation appropriate to each scenario and differs from the probability-weighted stage allocation used to determine the ECL allowance

shown above. For exposures subject to individual assessment, the distribution of ECL which could reasonably be expected has also been considered, assuming no

change in the number of cases subject to individual assessment, and within the context of a potential best to worst case outcome.


	Upside 1	Base case	Downside 1	Downside 2	Stubborn Inflation	Weighted
2022	£m	£m	£m	£m	£m	£m
Exposure	306,284	306,284	306,284	306,284	306,284	306,284
Retail Banking	213,557	213,557	213,557	213,557	213,557	213,557
– Homes - Mortgages	192,346	192,346	192,346	192,346	192,346	192,346
– EDB - Credit Cards	12,845	12,845	12,845	12,845	12,845	12,845
– EDB - Other	8,366	8,366	8,366	8,366	8,366	8,366
Consumer Finance	5,740	5,740	5,740	5,740	5,740	5,740
CCB	28,277	28,277	28,277	28,277	28,277	28,277
Corporate Centre	58,710	58,710	58,710	58,710	58,710	58,710

ECL	930	932	993	1,383	1,149	1,005
Retail Banking	489	497	529	830	647	544
– Homes - Mortgages	214	218	244	501	324	251
– EDB - Credit Cards	122	123	127	142	140	130
– EDB - Other	153	156	158	187	183	163
Consumer Finance	65	66	65	69	68	67
CCB	376	369	399	484	434	394
Corporate Centre	—	—	—	—	—	—
	%	%	%	%	%	%
Proportion of assets in Stage 2	4.0	4.0	5.0	11.0	7.0	7.0
Retail Banking	4.0	4.0	4.0	10.0	6.0	7.0
– Homes - Mortgages	4.0	4.0	4.0	11.0	6.0	7.0
– EDB - Credit Cards	3.0	3.0	3.0	3.0	3.0	3.0
– EDB - Other	7.0	7.0	7.0	9.0	8.0	8.0
Consumer Finance	6.0	6.0	6.0	6.0	6.0	6.0
CCB	8.0	9.0	9.0	18.0	14.0	12.0
Corporate Centre	—	—	—	—	—	—
	%	%	%	%	%	%
Proportion of assets in Stage 3	1.0	1.0	1.0	1.0	1.0	1.0
Retail Banking	1.0	1.0	1.0	1.0	1.0	1.0
– Homes - Mortgages	1.0	1.0	1.0	1.0	1.0	1.0
– EDB - Credit Cards	—	—	—	—	—	—
– EDB - Other	2.0	2.0	2.0	2.0	2.0	2.0
Consumer Finance	1.0	1.0	1.0	1.0	1.0	1.0
CCB	2.0	2.0	2.0	2.0	2.0	2.0
Corporate Centre	—	—	—	—	—	—

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 58


	Upside 1	Base case	Downside 1	Downside 2	Downside 3	Weighted
2021	£m	£m	£m	£m	£m	£m
Exposure	313,348	313,348	313,348	313,348	313,348	313,348
Retail Banking	212,396	212,396	212,396	212,396	212,396	212,396
– Homes - Mortgages	190,663	190,663	190,663	190,663	190,663	190,663
– EDB - Credit Cards	12,301	12,301	12,301	12,301	12,301	12,301
– EDB - Other	9,432	9,432	9,432	9,432	9,432	9,432
Consumer Finance	5,298	5,298	5,298	5,298	5,298	5,298
CCB	27,305	27,305	27,305	27,305	27,305	27,305
Corporate Centre	68,349	68,349	68,349	68,349	68,349	68,349

ECL	782	762	851	988	1,141	865
Retail Banking	307	286	375	510	662	388
– Homes - Mortgages	134	125	177	283	437	190
– EDB - Credit Cards	78	72	89	102	101	89
– EDB - Other	95	89	109	125	124	109
Consumer Finance	50	51	51	53	54	52
CCB	425	425	425	425	425	425
Corporate Centre	0	0	0	0	0	0
	%	%	%	%	%	%
Proportion of assets in Stage 2	5.0	5.0	5.0	6.0	7.0	5.0
Retail Banking	5.0	5.0	5.0	7.0	8.0	6.0
– Homes - Mortgages	6.0	6.0	6.0	7.0	8.0	6.0
– EDB - Credit Cards	2.0	1.0	2.0	2.0	2.0	2.0
– EDB - Other	3.0	3.0	4.0	5.0	4.0	4.0
Consumer Finance	4.0	4.0	4.0	4.0	4.0	4.0
CCB	16.0	16.0	17.0	21.0	21.0	18.0
Corporate Centre	—	—	—	—	—	—
	%	%	%	%	%	%
Proportion of assets in Stage 3	1.0	1.0	1.0	1.0	1.0	1.0
Retail Banking	1.0	1.0	1.0	1.0	1.0	1.0
– Homes - Mortgages	1.0	1.0	1.0	1.0	1.0	1.0
– EDB - Credit Cards	0.0	0.0	0.0	0.0	0.0	0.0
– EDB - Other	2.0	2.0	2.0	2.0	2.0	2.0
Consumer Finance	1.0	1.0	1.0	1.0	1.0	1.0
CCB	2.0	2.0	2.0	2.0	2.0	2.0
Corporate Centre	0.0	0.0	0.0	0.0	0.0	0.0

2022 compared to 2021

In 2022 ECL increased as a result of PD deterioration and an introduction of affordability JAs mainly due to changes in the current economic environment. As a risk

from further lockdowns relating to Covid19 reduced, we released all Corporate Covid19 related JAs. This release resulted in the movement of £0.4bn corporate

Stage 3 loans to Stage 2 and £1.7bn of corporate loans transferred from Stage 2 to Stage 1. However, this was offset by an introduction of a new corporate lending

JA relating to segments that are susceptible to high inflation and energy price, higher input costs, potential for lower consumer and business demand. This

resulted in movement of £1.4bn from Stages 1 to 2. Mortgage affordability continued to be impacted by the increased base rate and inflationary pressures,

resulting in an increase in Stage 2 mortgage asset by £0.8bn.

We have incorporated our JA's into the sensitivity analysis.

HPI sensitivity

Given the relative size of our residential mortgage portfolio, management considers that changes in HPI assumptions used to calculate the ECL allowance for

residential mortgages would have the most significant impact on the ECL allowance. The table below shows the ECL impact on the profit before tax of applying an

immediate and permanent hour price increase/decrease to our unweighted base case scenario, and assumes no changes to the stage allocation of exposures.


	Increase/decrease in house prices
	+20%	+10%	-10%	-20%
Increase/(decrease) in profit before tax	£m	£m	£m	£m
2022	48	32	(61)	(176)
2021	64	40	(69)	(197)

2022 compared to 2021

The HPI ECL sensitivity remains similar to 2021. The expected impact from a drop in the HPI index by 10% and 20% is £61m and £176m respectively. There has

been moderate growth for 2022 coupled with a negative economic outlook that has resulted in potential losses increasing towards the end of the year.

Both the modelled ECL and the PMAs were stressed in the sensitivity analysis to assess the potential impact on ECL from housing market volatility. The impact is

driven by marginal growth in the housing market with subdued demand for purchases driven by the increases interest rates.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 59

Measuring ECL (audited)

For accounts not in default at the reporting date, we estimate a monthly ECL for each exposure and for each month over the forecast period. The lifetime ECL is the

sum of the monthly ECLs over the forecast period, while the 12-month ECL is limited to the first 12 months. We calculate each monthly ECL as the discounted

value for the relevant forecast month of the product of the following factors:


Factor	Description
Survival rate (SR)	The probability that the exposure has not closed or defaulted since the reporting date.
Probability of default (PD)	The likelihood of a borrower defaulting in the following month, assuming it has not closed or defaulted since the reporting date. For each month in the forecast period, we estimate the monthly PD from a range of factors. These include the current risk grade for the exposure, which becomes less relevant further into the forecast period, as well as the expected evolution of the account risk with maturity and factors for changing economics. We support this with historical data analysis.
Exposure at default (EAD)	The amount we expect to be owed if a default event occurs. We determine EAD for each month of the forecast period by the expected payment profile, which varies by product. For amortising products, we base it on the borrower’s contractual repayments over the forecast period. We adjust this for any expected overpayments on Stage 1 accounts that the borrower may make and for any arrears we expect if the account was to default. For revolving products, or amortising products with an off-balance sheet element, we determine EAD using the balance at default and the contractual exposure limit. We vary these assumptions by product and base them on analysis of recent default data.
Loss given default (LGD)	Our expected loss if a default event were to occur. We express it as a percentage and calculate it based on factors that we have observed to affect the likelihood and/or value of any subsequent write-offs, which vary according to whether the product is secured or unsecured. If the product is secured, we take into account collateral values as well as the historical discounts to market/book values due to forced sales type.

We use the original effective interest rate as the discount rate. For accounts in default, we use the EAD as the reporting date balance. We also calculate an LGD to

reflect the default status of the account, considering the current DPD and loan to value. PD and SR are not required for accounts in default.

Forecast period

We base the forecast period for amortising facilities on the remaining contract term. For revolving facilities, we base it on the behavioural, rather than contractual,

characteristics of the facility type. In some cases, we shorten the period to simplify the calculation. If we do this, we apply a Judgemental Adjustment to reflect our

view of the full lifetime ECL.

Forward-looking information

Our assessments of a SICR and the calculation of ECL incorporate forward-looking data. We perform historical analysis and identify the key economic variables that

impact credit risk and ECL for each portfolio. These can include house price growth, GDP, unemployment rate and BoE Bank Rate. Where applicable, we incorporate

these economic variables and their associated impacts into our models.

Economic forecasts have the most impact on ECL measurement for residential mortgages and, to a lesser extent, corporate loans. This is due to the long

behavioural lives and large size of these portfolios. Economic forecasts have less impact on ECL for other portfolios due to their shorter lives and smaller size.

Grouping of instruments for losses measured on a collective basis

We measure ECL at the individual financial instrument level. However, where we have used internal capital or similar models as the basis for our ECL models, this

typically results in a large number of relatively small homogenous groups. We typically group instruments where they share risk characteristics using statistical

models and assess them for impairment collectively.

We use this approach for

–all our Retail Banking and Consumer Finance portfolios,

–SME customers in Corporate & Commercial Banking, and

–Legacy Portfolios in run-off in Corporate Centre.

We calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed.

For all our portfolios (whether we assess them for impairment individually or collectively) we use five forward-looking economic scenarios.

Governance around ECL impairment allowances (audited)

Our Risk Methodology team developed our ECL models (except for the external models we use, such as OGEM which we described earlier in ‘Our forecasting

approach’), and our Independent Validations team reviews all material models. As model owners, our Risk Provisioning & Forecasting team run the models to

calculate our ECL each month. The models are sensitive to changes in credit conditions and reflect management judgements that give rise to measurement

uncertainty in our ECL as set out above. The following committees and forums review the provision drivers and ensure that the ECL remains appropriate:

–Model Risk Control Forum (MRCF) reviews and approves new models and model changes. It also reviews the use of OGEM as a reliable model on which to base

our other forecast macroeconomic variables. We use it across all stress testing and planning so it is subject to model risk criteria.

–ALCO reviews and approves the base case used in the economic scenarios we use to calculate forward-looking scenarios.

–CRPF reviews and approves the economic scenarios and probability weights we use to calculate forward-looking scenarios. It also reviews management

judgements and approves ECL impairment allowances.

–Board Audit Committee reviews and challenges the appropriateness of the estimates and judgements made by management.

For more on the governance around specific elements of the ECL impairment allowances, including the frequency of, and thresholds for, reviews, including by

these committees and forums, see the detailed sections above.

How we assess the performance of our ECL estimation process

We assess the reasonableness of our ECL provisions and the results of our Staging analysis using a range of methods. These include:

–Benchmarking: we compare our coverage levels with our peers.

–Stand-back testing: we monitor the level of our coverage against actual write-offs.

–Back-testing: we compare key drivers periodically as part of model monitoring practices.

–Monitoring trends: we track ECL and Staged assets over time and against our internal budgets and forecasts, with triggers set accordingly.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 60

SANTANDER UK GROUP LEVEL – CREDIT RISK REVIEW

Our maximum and net exposure to credit risk (audited)

The tables below show the main differences between our maximum and net exposure to credit risk. They show the effects of collateral, netting, and risk transfer to

mitigate our exposure. The tables only show the financial assets that credit risk affects and to which the impairment requirements in IFRS 9 are applied.

For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances. Off-balance sheet exposures are mortgage

offers, guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum

amount that we would have to pay if the guarantees were called on. For formal standby facilities, credit lines and other commitments that are irrevocable over the

life of the facility, the maximum exposure is the total amount of the commitment.


	Maximum exposure
	Balance sheet asset			Off-balance sheet			Collateral(1)
	Gross amounts	Loss allowance	Net amounts	Gross amounts	Loss allowance	Net amounts	Cash	Non-cash	Netting(2)	Net exposure
2022	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Cash and balances at central banks	44.2	—	44.2	—	—	—	—	—	—	44.2
Financial assets at amortised cost:
–Loans and advances to customers:(3)
–Retail Mortgages(4)	184.3	(0.2)	184.1	8.0	—	8.0	—	(187.4)	—	4.7
–Corporate loans	19.1	(0.4)	18.7	9.3	—	9.3	(0.1)	(16.5)	—	11.4
–Finance leases	4.6	(0.1)	4.5	0.4		0.4	—	(4.8)	—	0.1
–Accrued interest and other adjustments	0.7	—	0.7	—	—	—	—	—	—	0.7
–Other unsecured loans	7.7	(0.2)	7.5	13.7	(0.1)	13.6				21.1
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures	4.2	—	4.2	—	—	—	—	—	—	4.2
Total loans and advances to customers	220.6	(0.9)	219.7	31.4	(0.1)	31.3	(0.1)	(208.7)	—	42.2
–Loans and advances to banks	1.0		1.0	0.4		0.4				1.4
–Reverse repurchase agreements – non trading	7.3	—	7.3	—	—	—	—	(7.3)	—	—
–Other financial assets at amortised cost	0.2	—	0.2	—	—	—	—	—	—	0.2
Total financial assets at amortised cost	229.1	(0.9)	228.2	31.8	(0.1)	31.7	(0.1)	(216.0)	—	43.8
Financial assets at fair value at FVOCI:
–Loans and advances to customers	—	—	—	—	—	—	—	—	—	—
–Debt securities	6.0	—	6.0	—	—	—	—	—	—	6.0
Total financial assets at FVOCI	6.0	—	6.0	—	—	—	—	—	—	6.0
Total	279.3	(0.9)	278.4	31.8	(0.1)	31.7	(0.1)	(216.0)	—	94.0

2021
Cash and balances at central banks	48.1	—	48.1	—	—	—	—	—	—	48.1
Financial assets at amortised cost:
–Loans and advances to customers:(3)
–Retail Mortgages(4)	174.7	(0.2)	174.5	16.0	—	16.0	—	(177.8)	—	12.7
–Corporate loans	19.3	(0.4)	18.9	7.6	—	7.6	(0.1)	(16.8)	—	9.6
–Finance leases	3.9	(0.1)	3.8	0.3	—	0.3	—	(4.7)	—	(0.6)
–Accrued interest and other adjustments	0.5	—	0.5	—	—	—	—	—	—	0.5
–Other unsecured loans	9.4	(0.2)	9.2	13.4	—	13.4	—	—	—	22.6
–Amounts due from fellow Banco Santander group subsidiaries and joint ventures	3.2	—	3.2	—	—	—	—	—	—	3.2
Total loans and advances to customers	211.0	(0.9)	210.1	37.3	—	37.3	(0.1)	(199.3)	—	48.0
–Loans and advances to banks	1.2	—	1.2	0.4	—	0.4	—	—	—	1.6
–Reverse repurchase agreements – non trading	12.7	—	12.7	—	—	—	—	(12.2)	(0.4)	0.1
–Other financial assets at amortised cost	0.5	—	0.5	—	—	—	—	—	—	0.5
Total financial assets at amortised cost	225.4	(0.9)	224.5	37.7	—	37.7	(0.1)	(211.5)	(0.4)	50.2
Financial assets at FVOCI:
–Loans and advances to customers	—	—	—	—	—	—	—	—	—	—
–Debt securities	5.9	—	5.9	—	—	—	—	—	—	5.9
Total financial assets at FVOCI	5.9	—	5.9	—	—	—	—	—	—	5.9
Total	279.4	(0.9)	278.5	37.7	—	37.7	(0.1)	(211.5)	(0.4)	104.2

(1)The forms of collateral we take to reduce credit risk include: residential and commercial property; other physical assets, including motor vehicles; liquid securities, including those transferred under reverse

repurchase agreements; cash, including cash used as collateral for derivative transactions; and receivables. Charges on residential property are most of the collateral we take.

(2)We can reduce credit risk exposures by applying netting. We do this mainly for derivative and repurchase transactions with financial institutions. For derivatives and securities finance transactions, we use standard

master netting agreements. For more on this, see ‘Credit risk mitigation’ in the ‘Credit risk - Credit risk management’ section.

(3)Balances include interest we have charged to the customer’s account and accrued interest that we have not charged to the account yet.

(4)The collateral value shown against advances secured on residential property is limited to the balance of each associated individual loan. It does not include the impact of over–collateralisation (where the

collateral has a higher value than the loan balance) and includes collateral we would receive on draw down of certain off–balance sheet commitments.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 61

The tables below show the main differences between our maximum and net exposure to credit risk on the financial assets that credit risk affects and to which the

impairment requirements in IFRS 9 are not applied.


	Balance sheet asset gross amount	Collateral(1)		Netting(2)	Net exposure
	Balance sheet asset gross amount	Cash	Non-cash	Netting(2)	Net exposure
2022	£bn	£bn	£bn	£bn	£bn
Financial assets at FVTPL:
–Derivative financial instruments	2.4		(1.7)	(0.5)	0.2
–Other financial assets at FVTPL	0.1		—	—	0.1
Total	2.5	—	(1.7)	(0.5)	0.3

2021
Financial assets at FVTPL:
–Derivative financial instruments	1.7	—	(0.7)	(0.8)	0.2
–Other financial assets at FVTPL	0.2	—	—	—	0.2
Total	1.9	—	(0.7)	(0.8)	0.4

(1)The forms of collateral we take to reduce credit risk include: liquid securities, including those transferred under reverse repurchase agreements; cash, including cash used as collateral for derivative transactions;

and receivables.

master netting agreements. They allow us to set off our credit risk exposure to a counterparty against our obligations to the counterparty in relation to transactions under the master netting agreement in the

event of default. This gives us a lower net credit exposure. They may also reduce settlement exposure. For more on this, see ‘Credit risk mitigation’ in the ‘Credit risk – Credit risk management’ section.

Single credit rating scale

In the table below, we have used a single rating scale to ensure we are consistent across all our credit risk portfolios in how we report the risk of default. It has

eight grades for non–defaulted exposures, from 9 (lowest risk) to 2 (highest risk). We define each grade by an upper and lower PD value and we scale the grades

so that the default risk increases by a factor of ten every time the grade number drops by two steps. For example, grade 9 has an average PD of 0.010%, and grade

7 has an average PD of 0.100%. We give defaulted exposures a grade 1 and a PD value of 100%. In the final column of the table we show the approximate

equivalent credit rating grade used by Standard & Poor’s Ratings Services (S&P).


	PD range
	Mid	Lower	Upper	S&P equivalent
Santander UK risk grade	%	%	%	S&P equivalent
9	0.010	0.000	0.021	AAA to AA+
8	0.032	0.021	0.066	AA to AA-
7	0.100	0.066	0.208	A+ to BBB
6	0.316	0.208	0.658	BBB- to BB
5	1.000	0.658	2.081	BB-
4	3.162	2.081	6.581	B+ to B
3	10.000	6.581	20.811	B-
2	31.623	20.811	99.999	CCC to C
1 (Default)	100.000	100.000	100.000	D

The PDs in the table above are based on Economic Capital (EC) PD mappings, calculated based on the average PD over an economic cycle. This is different to the

IFRS 9 PDs which are calculated at a point in time using forward looking economic scenarios. Where possible, the EC PD values are aligned to the regulatory capital

models however any regulatory floors are removed and PDs are defined at every possible rating rather than grouped into rating buckets.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 62

Rating distribution (audited)

The tables below show the credit rating of our financial assets to which the impairment requirements in IFRS 9 apply. JAs are incorporated in the balances. For

more on the credit rating profiles of key portfolios, see the credit risk review section for each business segment.


	Santander UK risk grade								Loss allowance	Total
	9	8	7	6	5	4	3 to 1	Other(1)	Loss allowance	Total
2022	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Exposures
On balance sheet
Cash and balances at central banks	44.2	—	—	—	—	—	—	—	—	44.2
–Stage 1	44.2	—	—	—	—	—	—	—	—	44.2
Financial assets at amortised cost:
–Loans and advances to customers(2)	9.5	35.9	85.6	52.1	15.2	9.2	5.4	7.7	(0.9)	219.7
–Stage 1	9.5	35.6	83.9	47.9	11.1	3.9	0.5	7.3	(0.1)	199.6
–Stage 2	—	0.3	1.7	4.2	4.1	5.2	2.6	0.2	(0.5)	17.8
–Stage 3	—	—	—	—	—	0.1	2.3	0.2	(0.3)	2.3
Of which mortgages:	9.5	33.4	82.3	45.0	7.2	3.8	3.1	—	(0.2)	184.1
–Stage 1	9.5	33.1	80.7	41.1	4.1	0.5	0.1	—	—	169.1
–Stage 2	—	0.3	1.6	3.9	3.1	3.2	1.3	—	(0.1)	13.3
–Stage 3	—	—	—	—	—	0.1	1.7	—	(0.1)	1.7
–Loans and advances to banks	0.1	(0.1)	—	—	—	—	—	1.0	—	1.0
–Stage 1	0.1	(0.1)	—	—	—	—	—	1.0	—	1.0
–Reverse repo agreements – non trading	5.4	0.6	0.1	1.1	—	—	—	0.1	—	7.3
–Stage 1	5.4	0.6	0.1	1.1	—	—	—	0.1	—	7.3
–Other financial assets at amortised cost	0.2	—	—	—	—	—	—		—	0.2
–Stage 1	0.2	—	—	—	—	—	—		—	0.2
Total financial assets at amortised cost	15.2	36.4	85.7	53.2	15.2	9.2	5.4	8.8	(0.9)	228.2
Financial assets at FVOCI:	3.5	2.2	0.3	—	—	—	—	—	—	6.0
–Stage 1	3.5	2.2	0.3	—	—	—	—	—	—	6.0
Total on balance sheet	62.9	38.6	86.0	53.2	15.2	9.2	5.4	8.8	(0.9)	278.4

Total off–balance sheet	0.1	7.2	6.9	6.5	4.9	2.1	0.4	3.7	(0.1)	31.7
–Stage 1	0.1	7.2	6.8	6.4	4.7	1.7	0.2	3.7	—	30.8
–Stage 2	—	—	0.1	0.1	0.2	0.4	0.1	—	(0.1)	0.8
–Stage 3	—	—	—	—	—	—	0.1	—	—	0.1
Total exposures	63.0	45.8	92.9	59.7	20.1	11.3	5.8	12.5	(1.0)	310.1

ECL
On balance sheet
Cash and balances at central banks	—	—	—	—	—	—	—	—		—
–Stage 1	—	—	—	—	—	—	—	—		—
Financial assets at amortised cost:
–Loans and advances to customers(2)	—	—	—	—	0.2	0.2	0.5	—		0.9
–Stage 1	—	—	—	—	0.1	—	—	—		0.1
–Stage 2	—	—	—	—	0.1	0.2	0.2	—		0.5
–Stage 3	—	—	—	—	—	—	0.3	—		0.3
Of which mortgages:	—	—	—	—	0.1	0.1	—	—		0.2
–Stage 1	—	—	—	—	—	—	—	—		—
–Stage 2	—	—	—	—	0.1	—	—	—		0.1
–Stage 3	—	—	—	—	—	0.1	—	—		0.1
–Loans and advances to banks	—	—	—	—				—		—
–Stage 1	—	—	—	—	—	—	—	—		—
–Reverse repo agreements – non trading	—	—	—	—	—	—	—	—		—
–Stage 1	—	—	—	—	—	—	—	—		—
–Other financial assets at amortised cost	—	—	—	—	—	—	—	—		—
–Stage 1	—	—	—	—	—	—	—	—		—
Total financial assets at amortised cost	—	—	—	—	0.2	0.2	0.5	—		0.9
Financial assets at FVOCI:	—	—	—	—	—	—	—	—		—
–Stage 1	—	—	—	—	—	—	—	—		—
Total on balance sheet	—	—	—	—	0.2	0.2	0.5	—		0.9

Total off–balance sheet	—	—	—	—	—	—	0.1	—		0.1
–Stage 1	—	—	—	—	—	—	—	—		—
–Stage 2	—	—	—	—	—	—	0.1	—		0.1
–Stage 3	—	—	—	—	—	—	—	—		—
Total ECL	—	—	—	—	0.2	0.2	0.6	—		1.0

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 63


	Santander UK risk grade								Total
	9	8	7	6	5	4	3 to 1	Other(1)	Total
2022	%	%	%	%	%	%	%	%	%
Coverage ratio
On balance sheet
Cash and balances at central banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Financial assets at amortised cost:
–Loans and advances to customers(2)	—	—	—	—	1.3	2.2	9.3	—	0.4
–Stage 1	—	—	—	—	0.9	—	—	—	0.1
–Stage 2	—	—	—	—	2.4	3.8	7.7	—	2.8
–Stage 3	—	—	—	—	—	—	13.0	—	13.0
Of which mortgages:	—	—	—	—	1.4	2.6	—	—	0.1
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	3.2	—	—	—	0.8
–Stage 3	—	—	—	—	—	100.0	—	—	5.9
–Loans and advances to banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Reverse repo agreements – non trading	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Other financial assets at amortised cost	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total financial assets at amortised cost	—	—	—	—	1.3	2.2	9.3	—	0.4
Financial assets at FVOCI:	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total on balance sheet	—	—	—	—	1.3	2.2	9.3	—	0.3

Total off–balance sheet	—	—	—	—	—	—	25.0	—	0.3
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	—	—	100.0	—	12.5
–Stage 3	—	—	—	—	—	—	—	—	—
Total coverage ratio	—	—	—	—	1.0	1.8	10.3	—	0.3

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 64


	Santander UK risk grade								Loss allowance
	9	8	7	6	5	4	3 to 1	Other(1)	Loss allowance	Total
2021	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Exposures
On balance sheet
Cash and balances at central banks	48.1	—	—	—	—	—	—	—	—	48.1
–Stage 1	48.1	—	—	—	—	—	—	—	—	48.1
Financial assets at amortised cost:
–Loans and advances to customers⁽²⁾	9.0	32.5	84.5	48.0	12.8	10.2	6.0	8.0	(0.9)	210.1
–Stage 1	9.0	31.7	83.1	44.9	10.0	5.0	0.6	7.4	(0.1)	191.6
–Stage 2	—	0.8	1.4	3.1	2.8	5.2	2.8	0.3	(0.4)	16.0
–Stage 3	—	—	—	—	—	—	2.6	0.3	(0.4)	2.5
Of which mortgages:	9.0	29.7	79.3	42.5	6.4	4.7	3.1	—	(0.2)	174.5
–Stage 1	9.0	29.5	78.0	39.6	4.1	1.6	—	—	—	161.8
–Stage 2	—	0.2	1.3	2.9	2.3	3.1	1.3	—	(0.1)	11.0
–Stage 3	—	—	—	—	—	—	1.8	—	(0.1)	1.7
–Loans and advances to banks	0.2	0.2	0.8	—	—	—	—	—	—	1.2
–Stage 1	0.2	0.2	0.8	—	—	—	—	—	—	1.2
–Reverse repo agreements – non trading	9.7	0.1	1.1	0.6	—	—	—	1.2	—	12.7
–Stage 1	9.7	0.1	1.1	0.6	—	—	—	1.2	—	12.7
–Other financial assets at amortised cost	0.5	—	—	—	—	—	—	—	—	0.5
–Stage 1	0.5	—	—	—	—	—	—	—	—	0.5
Total financial assets at amortised cost	19.4	32.8	86.4	48.6	12.8	10.2	6.0	9.2	(0.9)	224.5
Financial assets at FVOCI:	3.6	2.1	0.2	—	—	—	—	—	—	5.9
–Stage 1	3.6	2.1	0.2	—	—	—	—	—	—	5.9
Total on balance sheet	71.1	34.9	86.6	48.6	12.8	10.2	6.0	9.2	(0.9)	278.5

Total off–balance sheet	0.1	7.2	7.0	6.8	4.5	1.3	0.5	10.3	—	37.7
–Stage 1	0.1	6.9	6.7	6.6	4.3	1.0	0.2	10.3	—	36.1
–Stage 2	—	0.3	0.3	0.2	0.2	0.3	0.2	—	—	1.5
–Stage 3	—	—	—	—	—	—	0.1	—	—	0.1
Total exposures	71.2	42.1	93.6	55.4	17.3	11.5	6.5	19.5	(0.9)	316.2


ECL
On balance sheet
Cash and balances at central banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Financial assets at amortised cost:
–Loans and advances to customers⁽²⁾	—	—	—	—	0.2	0.1	0.6	—	0.9
–Stage 1	—	—	—	—	0.1	—	—	—	0.1
–Stage 2	—	—	—	—	0.1	0.1	0.2	—	0.4
–Stage 3	—	—	—	—	—	—	0.4	—	0.4
Of which mortgages:	—	—	—	—	—	0.1	0.1	—	0.2
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	—	0.1	—	—	0.1
–Stage 3	—	—	—	—	—	—	0.1	—	0.1
–Loans and advances to banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Reverse repo agreements – non trading	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Other financial assets at amortised cost	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total financial assets at amortised cost	—	—	—	—	0.2	0.1	0.6	—	0.9
Financial assets at FVOCI:	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total on balance sheet	—	—	—	—	0.2	0.1	0.6	—	0.9

Total off–balance sheet	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	—	—	—	—	—
–Stage 3	—	—	—	—	—	—	—	—	—
Total ECL	—	—	—	—	0.2	0.1	0.6	—	0.9

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 65


2021	%	%	%	%	%	%	%	%	%
Coverage ratio
On balance sheet
Cash and balances at central banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Financial assets at amortised cost:
–Loans and advances to customers⁽²⁾	—	—	—	—	1.6	1.0	10.0	—	0.4
–Stage 1	—	—	—	—	1.0	—	—	—	0.1
–Stage 2	—	—	—	—	3.6	1.9	7.1	—	2.5
–Stage 3	—	—	—	—	—	—	15.4	—	16.0
Of which mortgages:	—	—	—	—	—	2.1	3.2	—	0.1
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	—	3.2	—	—	0.9
–Stage 3	—	—	—	—	—	—	5.6	—	5.9
–Loans and advances to banks	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Reverse repo agreements – non trading	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Other financial assets at amortised cost	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total financial assets at amortised cost	—	—	—	—	1.6	1.0	10.0	—	0.4
Financial assets at FVOCI:	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
Total on balance sheet	—	—	—	—	1.6	1.0	10.0	—	0.3

Total off–balance sheet	—	—	—	—	—	—	—	—	—
–Stage 1	—	—	—	—	—	—	—	—	—
–Stage 2	—	—	—	—	—	—	—	—	—
–Stage 3	—	—	—	—	—	—	—	—	—
Total coverage ratio	—	—	—	—	1.2	0.9	9.2	—	0.3

(1)Includes cash at hand and smaller cases mainly in the Consumer (auto) finance and commercial mortgages portfolios, as well as loans written as part of the Covid-19 support schemes. We use scorecards for

these items, rather than rating models.

(2)Includes interest we have charged to the customer’s account and accrued interest we have not charged to the account yet.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 66

Credit performance (audited)


	Customer Loans							Gross write- offs	Loan Loss Allowances
	Total		Stage 1		Stage 2		Stage 3	Gross write- offs	Loan Loss Allowances
2022	£bn	£bn	%	£bn	%	£bn	%	£m	£m
Retail Banking	191.8	175.4	91.4	14.4	7.5	2.0	1.10	113	502
– Homes - Mortgages	184.3	169.1	91.7	13.4	7.3	1.8	1.00	3	248
– EDB - Credit Cards	2.5	2.1	85.7	0.3	12.9	0.1	2.53	40	120
– EDB - Other(1)	5.0	4.2	82.8	0.7	13.0	0.1	4.30	70	134
Consumer Finance(2)	5.4	5.0	93.0	0.4	6.5	—	0.54	19	67
CCB	18.5	14.5	78.3	3.5	18.8	0.5	3.08	24	362
Corporate Centre	—	—	—	—	—	—	—	—	—
Total Drawn	215.7	194.9	90.4	18.3	8.5	2.5	1.26	156	931
Retail Banking	21.7	21.1		0.5		0.1		—	42
– Homes - Mortgages	8.0	7.9		0.1		—		—	3
– EDB - Credit Cards	10.2	10.1		0.1		—		—	10
– EDB - Other(1)	3.5	3.1		0.3		0.1		—	29
Consumer Finance(2)	0.4	0.4		—		—		—	—
CCB	9.7	9.3		0.4		—		—	32
Corporate Centre	—	—		—		—		—	—
Total Undrawn	31.8	30.8		0.9		0.1		—	74
Total	247.5	225.7		19.2		2.6		156	1,005


2021	£bn	£bn	%	£bn	%	£bn	%	£m	£m
Retail Banking	183.0	169.2	92.5	11.7	6.4	2.1	1.10	107	367
– Homes - Mortgages	174.7	161.8	92.6	11.1	6.4	1.8	1.00	5	185
– EDB - Credit Cards	2.4	2.2	91.7	0.2	7.7	—	2.54	39	82
–EDB - Other	5.9	5.2	88.1	0.4	6.6	0.3	4.90	63	100
Consumer Finance	5.0	4.8	96.0	0.2	4.0	—	0.48	25	52
CCB	19.3	13.9	72.0	4.6	23.9	0.8	4.28	58	408
Corporate Centre	—	—	—	—	—	—	—	—	—
Total Drawn	207.3	187.9	90.6	16.5	7.9	2.9	1.45	190	827
Retail Banking	29.4	29.2		0.2		—		—	21
– Homes - Mortgages	16.0	15.9		0.1		—		—	5
– EDB - Credit Cards	9.9	9.9		—		—		—	7
–EDB - Other	3.5	3.4		0.1		—		—	9
Consumer Finance	0.3	0.3		—		—		—	—
CCB	8.0	6.7		1.3		—		—	17
Corporate Centre	—	—		—		—		—	—
Total Undrawn	37.7	36.2		1.5		—		—	38
Total	245.0	224.1		18.0		2.9		190	865

(1)EDB - Other includes £2.5bnof BBLS lending (£2.4bn is BBLS with 100% Government Guarantee), £2.0bn unsecured personal loans and£0.5bn overdrafts.

(2)Consumer Finance - 84% of lending is collateralised on the vehicle.

For more on the credit performance of our key portfolios by business segment, see the credit risk review section for each business segment.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 67

Credit quality (audited)

Total on-balance sheet exposures at 31 December 2022 comprised £215.7bn of customer loans, loans and advances to banks of £1.0bn, £7.5bn of sovereign

assets measured at amortised cost £6.0bn of assets measured at FVOCI, and £44.2bn of cash and balances at central banks.


	Stage 1	Stage 2	Stage 3	Total
2022	£m	£m	£m	£m
Exposures
On-balance sheet
Retail Banking	175,365	14,399	2,072	191,836
– Homes - Mortgages	169,066	13,424	1,827	184,317
– EDB - Credit Cards	2,192	328	37	2,557
– EDB - Other	4,107	647	208	4,962
Consumer Finance	5,005	350	29	5,384
CCB	14,507	3,476	535	18,518
Corporate Centre	58,710	—	—	58,710
Total on-balance sheet	253,587	18,225	2,636	274,448
Off-balance sheet
Retail Banking(1)	21,175	490	56	21,721
– Homes - Mortgages	7,899	109	21	8,029
– EDB - Credit Cards	10,137	122	29	10,288
– EDB - Other	3,139	259	6	3,404
Consumer Finance	356	—	—	356
CCB	9,310	412	37	9,759
Corporate Centre	—	—	—	—
Total off-balance sheet(2)	30,841	902	93	31,836
Total exposures	284,428	19,127	2,729	306,284

ECL
On-balance sheet
Retail Banking	56	295	151	502
– Homes - Mortgages	23	130	95	248
– EDB - Credit Cards	14	85	21	120
– EDB - Other	19	80	35	134
Consumer Finance	19	27	21	67
CCB	69	155	138	362
Corporate Centre	—	—	—	—
Total on-balance sheet	144	477	310	931
Off-balance sheet
Retail Banking	12	28	2	42
– Homes - Mortgages	2	1	—	3
– EDB - Credit Cards	3	6	1	10
– EDB - Other	7	21	1	29
Consumer Finance	—	—	—	—
CCB	14	11	7	32
Corporate Centre	—	—	—	—
Total off-balance sheet	26	39	9	74
Total ECL	170	516	319	1,005

Coverage ratio(3)	%	%	%	%
On-balance sheet
Retail Banking	—	2.0	7.3	0.3
– Homes - Mortgages	—	1.0	5.2	0.1
– EDB - Credit Cards	0.6	25.9	56.8	4.7
– EDB - Other	0.5	12.4	16.8	2.7
Consumer Finance	0.4	7.7	72.4	1.2
CCB	0.5	4.5	25.8	2.0
Corporate Centre	—	—	—	—
Total on-balance sheet	0.1	2.6	11.8	0.3
Off-balance sheet
Retail Banking	0.1	5.7	3.6	0.2
– Homes - Mortgages	—	0.9	—	—
– EDB - Credit Cards	—	4.9	3.4	0.1
– EDB - Other	0.2	8.1	16.7	0.9
Consumer Finance	—	—	—	—
CCB	0.2	2.7	18.9	0.3
Corporate Centre	—	—	—	—
Total off-balance sheet	0.1	4.3	9.7	0.2
Total coverage	0.1	2.7	11.7	0.3

(1)Off-balance sheet exposures include£2.8bn of residential mortgage offers in the pipeline.

(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 31.

(3)ECL as a percentage of the related exposure.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 68

Total on-balance sheet exposures at 31 December 2021 comprised £207.3bn of customer loans, loans and advances to banks of £1.2bn, £13.2bn of sovereign

assets measured at amortised cost, £5.9bn of assets measured at FVOCI, and £48.1bn of cash and balances at central banks.


	Stage 1	Stage 2	Stage 3	Total
2021	£m	£m	£m	£m
Exposures
On-balance sheet
Retail Banking	169,255	11,646	2,122	183,023
– Homes - Mortgages	161,845	11,071	1,796	174,712
– EDB - Credit Cards	2,125	181	35	2,341
– EDB - Other	5,285	394	291	5,970
Consumer Finance	4,760	200	24	4,984
CCB	13,890	4,602	790	19,282
Corporate Centre	68,349	—	—	68,349
Total on-balance sheet	256,254	16,448	2,936	275,638
Off-balance sheet
Retail Banking(1)	29,123	204	45	29,372
–Homes - Mortgages	15,851	81	19	15,951
– EDB - Credit Cards	9,887	49	24	9,960
– EDB - Other	3,385	74	2	3,461
Consumer Finance	314	—	—	314
CCB	6,675	1,312	36	8,023
Corporate Centre	—	—	—	—
Total off-balance sheet(2)	36,112	1,516	81	37,709
Total exposures	292,366	17,964	3,017	313,347

ECL
On-balance sheet
Retail Banking	52	178	137	367
– Homes - Mortgages	8	88	89	185
– EDB - Credit Cards	15	47	20	82
– EDB - Other	29	43	28	100
Consumer Finance	18	17	17	52
CCB	45	119	244	408
Corporate Centre	—	—	—	—
Total on-balance sheet	115	314	398	827
Off-balance sheet
Retail Banking	12	8	1	21
– Homes - Mortgages	5	—	—	5
– EDB - Credit Cards	3	3	1	7
– EDB - Other	4	5	—	9
Consumer Finance	—	—	—	—
CCB	5	8	4	17
Total off-balance sheet	17	16	5	38
Total ECL	132	330	403	865

Coverage ratio(3)	%	%	%	%
On-balance sheet
Retail Banking	—	1.5	6.5	0.2
– Homes - Mortgages	—	0.8	5.0	0.1
– EDB - Credit Cards	0.7	26.0	57.1	3.5
– EDB - Other	0.5	10.9	9.6	1.7
Consumer Finance	0.4	8.5	70.8	1.0
CCB	0.3	2.6	30.9	2.1
Corporate Centre	—	—	—	—
Total on-balance sheet	—	1.9	13.6	0.3
Off-balance sheet
Retail Banking	—	3.9	2.2	0.1
– Homes - Mortgages	—	0.0	—	—
– EDB - Credit Cards	—	6.1	4.2	0.1
– EDB - Other	0.1	6.8	—	0.3
Consumer Finance	—	—	—	—
CCB	0.1	0.6	11.1	0.2
Total off-balance sheet	—	1.1	6.2	0.1
Total coverage	—	1.8	13.4	0.3

(1)Off-balance sheet exposures include £10.6bn of residential mortgage offers in the pipeline.

(2)Off-balance sheet amounts consist of contingent liabilities and commitments. For more, see Note 31.

(3)ECL as a percentage of the related exposure.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 69

2022 compared to 2021

The ECL provision at 31 December 2022 increased by £140m to £1.0bn (2021: £0.9bn). Notable changes to ECL in 2022 which impacted credit impairment were:

–Corporate Covid-19 related JAs:: net release of £175m. All corporate sector staging JAs related to Covid-19 released, resulting in £0.4bn movement of

corporate Stage 3 loans to Stage 2.

–Economic scenarios and weights: charge of £163m. Updated economic scenarios with expectations for higher base rate and lower house prices in 2023

–Corporate sector staging risks: charge of £61m. JAs to reflect the corporate lending risks for sectors and counterparties which are most susceptible to

increased inflation, energy prices and input costs alongside potentially lower demand. As a result, £1.4bn of higher risk Stage 1 loans were moved to Stage 2,

and probability of defaults increased on some Stage 2 loans following an assessment of the client and sector risks.

–Affordability of retail lending repayments: charge of £44m. JAs to account for the potential repayment affordability risk among those customers with low

disposable income. After stressing for inflation, £0.2bn of unsecured loans, overdrafts and credit cards moved from Stage 1 to Stage 2. In addition, £5.0bn of

mortgages moved from Stage 1 to Stage 2 following an assessment of customer indebtedness.

–Write-offs against provision: Gross write-off utilisation of £157m (2021: £191m).

Key movements in exposures and ECL in the period by Stage were:

–The reduction in Stage 1 exposures arose mainly from changes in Corporate Centre. This reduction was partially offset by the growth in the mortgage portfolio

and Corporate & Commercial Banking. The Stage 1 ECL increased mainly due to the increase in Corporate & Commercial Banking as a result of unwinding the

Corporate lending to segments affected by Covid-19 JA that placed more vulnerable accounts into Stage 2.

–Total Stage 2 exposures increased due to the implementation of cost of living JAs to cover the affordability risk associated with the increase in interest rates and

energy pries. This included a portion of the mortgage and unsecured lending portfolios from Stage 1 to Stage 2. This was partially offset by the unwinding of the

Corporate lending to segments affected by Covid-19 JAs. In Retail Banking, Stage 2 exposures increased due to the implementation of cost of living JAs to cover

the affordability risk associated with the increase in interest rates and energy prices. Stage 2 ECL increased due to a worsening in the economic outlook with the

inclusion of an inflationary pressure scenario. Retail Banking Stage 2 ECL also increased due to affordability risk JAs.

–Stage 3 exposures and ECL reduced due to releasing the Stage 2-3 Corporate lending to segments affected by Covid-19 JAs. Stage 3 exposures and ECL

remained fairly stable across the Retail Banking portfolio.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 70

Stage 2 analysis (audited)

The following table analyses our Stage 2 exposures and ECL by the reason the exposure is classified as Stage 2.


2022		PD deterioration	Forbearance	Other	30 DPD	Mortgage affordability	Retail Unsecured affordability	High risk corporate	Total
Retail Banking Homes - Mortgages	Exposure £m	7,310	449	241	463	4,961	—	—	13,424
	ECL £m	86	2	5	10	27	—	—	130
	Coverage %	1.2	0.4	2.1	2.2	0.5	—	—	1.0
Retail Banking EDB - Credit Cards	Exposure £m	239	—	22	8	—	59	—	328
	ECL £m	63	—	4	4	—	14	—	85
	Coverage %	26.4	—	18.2	50.0	—	23.7	—	25.9
Retail Banking EDB - Other	Exposure £m	304	—	26	178	—	139	—	647
	ECL £m	43	—	6	14	—	17	—	80
	Coverage %	14.1	—	23.1	7.9	—	12.2	—	12.4
Consumer Finance	Exposure £m	159	—	164	27	—	—	—	350
	ECL £m	11	—	6	10	—	—	—	27
	Coverage %	6.9	—	3.7	37.0	—	—	—	7.7
CCB	Exposure £m	1,548	64	684	214	—	—	966	3,476
	ECL £m	81	4	1	10	—	—	59	155
	Coverage %	5.2	6.3	0.1	4.7	—	—	6.1	4.5
Corporate Centre	Exposure £m	—	—	—	—	—	—	—	—
	ECL £m	—	—	—	—	—	—	—	—
	Coverage %	—	—	—	—	—	—	—	—
Total Drawn	Exposure £m	9,560	513	1,137	890	4,961	198	966	18,225
	ECL £m	284	6	22	48	27	31	59	477
	Coverage %	3.0	1.2	1.9	5.4	0.5	15.7	6.1	2.6
Undrawn	ECL £m	19	—	8	6	—	4	2	39
Total Reported	Exposure £m	10,323	625	1,116	937	4,961	199	966	19,127
Total Reported	ECL £m	303	6	30	54	27	35	61	516

2021
Retail Banking Homes - Mortgages	Exposure £m	5,091	650	600	489	4,241	—	—	11,071
	ECL £m	57	4	2	7	18	—	—	88
	Coverage %	1.1	0.6	0.3	1.4	0.4	—	—	0.8
Retail Banking EDB - Credit Cards	Exposure £m	160	—	13	7	—	—	—	180
	ECL £m	41	—	2	4	—	—	—	47
	Coverage %	25.6	—	15.4	57.1	—	—	—	26.1
Retail Banking EDB - Other	Exposure £m	150	—	6	239	—	—	—	395
	ECL £m	22	—	1	20	—	—	—	43
	Coverage %	14.7	—	16.7	8.4	—	—	—	10.9
Consumer Finance	Exposure £m	42	11	130	17	—	—	—	200
	ECL £m	6	2	4	5	—	—	—	17
	Coverage %	14.3	18.2	3.1	29.4	—	—	—	8.5
CCB	Exposure £m	463	272	445	313	—	—	3,109	4,602
	ECL £m	19	8	17	1	—	—	74	119
	Coverage %	4.1	2.9	3.8	0.3	—	—	2.4	2.6
Corporate Centre	Exposure £m	—	—	—	—	—	—	—	—
	ECL £m	—	—	—	—	—	—	—	—
	Coverage %								—
Total Drawn	Exposure £m	5,906	933	1,194	1,065	4,241	—	3,109	16,448
	ECL £m	145	14	26	37	18	—	74	314
	Coverage %	2.5	1.5	2.2	3.5	0.4	—	2.4	1.9
Undrawn	ECL £m	8	1	1	2	—	—	4	16
Total Reported	Exposure £m	6,373	1,004	1,302	1,183	4,272	—	3,830	17,964
Total Reported	ECL £m	153	15	27	39	18	—	78	330

Where balances satisfy more than one of the criteria above for determining a SICR, we have assigned the corresponding gross carrying amount and ECL in order of

the categories presented.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 71

The following table analyses our Stage 2 exposures and the related ECL by whether or not they are in a cure period at the balance sheet date:


	2022			2021
	Exposure	ECL	Coverage	Exposure	ECL	Coverage
	£m	£m	%	£m	£m	%
Stage 2 not in cure period	13,001	439	3.4	13,302	286	2.2
Stage 2 in cure period (for transfer to Stage 1)	6,126	77	1.3	4,662	44	0.9
	19,127	516	2.7	17,964	330	1.8

2022 compared to 2021

The accounts in a cure period increased in 2022 due to the introduction of the Unsecured Affordability JA and an increase in the number of accounts falling in scope

for the Mortgage affordability JA. Accounts which have been moved into Stage 2 due to a JA are assumed to not be in a cure period.

Stage 3 analysis (audited)

The following table analyses our Stage 3 exposures and the related ECL by whether or not they are in a cure period at the balance sheet date.


	2022			2021
	Exposure	ECL	Coverage	Exposure	ECL	Coverage
	£m	£m	%	£m	£m	%
Stage 3 not in cure period	2,415	285	11.8	N/A	N/A	N/A
Stage 3 in cure period (for transfer to Stage 2)	314	34	10.8	N/A	N/A	N/A
	2,729	319	11.7	3,017	403	13.4

2022 compared to 2021

Following the implementation of a new regulatory definition of default in early 2022, we introduced a cure period criteria for Stage 3 assets. We did not have any

cure period criteria for Stage 3 at 31 December 2021 and as the change in definition was a change in estimate the prior periods were not amended.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 72

Reconciliation of exposures, loss allowance and net carrying amounts (audited)

The table below shows the relationships between disclosures in this Credit risk review section which refer to drawn exposures and the associated ECL, and the

total assets as presented in the Consolidated Balance Sheet. The Credit risk review disclosures exclude Joint ventures, as they carry low credit risk and therefore

have an immaterial ECL, and Other items, mainly accrued interest that we have not yet charged to the customer's account, and cash collateral.


	On-balance sheet			Off-balance sheet
	Exposures	Loss allowance	Net carrying amount	Exposures	Loss allowance
2022	£m	£m	£m	£m	£m
Retail Banking	191,836	502	191,334	21,721	42
–Homes - Mortgages(1)	184,317	248	184,069	8,029	3
–EDB - Credit Cards(2)	2,557	120	2,437	10,288	10
–EDB - Other(3)	4,962	134	4,828	3,404	29
Consumer Finance	5,384	67	5,317	356	—
Corporate & Commercial Banking	18,518	362	18,156	9,759	32
Corporate Centre	58,710	—	58,710	—	—
Total exposures presented in Credit Quality tables	274,448	931	273,517	31,836	74
Joint ventures			4,164
Other items			745
Adjusted net carrying amount			278,426
Assets classified at FVTPL			2,536
Non-financial assets(3)			4,251
Total assets per the Consolidated Balance Sheet			285,213

2021
Retail Banking	183,023	367	182,656	29,372	21
–Homes(1)	174,712	185	174,527	15,951	5
–EDB - Credit Cards(2)	2,341	82	2,259	9,960	7
–EDB - Other(3)	5,970	100	5,870	3,461	9
Consumer Finance	4,984	52	4,932	314	—
Corporate & Commercial Banking	19,282	408	18,874	8,023	17
Corporate Centre	68,349	—	68,349	—	—
Total exposures presented in Credit Quality tables	275,638	827	274,810	37,709	38
Joint ventures			3,079
Other items			553
Adjusted net carrying amount			278,442
Assets classified at FVTPL			1,866
Non-financial assets(3)			6,790
Total assets per the Consolidated Balance Sheet			287,098

(1)Off-balance sheet exposures include offers in the pipeline and undrawn flexible mortgages products.

(2)Off-balance sheet exposures include credit cards.

(3)Non-financial assets include £(2,657)m (2021: £77m) of Macro hedge of interest rate risk.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 73

Movement in total exposures and the corresponding ECL(audited)

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 2022	292,366	132	17,964	330	3,017	403	313,347	865
Transfers from Stage 1 to Stage 2(3)	(9,100)	(25)	9,100	25	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	7,207	133	(7,207)	(133)	—	—	—	—
Transfers to Stage 3(3)	(621)	(4)	(624)	(32)	1,245	36	—	—
Transfers from Stage 3(3)	10	1	758	150	(768)	(151)	—	—
Transfers of financial instruments	(2,504)	105	2,027	10	477	(115)	—	—
Net ECL remeasurement on stage transfer(4)	—	(110)	—	98	—	110	—	98
Change in economic scenarios(2)	—	37	—	123	—	3	—	163
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	48,194	42	1,119	76	64	24	49,377	142
Redemptions, repayments and assets sold(7)	(54,546)	(35)	(2,065)	(60)	(950)	(35)	(57,561)	(130)
Changes in risk parameters and other movements(6)	918	(1)	82	(61)	375	86	1,375	24
Assets written off(7)	—	—	—	—	(254)	(157)	(254)	(157)
At 31 December 2022	284,428	170	19,127	516	2,729	319	306,284	1,005
Net movement in the period	(7,938)	38	1,163	186	(288)	(84)	(7,063)	140

ECL charge/(release) to the Income Statement		38		186		73		297
Less: Discount unwind		—		—		(13)		(13)
Less: Recoveries net of collection costs		—		—		36		36
Total ECL charge/(release) to the Income Statement		38		186		96		320
Discontinued operations ECL adjustment		—		—		—		—
ECL charge/(release) to the Income Statement from continued operations		38		186		96		320



At 1 January 2021	301,413	216	18,336	592	2,996	569	322,745	1,377
Transfers from Stage 1 to Stage 2(3)	(6,805)	(9)	6,805	9	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	5,883	167	(5,883)	(167)	—	—	—	—
Transfers to Stage 3(3)	(571)	(3)	(532)	(20)	1,103	23	—	—
Transfers from Stage 3(3)	14	2	456	62	(470)	(64)	—	—
Transfers of financial instruments	(1,479)	157	846	(116)	633	(41)	—	—
Net remeasurement of ECL on stage transfer(4)	—	(133)	—	26	—	64	—	(43)
Change in economic scenarios(2)	—	(7)	—	(151)	—	(12)	—	(170)
New lending and assets purchased(5)	50,862	31	936	26	25	19	51,823	76
Redemptions, repayments and assets sold(7)	(63,658)	(70)	(3,442)	(67)	(519)	(68)	(67,619)	(205)
Changes in risk parameters and other movements(6)	5,228	(62)	1,288	20	179	63	6,695	21
Assets written off(7)	—	—	—	—	(297)	(191)	(297)	(191)
At 31 December 2021	292,366	132	17,964	330	3,017	403	313,347	865
Net movement in the period	(9,047)	(84)	(372)	(262)	21	(166)	(9,398)	(512)

ECL charge/(release) to the Income Statement		(84)		(262)		25		(321)
Less: Discount unwind		—		—		(11)		(11)
Less: Recoveries net of collection costs		—		—		88		88
Total ECL charge/(release) to the Income Statement		(84)		(262)		102		(244)
Discontinued operations ECL adjustment		11		—		—		11
ECL charge/(release) to the Income Statement from continued operations		(73)		(262)		102		(233)

(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, the scenarios themselves, and the probability weights from all other movements. Also

includes the impact of quarterly revaluation of collateral. The impact of changes in economics on exposure Stage allocations are shown in 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 existing facilities that did not change Stage in the period, and which were not acquired in the period. Includes the net increase or decrease in the period of cash at central banks, 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.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 74

COUNTRY RISK EXPOSURES (AUDITED)

We manage our country risk exposure under our global limits framework. We set our Risk Appetite for each country, taking into account factors that may affect its

risk profile. These can include political events, macroeconomics and the nature of the risk. We actively manage exposures if we need to.

The tables below show our total exposures, which are the total of balance sheet and off–balance sheet values. We calculate balance sheet values in line with IFRS

(i.e. after netting allowed under IAS 32) except for credit provisions which we add back. Off–balance sheet values are undrawn facilities and letters of credit. We

classify location by country of risk – the country where each client has its main business or assets. That is unless there is a full risk transfer guarantee in place. If so,

we use the guarantor’s country of domicile. If a client has operations in many countries, we use their country of incorporation. The table below excludes balances

with other Banco Santander group members. We show them separately in the section that immediately follows.


	2022						2021
		Financial institutions						Financial institutions
	Governments	Banks(1)	Other	Retail	Corporate	Total(2)	Governments	Banks(1)	Other	Retail	Corporate	Total(2)
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Eurozone
Ireland	—	—	2.3	—	0.1	2.4	—	—	5.3	—	—	5.3
Spain	—	—	—	—	—	—	—	—	—	—	0.1	0.1
France	0.1	0.8	0.5	—	—	1.4	0.1	0.3	0.2	—	—	0.6
Germany	—	0.3	—	—	0.1	0.4	—	0.4	—	—	—	0.4
Luxembourg	—	—	—	—	—	—	—	—	0.1	—	—	0.1
Other(3)	0.3	0.5	—	—	—	0.8	0.3	0.8	—	—	—	1.1
	0.4	1.6	2.8	—	0.2	5.0	0.4	1.5	5.6	—	0.1	7.6
Other countries
UK	44.1	1.8	5.8	217.3	26.9	295.9	47.9	2.0	9.3	215.1	28.7	303.0
US	0.1	0.9	0.1	—	—	1.1	0.5	0.8	—	—	—	1.3
Japan	1.1	0.3	—	—	—	1.4	1.0	0.2	—	—	—	1.2
Switzerland	1.2	—	—	—	—	1.2	—	—	—	—	—	—
Other	0.1	0.7	0.2		0.5	1.5	0.3	0.2	0.1	—	0.1	0.7
	46.6	3.7	6.1	217.3	27.4	301.1	49.7	3.2	9.4	215.1	28.8	306.2
Total	47.0	5.3	8.9	217.3	27.6	306.1	50.1	4.7	15.0	215.1	28.9	313.8

(1)Excludes balances with central banks.

(2)Excludes cash at hand, interests in other entities, intangible assets, property, plant and equipment, tax assets, retirement benefit assets and other assets.

1.Includes The Netherlands £0.1bn (2021: £0.2bn), Belgium £0.6bn (2021: £0.7bn), and Finland £0.1bn (2021: £nil).

Balances with other Banco Santander group members (audited)

We deal with other Banco Santander group members in the ordinary course of business. We do this where we have a particular business advantage or expertise

and where they can offer us commercial opportunities. These transactions also arise where we support the activities of, or with, larger multinational corporate

clients and financial institutions which may deal with other Banco Santander group members. We conduct these activities on the same terms as for similar

transactions with third parties, and in a way that manages the credit risk within limits acceptable to the Board and the PRA.

At 31 December 2022 and 31 December 2021, we had gross balances with other Banco Santander group members as follows:


	2022				2021
	Financial institutions				Financial institutions
	Banks	Other	Corporate	Total	Banks	Other	Corporate	Total
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Assets
Spain	1.4	—	—	1.4	0.8	—	—	0.8
UK	—	4.2	—	4.2	—	3.3	—	3.3
	1.4	4.2	—	5.6	0.8	3.3	—	4.1
Liabilities
Spain	1.7	0.1	—	1.8	1.2	0.1	—	1.3
UK	—	15.6	—	15.6	—	12.1	—	12.1
Uruguay	—	—	—	—	0.1	—	—	0.1
	1.7	15.7	—	17.4	1.3	12.2	—	13.5

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 75

RETAIL BANKING – CREDIT RISK REVIEW

We provide detailed credit risk analysis for Retail Banking in separate sections below for Homes, our largest portfolio, and our Everyday Banking portfolio.

RETAIL BANKING: HOMES – CREDIT RISK REVIEW

We offer mortgages to people who want to buy a property and offer additional borrowing (known as further advances) to existing mortgage customers. The

property must be in the UK

Borrower profile (audited)


	Stock				New business
	2022		2021		2022		2021
	£m	%	£m	%	£m	%	£m	%
Home movers(1)	76,357	41	74,657	42	12,221	36	13,537	43
Remortgagers(2)	53,190	29	50,645	29	10,644	31	8,031	25
First-time buyers	37,971	21	34,517	20	8,129	24	6,206	19
Buy-to-let	16,799	9	14,893	9	3,133	9	4,239	13
	184,317	100	174,712	100	34,127	100	32,013	100

(1)'Home movers’ include both existing customers moving house and taking out a new mortgage with us, and customers who switch their mortgage to us when they move house.

(2)'Remortgagers’ are new customers who are taking a new mortgage with us

As well as the new business above, there were £24.9bn (2021: £29.8bn) of remortgages where we moved customers with maturing products onto new

mortgages. We also provided £1.2bn (2021: £1.4bn) of further advances and flexible mortgage drawdowns. 81% (2021: 83%) of customers with a maturing

mortgage were retained, which applied to mortgages four months post maturity and calculated as a 12-month average of retention rates to September.

2022 compared to 2021

In 2022, mortgage asset stock increased across all sectors, with the stock borrower profile unchanged. Our new business increased, mainly in remortgages,

reflecting market conditions and strong demand from first time buyers, driven by customers securing fixed rate products in a rising interest rate environment. In

2022, we helped first-time buyers buy their new home with £8.1bn of gross lending (2021: £6.2bn).

Interest rate profile (audited)

The interest rate profile of our maturing mortgage asset stock was:


	2022		2021
	£m	%	£m	%
Fixed rate	163,622	89	147,147	84
Of which maturing:
–< 12 months	38,233	21	29,644	17
–Later than 1 year but no later than 3 years	38,213	21	40,967	23
–Later than 3 years but no later than 4 years	24,310	13	24,074	14
–Later than 4 years but no later than 5 years	24,888	14	21,140	12
–Later than 5 years	37,978	21	31,322	18
Variable rate	12,430	7	17,010	10
Standard Variable Rate (SVR)	5,645	3	7,836	4
Follow on Rate (FoR)	2,620	1	2,719	2
	184,317	100	174,712	100

2022 compared to 2021

In 2022 , we continued to see customers refinance from variable rate and SVR to fixed rate products influenced by the rapid increases in interest rates and the

competitive mortgage market. Within fixed rate products, we continued to see an increase in the proportion of 5 year fixed rate mortgages in 2022.

Geographical distribution (audited)

The geographical distribution of our mortgage asset stock and new business was:


	Stock		New business
	2022	2021	2022	2021
Region	£bn	£bn	£bn	£bn
London	47.0	44.6	8.3	8.3
Midlands and East Anglia	25.6	23.8	5.3	4.7
North	24.4	23.1	4.7	3.8
Northern Ireland	2.9	3.0	0.3	0.3
Scotland	6.8	6.6	1.2	1.0
South East excluding London	58.4	55.5	10.6	10.5
South West, Wales and other	19.2	18.1	3.7	3.4
	184.3	174.7	34.1	32.0

2022 compared to 2021

The portfolio's geographical distribution continued to represent a broad footprint across the UK, with a concentration around London and the South East. The loan-

to-income multiple of mortgage lending in the year, based on average earnings of new business at inception, was 3.35 (2021: 3.35).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 76

Mortgage loan size (audited)

The split of our mortgage asset by size was:


Mortgage loan size	2022	2021
>£1.0m	2%	2%
£0.5m to £1.0m	10%	9%
£0.25m to £0.5m	31%	30%
<£0.25m	57%	59%
Average loan size (stock)	£183k	£174k
Average loan size (new business)	£237k	£234k

Loan-to-value analysis (audited)

This table shows the LTV distribution for the gross carrying amount and the related ECL of our total mortgage portfolio and Stage 3 mortgages, and new business.

We also show the collateral value and average LTV. We use our estimate of the property value at the balance sheet date and include fees that have been added to

the loan. For flexible products, we only include the drawn amount, not undrawn limits.


	2022					2021
	Stock		Stage 3		New	Stock		Stage 3		New
	Total	ECL	Total	ECL	Business	Total	ECL	Total	ECL	Business
LTV	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Up to 50%	87,379	37	1,111	14	4,890	78,911	25	942	9	4,997
>50-60%	35,664	29	283	11	4,014	30,328	22	301	10	4,379
>60-70%	33,868	50	197	16	6,104	32,803	25	227	11	6,517
>70-80%	17,824	45	110	15	10,094	24,217	30	154	14	10,242
>80-90%	7,339	29	42	9	6,002	6,565	21	68	10	4,558
>90-100%	1,873	17	32	9	2,999	1,360	16	39	9	1,270
>100%	370	45	52	21	24	528	51	65	26	50
	184,317	252	1,827	95	34,127	174,712	190	1,796	89	32,013
Collateral value (1)	184,269		1,818		34,126	174,637		1,784		32,012

	%		%		%	%		%		%
Average LTV - Balance weighted(2)(3)	50		47		69	52		51		66

(1)Collateral value is limited to the balance of each loan and excludes the impact of any over-collateralisation. Includes collateral against loans in negative equity of £323m (2021: £455m).

(2)Balance weighted LTV = (Loan 1 balance x (Loan 1 Balance/Loan 1 latest property valuation) + (Loan 2 balance x (loan 2 balance/Loan 2 latest property valuation)+ ...) /(Loan 1 balance + Loan 2 balance+...).

(3)Simple average stock LTV 39% (2021: 41%).

At 31 December 2022, the parts of loans in negative equity which were effectively uncollateralised before deducting loss allowances was £48m (2021: £75m).

The balance weighted average LTV of new business in the period in London was 66% (2021: 64%).

31 December 2022 compared to 31 December 2021

There were no significant changes in collateral quality in 2022. Despite economic pressures, balance weighted average LTVs were broadly flat over the period. We

monitor the LTV profile of new lending and take action as needed to ensure the LTV mix of completions is appropriate.

Credit performance (audited)


	2022	2021
	£m	£m
Mortgage loans and advances to customers of which:	184,317	174,712
–Stage 1	169,066	161,845
–Stage 2	13,424	11,071
–Stage 3	1,827	1,796
Loss allowances(1)	251	190


	%	%
Stage 1 ratio(2)	91.73	92.64
Stage 2 ratio(2)	7.28	6.34
Stage 3 ratio(3)	1.00	1.04

(1)The ECL allowance is for both on and off–balance sheet exposures.

(2)Stage 1/Stage 2 exposures as a percentage of customer loans.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 77

Movement in total exposures and the corresponding ECL (audited)

The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page

74 also apply to these tables.


	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 2022	177,696	13	11,152	88	1,815	89	190,663	190
Transfers from Stage 1 to Stage 2(3)	(5,834)	(1)	5,834	1	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	2,961	16	(2,961)	(16)	—	—	—	—
Transfers to Stage 3(3)	(278)	(2)	(448)	(11)	726	13	—	—
Transfers from Stage 3(3)	4	—	279	9	(283)	(9)	—	—
Transfers of financial instruments	(3,147)	13	2,704	(17)	443	4	—	—
Net ECL remeasurement on stage transfer(4)	—	(15)	—	40	—	8	—	33
Change in economic scenarios(2)	—	1	—	21	—	2	—	24
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	35,028	7	529	11	1	—	35,558	18
Redemptions, repayments and assets sold(7)	(32,565)	(3)	(1,229)	(11)	(415)	(12)	(34,209)	(26)
Changes in risk parameters and other movements(6)	(47)	9	377	(1)	14	7	344	15
Assets written off (7)	—	—	—	—	(10)	(3)	(10)	(3)
At 31 December 2022	176,965	25	13,533	131	1,848	95	192,346	251
Net movement in the period	(731)	12	2,381	43	33	6	1,683	61

ECL charge/(release) to the Income Statement		12		43		9		64
Less: Discount unwind		—		—		(2)		(2)
Less: Recoveries net of collection costs		—		—		(1)		(1)
Total ECL charge/(release) to the Income Statement		12		43		6		61


At 1 January 2021	167,766	17	10,427	131	1,813	132	180,006	280
Transfers from Stage 1 to Stage 2(3)	(5,439)	(2)	5,439	2	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	3,782	21	(3,782)	(21)	—	—	—	—
Transfers to Stage 3(3)	(242)	(2)	(451)	(4)	693	6	—	—
Transfers from Stage 3(3)	3	—	353	15	(356)	(15)	—	—
Transfers of financial instruments	(1,896)	17	1,559	(8)	337	(9)	—	—
Net ECL remeasurement on stage transfer(4)	—	(19)	—	10	—	9	—	—
Change in economic scenarios(2)	—	(1)	—	(67)	—	(12)	—	(80)
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased (5)	33,292	6	332	2	1	—	33,625	8
Redemptions, repayments and assets sold(7)	(25,072)	(3)	(1,436)	(6)	(331)	(16)	(26,839)	(25)
Changes in risk parameters and other movements(6)	3,606	(4)	270	26	11	(10)	3,887	12
Assets written off (7)	—	—	—	—	(16)	(5)	(16)	(5)
At 31 December 2021	177,696	13	11,152	88	1,815	89	190,663	190
Net movement in the period	9,930	(4)	725	(43)	2	(43)	10,657	(90)

ECL charge/(release) to the Income Statement		(4)		(43)		(38)		(85)
Less: Discount unwind		—		—		(2)		(2)
Less: Recoveries net of collection costs		—		—		(1)		(1)
Total ECL charge/(release) to the Income Statement		(4)		(43)		(41)		(88)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 78

Loan modifications

Forbearance(1)

The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.


	2022	2021
	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	315	422
–Net modification loss	7	9
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the period	91	152

The balances at 31 December 2022 and 31 December 2021, analysed by their staging at the period-end and the forbearance we applied, were:


	Capitalisation	Term extension	Interest-only	Concessionary interest rate	Total (audited)	Loss allowances
2022	£m	£m	£m	£m	£m	£m
Stage 2	309	319	240	6	874	11
Stage 3	298	140	65	190	693	31
	607	459	305	196	1,567	42
Proportion of portfolio	0.3%	0.3%	0.2%	0.1%	0.9%

2021
Stage 2	387	444	273	4	1,108	12
Stage 3	217	74	73	111	475	26
	604	518	346	115	1,583	38
Proportion of portfolio	0.3%	0.3%	0.2%	0.1%	0.9%

(1)We base forbearance type on the first forbearance on the accounts.

2022 compared to 2021

In 2022, forbearance activity was stable. The proportion of the mortgage portfolio in forbearance remained flat at 0.9% (2021: 0.9%).

–At 2022, the proportion of accounts in forbearance for more than six months that had made their last six months’ contractual payments was 85% (2021: 85%).

–The weighted average LTV of all accounts in forbearance was 43% (2021: 32%) compared to the weighted average portfolio LTV of 50% (2021: 35%)

–At 2022, the carrying value of mortgages classified as multiple forbearance increased slightly to £152m (2021: £148m).

Other loan modifications

From March 2020 to March 2021, we provided mortgage customers with payment holiday terms in line with UK Government and FCA guidance. The scheme has

now ceased. The following table provides information on such loan modifications.


	2022	2021
	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	—	647
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12 months ECL in the period	—	8

At 2022, there were £1.9bn (2021: £2.3bn) of other mortgages on the balance sheet that we had modified since January 2008. At 2022:

–The average LTV was 24% (2021: 27%), and 94% (2021: 95%) of accounts had made their last six months’ contractual payments.

–The proportion of accounts that were 90 days or more in arrears was 1.53% (2021: 2.62%).

There were no other loan modifications made in the year.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 79

RETAIL BANKING: HOMES – PORTFOLIOS OF PARTICULAR INTEREST

Introduction

We are mainly a residential prime lender and we do not originate sub-prime or second charge mortgages. Despite that, some types of mortgages have higher risks

and others stand out for different reasons. These are:


Product	Description
Interest-only loans and part interest-only, part repayment loans	With an interest-only mortgage, the customer pays interest every month but the principal is only repaid at the end of the mortgage term. Some mortgages have a part that is interest-only, with the rest being a normal repayment mortgage. Customers with part interest-only, part repayment mortgages still have to pay back a lump sum at the end of their mortgage for the interest-only part. This means these loans have a higher credit risk as we depend on the customers to pay back a lump sum. We design new account LTV maximums to mitigate this risk. We also make sure the customer has a plausible repayment plan before we lend to them and stays on track for the loan term. We mitigate the risk from new interest-only mortgages by having lower maximum LTVs. For most applicants, the maximum LTV is 50%. For high net worth customers, it can be up to 75%. When a customer plans to repay their mortgage by selling the property, we require a minimum equity buffer of £250k. We also remind customers that they have to arrange to repay the principal at the end of the mortgage. We send them messages with their annual mortgage statements, and we contact them throughout the mortgage term to encourage them to tell us how they plan to repay. We increase the frequency of contact as the loan approaches maturity. If customers know they will not be able to repay their mortgage when it ends, or if their mortgage has already passed the date when it should have ended, we talk to them. If we think it is in their interests and they can afford it, we look at other ways to manage it, such as turning the mortgage into a repayment one and extending it. If the customer is waiting for their way to repay it, such as an investment plan, to mature, we may permit an extension.
Flexible loans	Flexible mortgages allow customers to pay more or less than their usual amount each month, or even to take ‘payment holidays’ when they pay nothing at all. There are conditions on when and how much customers can draw down, and they do not have to take or draw down the whole loan all at once. A customer can ask us to raise their credit limit, but that means we will go through our full credit approval process. We can also lower a customer’s credit limit at any time, so it never goes above 90% of the property’s current market value. We no longer offer flexible loans for new mortgages. This is an area of interest if any customers might be using these facilities to self-forbear, such as regularly drawing down small amounts. We reflect signs that the credit risk has significantly increased in our ECL calculations.
Loans with an LTV >100%	In some cases, property prices have fallen, so mortgages we gave in the past with lower LTVs now have LTVs greater than 100%. Where the mortgage balance is more than the property is now worth, we cannot recover the full value of the loan by repossessing and selling the property. This means there is a higher credit risk on these loans so we monitor them as part of our assessment of ongoing portfolio performance. We design new account LTV maximums to mitigate an increase in accounts with an LTV >100%.
Buy-to-Let (BTL) loans	We have specific policies for BTL and focus on non-professional landlords. We have prudent lending criteria and the maximum LTV is 75%. The first applicant must earn a minimum of £25,000 per year, and we require proof of income in all cases. We also use a BTL affordability rate as part of our lending assessment. This means that the rental income must cover the monthly mortgage interest payments by a prescribed amount when calculated using a stressed interest rate. We regularly review the prescribed amount and adjust it as needed.

Climate change

The value of property collateral for mortgages might be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood

and subsidence risk or changing environmental performance standards for property. In 2022 we reviewed the proportion of mortgage loans subject to flood and

subsidence risk and concluded that the risk was not material. The terms of our mortgage lending require homeowners to buy suitable insurance which transfers

the majority of the risk to asset valuations to third party insurers.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 80

Credit performance (audited)


		Portfolio of particular interest(1)
	Total	Interest-only	Part interest- only, part repayment (2)	Flexible	LTV >100%	Buy-to-let	Other portfolio
2022	£m	£m	£m	£m	£m	£m	£m
Mortgage portfolio	184,317	40,825	13,510	6,765	370	16,799	126,996
–Stage 1	169,066	35,702	12,143	5,713	217	15,884	118,507
–Stage 2	13,424	4,250	1,149	839	101	876	7,791
–Stage 3	1,827	873	218	213	52	39	698
Stage 3 ratio	1.00%	2.16%	1.62%	3.45%	13.94%	0.23%	0.55%
Properties in possession	47	18	8	3	7	1	16
Balance weighted LTV (indexed)	50%	47%	49%	36%	117%	58%	52%

2021
Mortgage portfolio	174,712	40,654	13,638	8,549	528	14,893	116,767
–Stage 1	161,845	36,212	12,391	7,509	354	14,363	109,878
–Stage 2	11,071	3,626	1,020	796	109	489	6,188
–Stage 3	1,796	816	227	244	65	41	701
Stage 3 ratio	1.04%	2.03%	1.66%	3.06%	12.34%	0.27%	0.60%
Properties in possession	2	1	1	—	1	—	—
Balance weighted LTV (indexed)	52%	49%	52%	39%	118%	61%	53%

(1)Where a loan falls into more than one category, we include it in all the categories that apply. As a result, the sum of the mortgages in the segments of particular interest and the other portfolio does not agree to

the total mortgage portfolio.

(2)Mortgage balance includes both the interest-only part of £10,010m (2021: £10,106m) and the non-interest-only part of the loan.

2022 compared to 2021

–In 2022, the combined total proportion of interest-only loans, part interest-only, part repayment loans and flexible loans remained stable.

–BTL mortgage balances increased £1.9bn to £16.8bn (2021: £14.9bn) driven by continued focus in growing this portfolio. In 2022, the balance weighted

average LTV of mortgage total new BTL lending was 67% (2021: 68%)

Forbearance(1) (audited)

The balances at 31 December 2022 and 31 December 2021 were:


	Interest-only(2)	Flexible	LTV >100%	Buy-to-Let
2022	£m	£m	£m	£m
Total	290	36	9	15
–Stage 2	111	19	—	11
–Stage 3	179	17	9	4

2021
Total	419	35	13	11
–Stage 2	280	24	3	8
–Stage 3	139	11	10	3

(1)Where a loan falls into more than one category, we have included it in all the categories that apply.

(2)Comprises full interest-only loans and part interest-only, part repayment loans.

2022 compared to 2021

Levels of forbearance on interest-only accounts decreased in 2022. The higher levels of forbearance on interest-only accounts in 2021 were driven by the

availability of a one year deferral of repaying capital for maturing or past maturity interest-only customers impacted or potentially impacted by Covid-19. This was

offered in line with FCA guidance. The scheme closed in 2021.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 81

RETAIL BANKING: EVERYDAY BANKING – CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL (audited)

The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page

74 also apply to these tables.


	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 2022	20,682	51	698	98	352	49	21,732	198
Transfers from Stage 1 to Stage 2(3)	(841)	(7)	840	8	—	—	(1)	1
Transfers from Stage 2 to Stage 1(3)	155	22	(155)	(22)	—	—	—	—
Transfers to Stage 3(3)	(158)	(1)	(56)	(7)	214	7	—	(1)
Transfers from Stage 3(3)	7	—	14	4	(21)	(5)	—	(1)
Transfers of financial instruments	(837)	14	643	(17)	193	2	(1)	(1)
Net ECL remeasurement on stage transfer(4)	—	(22)	—	91	—	30	—	99
Change in economic scenarios(2)	—	(2)	—	26	—	—	—	24
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	2,312	12	253	38	16	10	2,581	60
Redemptions, repayments and assets sold (7)	(2,829)	(11)	(176)	(10)	(483)	(5)	(3,488)	(26)
Changes in risk parameters and other movements(6)	249	1	(62)	(35)	324	83	511	49
Assets written off(7)	—	—	—	—	(122)	(110)	(122)	(110)
At 31 December 2022	19,577	43	1,356	191	280	59	21,213	293
Net movement in the period	(1,105)	(8)	658	93	(72)	10	(519)	95

Charge/(release) to the Income Statement		(8)		93		120		205
Less: Discount unwind		—		—		(4)		(4)
Less: Recoveries net of collection costs		—		—		1		1
Total ECL charge/(release) to the Income Statement		(8)		93		117		202


At 1 January 2021	21,089	57	791	201	105	50	21,985	308
Transfers from Stage 1 to Stage 2(3)	(214)	(2)	214	2	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	418	81	(418)	(81)	—	—	—	—
Transfers to Stage 3(3)	(284)	(1)	(36)	(10)	320	11	—	—
Transfers from Stage 3(3)	5	1	11	5	(16)	(6)	—	—
Transfers of financial instruments:	(75)	79	(229)	(84)	304	5	—	—
Net ECL remeasurement on stage transfer(4)	—	(78)	—	39	—	23	—	(16)
Change in economic scenarios(2)	—	(4)	—	(19)	—	—	—	(23)
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	2,150	13	84	12	9	4	2,243	29
Redemptions, repayments and assets sold(7)	(3,023)	(11)	(101)	(16)	(29)	(5)	(3,153)	(32)
Changes in risk parameters and other movements(6)	541	(6)	153	(34)	77	74	771	34
Assets written off(7)	—	1	—	(1)	(114)	(102)	(114)	(102)
At 31 December 2021	20,682	51	698	98	352	49	21,732	198
Net movement in the period	(407)	(6)	(93)	(103)	247	(1)	(253)	(110)

Charge/(release) to the Income Statement		(7)		(102)		101		(8)
Less: Discount unwind		—		—		(4)		(4)
Less: Recoveries net of collection costs		—		—		(51)		(51)
Total ECL charge/(release) to the Income Statement		(7)		(102)		46		(63)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 82

Credit performance (audited)


	Business banking	Other unsecured
	Business banking	Personal loans	Credit cards	Overdrafts	Total other unsecured	Total
2022	£m	£m	£m	£m	£m	£m
Loans and advances to customers of which:	2,519	1,982	2,558	461	5,001	7,520
–Stage 1	2,223	1,730	2,192	155	4,077	6,300
–Stage 2	133	231	329	282	842	975
–Stage 3	163	21	37	24	82	245
Loss allowances(1)	19	62	130	82	274	293
Stage 3 undrawn exposures	3				32	35
Stage 3 ratio	6.58%				2.27%	3.71%
Gross write-offs	11				99	110

2021
Loans and advances to customers of which:	3,532	2,000	2,341	438	4,779	8,311
–Stage 1	3,076	1,910	2,125	299	4,334	7,410
–Stage 2	201	73	181	120	374	575
–Stage 3	255	17	35	19	71	326
Loss allowances(1)	22	47	89	40	176	198
Stage 3 undrawn exposures	—				26	26
Stage 3 ratio	7.20%				2.03%	4.23%
Gross write-offs	6				97	103

(1)The ECL allowance is for both on and off–balance sheet exposures

2022 compared to 2021

Business Banking balances were lower, mainly due to reductions in the Bounce back loans (BBL) portfolio. Stage 3 assets reduced, although this had a minimal

impact on write offs as the reduction in assets was mainly due to the BBLs, where the 100% government guarantee was claimed. Other unsecured balances

increased slightly in 2022. However, Stage 2 unsecured assets increased by125%, reflecting the current economic environment. This is yet to impact Stage 3 or

write offs, which did not increase.

Loan modifications

Forbearance

The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.


	Business banking	Credit cards	Overdrafts	Total
2022	£m	£m	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	—	7	7	14
–Net modification gain	—	7	6	13
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period	—	3	1	4

2021
Financial assets modified in the period:
–Amortised cost before modification	—	13	9	22
–Net modification gain	—	5	4	9
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period	—	4	2	6

The balances (audited) at 31 December 2022 and 31 December 2021 were:


		Other unsecured
	Business banking	Personal loans	Credit cards	Overdrafts	Total other unsecured	Total
2022	£m	£m	£m	£m	£m	£m
Total	3	1	34	16	51	54
–Stage 2	—	1	6	2	9	9
–Stage 3	3	—	28	14	42	45

2021
Total	2	1	38	15	54	56
–Stage 2	—	—	7	3	10	10
–Stage 3	2	1	31	12	44	46

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 83

Other loan modifications

From March 2020 to March 2021, we provided business banking and other unsecured lending customers with payment holiday terms. The following table

provides information on such loan modifications.


	Business banking	Other unsecured	Total
2022	£m	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	—	—	—
–Net modification gain	—	—	—
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period	—	—	—

2021
Financial assets modified in the period:
–Amortised cost before modification	—	9	9
–Net modification gain	—	—	—
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12m ECL in the period	—	1	1

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 84

CONSUMER FINANCE – CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL (audited)

The following table shows changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level analysis on

page 74 also apply to this table.


	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 2022	5,074	18	200	17	24	17	5,298	52
Transfers from Stage 1 to Stage 2(3)	(232)	(2)	232	2	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	68	2	(68)	(2)	—	—	—	—
Transfers to Stage 3(3)	(13)	—	(10)	(2)	22	2	(1)	—
Transfers from Stage 3(3)	—	—	1	1	(1)	(1)	—	—
Transfers of financial instruments	(177)	—	155	(1)	21	1	(1)	—
Net ECL remeasurement on stage transfer(4)	—	(2)	—	9	—	10	—	17
Change in economic scenarios(2)	—	—	—	—	—	—	—	—
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	2,225	7	110	8	3	2	2,338	17
Redemptions, repayments and assets sold(7)	(1,232)	(5)	(77)	(7)	—	—	(1,309)	(12)
Changes in risk parameters and other movements(6)	(529)	1	(38)	1	18	10	(549)	12
Assets written off(7)	—	—	—	—	(37)	(19)	(37)	(19)
At 31 December 2022	5,361	19	350	27	29	21	5,740	67
Net movement in the period	287	1	150	10	5	4	442	15

Charge/(release) to the Income Statement		1		10		23		34
Less: Discount unwind		—		—		(2)		(2)
Less: Recoveries net of collection costs		—		—		(5)		(5)
Total ECL charge/(release) to the Income Statement		1		10		16		27


At 1 January 2021	7,824	44	379	37	58	37	8,261	118
Transfers from Stage 1 to Stage 2(3)	(98)	(1)	98	1	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	105	6	(105)	(6)	—	—	—	—
Transfers to Stage 3(3)	(8)	—	(8)	(2)	16	2	—	—
Transfers from Stage 3(3)	5	—	3	2	(8)	(2)	—	—
Transfers of financial instruments:	4	5	(12)	(5)	8	—	—	—
Net ECL remeasurement on stage transfer(4)	—	—	—	—	—	—	—	—
Change in economic scenarios(2)	—	—	—	(2)	—	—	—	(2)
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	2,212	6	70	4	3	2	2,285	12
Redemptions, repayments and assets sold(7)	(4,063)	(19)	(142)	(6)	(19)	(3)	(4,224)	(28)
Changes in risk parameters and other movements(6)	(903)	(18)	(95)	(12)	11	6	(987)	(24)
Assets written off(7)	—	—	—	1	(37)	(25)	(37)	(24)
At 31 December 2021	5,074	18	200	17	24	17	5,298	52
Net movement in the period	(2,750)	(26)	(179)	(20)	(34)	(20)	(2,963)	(66)

Charge/(release) to the Income Statement		(26)		(21)		5		(42)
Less: Discount unwind		—		—		—		—
Less: Recoveries net of collection costs		—		—		9		9
Total ECL charge/(release) to the Income Statement		(26)		(21)		14		(33)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 85

Credit performance (audited)


	2022	2021
	£m	£m
Loans and advances to customers of which:	5,384	4,984
–Stage 1	5,005	4,760
–Stage 2	350	200
–Stage 3	29	24
Loss allowances(1)	67	52
Stage 3 undrawn exposures	—	—
Stage 3 ratio	0.54%	0.49%
Gross write offs	19	25

(1)The ECL allowance is for both on and off–balance sheet exposures.

2022 compared to 2021

In 2022, we maintained our prudent Consumer (auto) finance underwriting criteria. The product mix was broadly unchanged, with wholesale balances increasing

slightly.

At 31 December 2022, Consumer (auto) finance gross lending (new business) was £2,519m( 2021: £2,383m). Wholesale loans (Stock finance) to car dealerships

at 31 December 2022 were approximately 10.1% (2021: 7.3%) of the Consumer loan book. At 31 December 2022, the average Consumer (auto) finance loan size

was £17,256 (2021: £16,182).

The risk profile was stable in terms of our credit scoring acceptance policies. The overall risk performance was good with the vast majority of customers paying.

Loan modifications

Forbearance

There were no accounts in forbearance at 31 December 2022 and 31 December 2021.

Other loan modifications

From March 2020 to March 2021, we provided Consumer Finance customers with payment holiday terms. The following table provides information on such loan

modifications.


	2022	2021
	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	—	54
–Net modification loss	—	—
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the ECL allowance changed to 12-month measurement in the period	95	226

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 86

CORPORATE & COMMERCIAL BANKING – CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL (audited)

The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page

74 also apply to these tables.


	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 2022	20,604	50	5,914	127	827	248	27,345	425
Transfers from Stage 1 to Stage 2(3)	(2,195)	(14)	2,195	14	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	4,023	92	(4,023)	(92)	—	—	—	—
Transfers to Stage 3(3)	(172)	(1)	(111)	(13)	283	14	—	—
Transfers from Stage 3(3)	—	—	463	135	(463)	(135)	—	—
Transfers of financial instruments	1,656	77	(1,476)	44	(180)	(121)	—	—
Net ECL remeasurement on stage transfer(4)	—	(72)	—	(41)	—	61	—	(52)
Change in economic scenarios(2)	—	38	—	76	—	—	—	114
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	8,629	16	228	19	43	12	8,900	47
Redemptions, repayments and assets sold(7)	(9,019)	(15)	(584)	(32)	(53)	(17)	(9,656)	(64)
Changes in risk parameters and other movements(6)	1,968	(11)	(194)	(27)	21	(14)	1,795	(52)
Assets written off (7)	—	—	—	—	(86)	(24)	(86)	(24)
At 31 December 2022	23,838	83	3,888	166	572	145	28,298	394
Net movement in the period	3,234	33	(2,026)	39	(255)	(103)	953	(31)

ECL charge/(release) to the Income Statement		33		39		(79)		(7)
Less: Discount unwind		—		—		(3)		(3)
Less: Recoveries net of collection costs		—		—		42		42
Total ECL charge/(release) to the Income Statement		33		39		(40)		32


	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 2021	20,952	77	6,311	199	1,020	350	28,283	626
Transfers from Stage 1 to Stage 2(3)	(1,055)	(4)	1,055	4	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	1,579	60	(1,579)	(60)	—	—	—	—
Transfers to Stage 3(3)	(38)	—	(37)	(3)	75	3	—	—
Transfers from Stage 3(3)	1	—	88	40	(89)	(40)	—	—
Transfers of financial instruments	487	56	(473)	(19)	(14)	(37)	—	—
Net ECL remeasurement on stage transfer(4)	—	(39)	—	(22)	—	31	—	(30)
Change in economic scenarios(2)	—	(2)	—	(62)	—	(1)	—	(65)
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	13,208	6	450	8	12	13	13,670	27
Redemptions, repayments and assets sold(7)	(16,644)	(15)	(1,357)	(17)	(139)	(42)	(18,140)	(74)
Changes in risk parameters and other movements(6)	2,601	(33)	983	40	54	(7)	3,638	—
Assets written off (7)	—	—	—	—	(106)	(59)	(106)	(59)
At 31 December 2021	20,604	50	5,914	127	827	248	27,345	425
Net movement in the period	(348)	(27)	(397)	(72)	(193)	(102)	(938)	(201)

ECL charge/(release) to the Income Statement		(27)		(72)		(43)		(142)
Less: Discount unwind		—		—		(4)		(4)
Less: Recoveries net of collection costs		—		—		56		56
Total ECL charge/(release) to the Income Statement		(27)		(72)		9		(90)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 87

Committed exposures

Credit risk arises on both on- and off–balance sheet transactions, e.g. guarantees. Therefore, committed exposures are typically higher than asset balances.

However, committed exposures can be smaller than asset balances due to netting.

Rating distribution (audited)

These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section)

for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.


	Santander UK risk grade
	9	8	7	6	5	4	3 to 1	Other(1)	Total
2022	£m	£m	£m	£m	£m	£m	£m	£m	£m
SME and mid corporate	—	336	923	2,341	3,299	5,327	1,791	106	14,123
Commercial Real Estate	—	2	111	2,044	2,128	936	185	1	5,407
Social Housing	44	4,028	3,956	6	—	—	—	—	8,034
	44	4,366	4,990	4,391	5,427	6,263	1,976	107	27,564
Of which:
Stage 1	39	4,364	4,944	4,202	4,773	4,289	386	107	23,104
Stage 2	5	2	46	189	654	1,974	1,018	—	3,888
Stage 3	—	—	—	—	—	—	572	—	572

2021
SME and mid corporate	—	659	714	2,397	3,067	5,545	2,207	66	14,655
Commercial Real Estate	—	126	137	1,471	2,228	638	249	—	4,849
Social Housing	52	3,961	3,759	9	—	53		105	7,939
	52	4,746	4,610	3,877	5,295	6,236	2,456	171	27,443
Of which:
Stage 1	52	3,809	4,359	3,604	4,192	4,138	380	168	20,702
Stage 2	—	937	251	239	1,086	2,005	1,509	(114)	5,913
Stage 3	—	—	—	34	17	93	567	117	828

(1)Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.

2022 compared to 2021

In 2022, committed exposure was substantially unchanged, with an increase in the CRE portfolio of 12%, largely offset by reductions in SME and mid corporate.

The rating distribution improved in the CRE portfolios following recovery in the credit quality of a number of customers initially downgraded as a result of Covid-19.

It has remained broadly stable in SME and mid corporate.

Geographical distribution (audited)

We typically classify geographical location according to the counterparty’s country of domicile unless a full risk transfer guarantee is in place, in which case we use

the guarantor’s country of domicile instead.


	2022					2021
	UK	Europe	US	Rest of World	Total	UK	Europe	US	Rest of World	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
SME and mid corporate	14,091	32	—	—	14,123	14,612	43	—	—	14,655
Commercial Real Estate	5,407	—	—	—	5,407	4,849	—	—	—	4,849
Social Housing	8,034	—	—	—	8,034	7,939	—	—	—	7,939
	27,532	32	—	—	27,564	27,400	43	—	—	27,443

Credit risk mitigation (audited)


	Gross exposure	Collateral	Net exposure
	Stage 3	Stage 3	Stage 3
2022	£m	£m	£m
SME and mid corporate	513	169	344
Commercial Real Estate	59	30	29
	572	199	373


2021
SME and mid corporate	747	307	440
Commercial Real Estate	81	37	44
	828	344	484

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 88

Credit performance (audited)

We monitor exposures that show potentially higher risk characteristics using our Watchlist process. The table below shows the exposures we monitor, and those

we classify as Stage 3 by portfolio at 31 December 2022 and 31 December 2021.


	Committed exposure
		Watchlist
	Fully performing	Enhanced monitoring	Proactive management	Stage 3	Total(1)	Loss allowances
2022	£m	£m	£m	£m	£m	£m
SME and mid corporate	11,796	431	1,383	513	14,123	355
Commercial Real Estate	4,765	103	480	59	5,407	38
Social Housing	7,978	46	10	—	8,034	1
	24,539	580	1,873	572	27,564	394


2021(2)
SME and mid corporate	11,227	520	2,161	747	14,655	376
Commercial Real Estate	4,344	204	220	81	4,849	46
Social Housing	7,799		140		7,939	3
	23,370	724	2,521	828	27,443	425

(1)Includes committed facilities and derivatives.

(2)New customer management systems have introduced improved portfolio segmentation information. This has led to a realignment of portfolio segmentation and improved the identification of portfolios of

particular interest. Due to this a restatement of the 2021 figures has taken place.

2022 compared to 2021

Across Corporate & Commercial Banking, watchlist exposure decreased, enhanced monitoring by 20% and proactive monitoring by 26% This followed the

upgrading of cases as they stabilised after emerging from Covid-19 lockdowns especially in SME and Mid Corporates whilst CRE saw an increase in Proactive

Management.

Stage 3 assets also decreased, down 31% with loss allowances decreasing by £31m (7%). The remaining Covid-19 related judgemental adjustments (JAs) were

released. New JAs have been introduced to reflect the heightened risks of sectors and counterparties deemed most susceptible to current headwinds.

Loan modifications

Forbearance

The following table (audited) sets out the financial assets that were forborne while they had a loss allowance measured at lifetime ECL.


	2022	2021
	£m	£m
Financial assets modified in the period:
–Amortised cost before modification	240	243
–Net modification gain/ (loss)	8	(5)
Financial assets modified since initial recognition:
–Gross carrying amount of financial assets for which the loss allowance changed to 12-month ECL in the period	15	29

We only make forbearance arrangements for lending to customers. The balances (audited) at 31 December 2022 and 31 December 2021, analysed by their

staging at the period–end and the forbearance we applied, were:


	2022	2021
	£m	£m
Stock(1)
–Term extension	98	150
–Interest-only	238	239
–Other payment rescheduling	219	204
	555	593
Of which:
–Stage 1	17	20
–Stage 2	173	303
–Stage 3	365	270
	555	593
Proportion of portfolio	2.0%	2.4%

(1)We base forbearance type on the first forbearance we applied. Tables only show accounts open at the period-end. Amounts are drawn balances and include off balance sheet balances.

2022 compared to 2021

In 2022, forbearance stock decreased overall due to a single case that was first reported as forbearance in 2021, and was repaid in 2022. This was partially offset

by a small increase in other cases.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 89

PORTFOLIOS OF PARTICULAR INTEREST

Introduction

Some types of lending have higher risk and others stand out for other reasons. We give more detail below on the following areas of particular interest.


Portfolio	Description
Commercial Real Estate (CRE)	Lending to experienced, professional landlords mainly secured by tenanted UK property. The CRE market has seen regular cyclical downturns, and so is a portfolio of particular interest. We manage and report our CRE portfolio in Corporate & Commercial Banking.

In prior periods, we also gave a summary of our total Social Housing portfolio as we managed part of it in Corporate & Commercial Banking and part of it in

Corporate Centre. With effect from 2022, we manage all our Social Housing portfolio in Corporate & Commercial Banking, as explained in Note 2 to the

Consolidated Financial Statements. As a result, information on our total Social Housing portfolio is now presented in the main Corporate & Commercial Banking

section.

Climate change

The global economy is still heavily dependent on fossil fuel energy sources such as coal, natural gas and oil, which significantly contribute to climate change.

Energy transmission requires building and maintaining appropriate wholesale networks that can affect the natural environment. We remain committed to

reallocating financial flows from fossil fuel consumption, including for electricity generation, to cleaner alternatives as set out in our Environmental, Social and

Climate Change Policy.

In order to track and measure how our current lending activities contribute towards the reliance of fossil fuels, in 2022 we analysed our portfolio to identify fossil

fuel exposures. We classified lending as a fossil fuel exposure if the counterparty engaged in any of the following activities:

–Oil & Gas: production and treatment including refining, transportation, storage and wholesale distribution

–Mining & Extraction: any coal mining or extraction activities

–Power Generation: clients for who coal-fired generation represents more than 10% of revenues on a consolidated basis.

At 31 December 2022, we had limited exposure to such counterparties, with these activities making up 0.4% of our Corporate and Commercial Banking lending to

non-financial corporates. On an individually assessed basis, clients in these industries were highly rated and their markets remained highly liquid. We will continue

to monitor, disclose and reduce lending which contributes to ongoing fossil fuel use.

Commercial Real Estate

Credit performance

The table below shows the main CRE credit performance metrics at 31 December 2022 and 31 December 2021.


	Customer loans	Stage 3	Stage 3 Ratio	Gross write–offs	Total loss allowance
	£m	£m	%	£m	£m
2022	4,822	58	1.20	—	38
2021	4,345	79	1.82	25	46

LTV analysis

The table below shows the LTV distribution for our CRE total stock and Stage 3 stock (based on the drawn balance and our latest estimate of the property’s current

value) of the portfolio at 31 December 2022 and 31 December 2021.


	2022				2021
	Stock		Stage 3		Stock		Stage 3
	Total	ECL	Total	ECL	Total	ECL	Total	ECL
LTV	£m	£m	£m	£m	£m	£m	£m	£m
Up to 50%	2,818	15	14	1	2,485	15	21	5
>50-70%	1,416	7	2	—	1,194	20	41	14
>70-100%	137	4	15	3	35	2	3	—
> 100%	67	—	1	—	37	1	5	1
Other portfolio (1)	359	12	26	7	594	8	9	3
Total with collateral	4,797	38	58	11	4,345	46	79	23
Development loans	25	—	—	—	—	—	—	—
	4,822	38	58	11	4,345	46	79	23

(1)Smaller value transactions, mainly commercial mortgages.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 90

Refinancing risk

At 31 December 2022, CRE loans of £964m (2021: £1,084m) were due to mature within 12 months. Of these, £17m or 1.8% (2021: £7m or 0.7%) had an LTV ratio

higher than is acceptable under our current credit policy, £7m of which were reported as Stage 3 (2021: £4m).

Sector analysis


Sector	2022		2021
Sector	£m	%	£m	%
Office	1,267	26	1,127	26
Retail	635	13	653	15
Industrial	749	16	457	10
Residential	853	18	720	17
Mixed use	641	13	526	12
Student accommodation	81	2	58	1
Hotels and leisure	212	4	210	5
Other	25	1	—	—
Small value transactions portfolio(1)	359	7	594	14
	4,822	100	4,345	100

1)Mainly commercial mortgages.

2022 compared to 2021

The CRE portfolio is well diversified across sectors with no significant regional or single name concentration. In 2022, the market faced falling capital and rental

yields along with structural changes in certain sub-sectors such as Retail and Office. However at 31 December 2022, the LTV profile of the portfolio remained

conservative with £4,234m and 95% (2021: £3,679m and 98%) at or below 70% LTV. Almost two thirds of the CRE portfolio has an LTV below 50%.

Drawn customer loans increased by £477m. In 2022 , we maintained a prudent lending approach, with >99% of new business (2021: 100%) written at or below

60% LTV. The weighted average LTV of the CRE portfolio was 46%.

Drawn facilities subject to enhanced monitoring decreased by 48% to £102m (2021: £198m). Drawn facilities subject to proactive management increased by

115% to £473m (2021: £220m). Stage 3 exposures decreased to £58m (2021: £79m).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 91

CORPORATE CENTRE – CREDIT RISK REVIEW

Movement in total exposures and the corresponding ECL (audited)

The following tables show changes in total on and off-balance sheet exposures and ECL in the period. The footnotes to the Santander UK group level table on page

74 also apply to these tables.


	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 2022	68,349	—	—	—	—	—	68,349	—
Transfers from Stage 1 to Stage 2(3)	—	—	—	—	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	—	—	—	—	—	—	—	—
Transfers to Stage 3(3)	—	—	—	—	—	—	—	—
Transfers from Stage 3(3)	—	—	—	—	—	—	—	—
Transfers of financial instruments	—	—	—	—	—	—	—	—
Net ECL remeasurement on stage transfer(4)	—	—	—	—	—	—	—	—
Change in economic scenarios(2)	—	—	—	—	—	—	—	—
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	—	—	—	—	—	—	—	—
Redemptions, repayments and assets sold (7)	(8,901)	—	—	—	—	—	(8,901)	—
Changes in risk parameters and other movements(6)	(738)	—	—	—	—	—	(738)	—
Assets written off (7)	—	—	—	—	—	—	—	—
At 31 December 2022	58,710	—	—	—	—	—	58,710	—
Net movement in the period	(9,639)	—	—	—	—	—	(9,639)	—

ECL charge/(release) to the Income Statement						—		—
Less: Discount unwind						—		—
Less: Recoveries net of collection costs						—		—
Total ECL charge/(release) to the Income Statement		—		—		—		—


	£m	£m	£m	£m	£m	£m	£m	£m
At 1 January 2021	72,575	35	—	—	—	—	72,575	35
Transfers from Stage 1 to Stage 2(3)	—	—	—	—	—	—	—	—
Transfers from Stage 2 to Stage 1(3)	—	—	—	—	—	—	—	—
Transfers to Stage 3(3)	—	—	—	—	—	—	—	—
Transfers from Stage 3(3)	—	—	—	—	—	—	—	—
Transfers of financial instruments	0	—	—	—	—	—	—	—
Net ECL remeasurement on stage transfer(4)	—	—	—	—	—	—	—	—
Change in economic scenarios(2)	—	—	—	—	—	—	—	—
Changes to model	—	—	—	—	—	—	—	—
New lending and assets purchased(5)	—	—	—	—	—	—	—	—
Redemptions, repayments and assets sold (7)	(3,749)	(18)	—	—	—	—	(3,749)	(18)
Changes in risk parameters and other movements(6)	(477)	(17)	—	—	—	—	(477)	(17)
Assets written off (7)	—	—	—	—	—	—	—	—
At 31 December 2021	68,349	—	—	—	—	—	68,349	—
Net movement in the period	(4,226)	(35)	—	—	—	—	(4,226)	(35)

ECL charge/(release) to the Income Statement		(35)		—		—		(35)
Less: Discount unwind		—		—		—		—
Less: Recoveries net of collection costs		—		—		—		—
Total ECL charge/(release) to the Income Statement		(35)		—		—		(35)

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 92

Committed exposures

Credit risk arises on both on- and off–balance sheet transactions, e.g. derivatives.

Rating distribution (audited)

These tables show our credit risk exposure according to our internal rating scale (see ‘Credit quality’ in the ‘Santander UK group level – credit risk review’ section)

for each portfolio. On this scale, the higher the rating, the better the quality of the counterparty.


	Santander UK risk grade
	9	8	7	6	5	4	3 to 1	Other(1)	Total
2022	£m	£m	£m	£m	£m	£m	£m	£m	£m
Corporate Centre
Sovereign and Supranational	47,040	1,077	—	—	—	—	—	—	48,117
Structured Products	136	1,162	875	—	—	—	—	—	2,173
Financial Institutions	1,191	672	521	26	—	—	—	—	2,410
	48,367	2,911	1,396	26	—	—	—	—	52,700
Of which:
Stage 1	48,367	2,911	1,396	26	—	—	—	—	52,700
Stage 2	—	—	—	—	—	—	—	—	—
Stage 3	—	—	—	—	—	—	—	—	—

2021
Corporate Centre
Sovereign and Supranational	55,061	1,051	—	—	—	—	—	—	56,112
Structured Products	573	1,064	197	41	—	—	—	—	1,875
Financial Institutions	479	533	345	7	—	—	—	—	1,364
	56,113	2,648	542	48	—	—	—	—	59,351
Of which:
Stage 1	56,113	2,648	542	46	—	—	—	—	59,349
Stage 2	—	—	—	2	—	—	—	—	2
Stage 3	—	—	—	—	—	—	—	—	—

(1)Smaller exposures mainly in the commercial mortgage portfolio. We use scorecards for them, instead of a rating model.

(2)Commercial mortgages and residual structured and asset finance loans (shipping, aviation and structured finance).

2022 compared to 2021

Committed exposures decreased by 11.2% mainly driven by UK Sovereign and Supranational exposures, as part of normal liquid asset portfolio management,

which reduced by 14.2%. The portfolio profile remained short-term, reflecting the purpose of the holdings.

Geographical distribution (audited)

We typically classify geographical location according to the counterparty’s country of domicile unless a full risk transfer guarantee is in place, in which case we use

the guarantor’s country of domicile instead.


	2022					2021
	UK	Europe	US	Rest of World	Total	UK	Europe	US	Rest of World	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Sovereign and Supranational	43,936	1,886	83	2,212	48,117	52,297	950	469	2,396	56,112
Structured Products	1,379	422	4	368	2,173	1,219	656	—	—	1,875
Financial Institutions	988	1,005	230	187	2,410	504	565	81	214	1,364
	46,303	3,313	317	2,767	52,700	54,020	2,171	550	2,610	59,351

Credit performance (audited)

We monitor exposures that show potentially higher risk characteristics using our Watchlist process. In Corporate Centre committed exposures were all fully

performing at 31 December 2022 and 31 December 2021.

Loan modifications (audited)

There were no loan modifications made in 2022 and 2021.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 93

Market risk


	Overview Market risk comprises non-traded market risk and traded market risk. Non-traded market risk is the risk of loss of income, economic or market value due to changes to interest rates in the non-trading book or to changes in other market risk factors (e.g. credit spread and inflation risk), where such changes would affect our net worth through an adjustment to revenues, assets, liabilities and off-balance sheet exposures in the non-trading book. Traded market risk is the risk of changes in market factors that affect the value of the positions in the trading book. We have no significant traded market risk exposure. In this section, we set out which of our assets and liabilities are exposed to non-traded and traded market risk. Then we explain how we manage these risks and discuss our key market risk metrics.			Key metrics Net Interest Income (NII) sensitivity to +100bps was £241m and to ‑100bps was £(197)m (2021: £318m and £(440)m). Economic Value of Equity (EVE) sensitivity to +100bps was £(487)m and to ‑100bps was £635m (2021: £(431)m and £184m).

BALANCE SHEET ALLOCATION BY MARKET RISK CLASSIFICATION (AUDITED)

We classify all our assets and liabilities exposed to market risk as non-traded market risk, except for certain portfolios that we must classify as trading books for

regulatory purposes (such as selling derivatives or derivative-based products to clients), of which we must fair value for accounting reasons (such as assets in the

eligible liquidity pool). For accounting purposes, we classify all derivatives as held for trading unless they are designated as being in a hedging relationship. For

more, see Note 11 to the Consolidated Financial Statements.

NON-TRADED MARKET RISK

OUR KEY NON-TRADED MARKET RISKS (audited)

Non-traded market risk mainly comes from providing banking products and services to our customers, as well as our structural balance sheet exposures. It arises in

all our business segments. In Retail Banking, Consumer Finance and Corporate & Commercial Banking, it is a by-product of us writing customer business and we

transfer most of these risks to Corporate Centre to manage. The only types of non-traded market risk that we keep in Retail Banking, Consumer Finance and

Corporate & Commercial Banking are short-term mismatches due to forecasting variances in prepayment and launch risk. This is where customers repay their

loans earlier than their expected maturity date or do not take the expected volume of new products. Corporate Centre also manages our structural balance sheet

exposures, such as foreign exchange and Income Statement volatility risk.

Our key non-traded market risks are:


Key risks	Description
Interest rate risk	Yield curve risk: comes from timing mismatches in repricing fixed and variable rate assets, liabilities and off-balance sheet instruments. It also comes from investing non-rate sensitive liabilities in interest-earning assets. Basis risk: comes from pricing assets using a different rate index to the liabilities that fund them. We are exposed to basis risks associated with Bank of England bank rate, reserve rate linked assets we deposit with central banks, and the Sterling Overnight Index Average (SONIA) rate.
Spread risk	Spread risk arises when the value of assets or liabilities which are accounted for at fair value (either through Other Comprehensive Income or through Profit and Loss) are affected by changes in the credit spread. We measure these spreads as the difference between the discount rate we use to value the asset or liability, and an underlying interest rate curve.
Foreign exchange risk	Our banking businesses operate mainly in sterling markets, so we do not create significant foreign exchange exposures. The only exception to this is money we raise in foreign currencies. For more on this, see ‘Wholesale funding’ in the ‘Liquidity risk’ section.
Income statement volatility risk	We measure most of the assets and liabilities in our banking book balance sheet at amortised cost. We sometimes manage their risk profile by using derivatives. As all derivatives are accounted for at fair value, the mismatch in their accounting treatment can lead to volatility in our Income Statement. This happens even if the derivative is an economic hedge of the asset or liability.

NON-TRADED MARKET RISK MANAGEMENT

Risk appetite

Our Structural and Market Risk framework sets out our high-level arrangements and standards to manage, control and oversee non-traded market risk, and is part

of our overall Risk Framework. Our Risk Appetite sets the controls, risk limits and key risk metrics for non-traded market risk. We show risk appetite by the income

and value sensitivity limits we set in our Risk Appetite, at both Santander UK and Banco Santander group levels.

Risk measurement

We mainly measure our exposures with NII and EVE sensitivity analysis. We support this with VaR risk measures and stress testing. We also monitor our interest

rate repricing gap. We regularly review our risk models and metrics including underlying model assumptions to ensure they continue to reflect the risks inherent in

the current rate environment and regulatory expectations.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 94

NII and EVE sensitivities (audited)

The calculations for NII and EVE sensitivities involve many assumptions, including expected customer behaviour (such as early repayment of loans) and how

interest rates may move. These assumptions are a key part of our overall control framework, so we update and review them regularly. Our NII and EVE sensitivities

include the interest rate risk from all our banking book positions. Our banking book positions generate almost all our reported net interest income.

NII sensitivity

NII sensitivity is an income-based measure we use to forecast the changes to interest income and interest expense in different scenarios. It gives us a combined impact on

net interest income over a given period – usually 12 or 36 months.

We calculate NII sensitivity by simulating the NII using 2 yield curves. The difference between the 2 NII totals is the NII sensitivity.

EVE sensitivity

–We calculate EVE sensitivity as the change in the net present value of all the interest rate sensitive items in the banking book balance sheet for a defined set of

instantaneous parallel and non-parallel shifts in the yield curve.

The limitations of sensitivities

We use sensitivities to measure the impact of standard, instantaneous, parallel shifts in relevant yield curves. The advantage of using standard parallel shifts is

they generally give us a constant measure of the size of our market risk exposure, with a simple and consistent stress. We also run non-parallel stress tests, to

calculate the impact of some plausible non-parallel scenarios, and over various time periods for income stresses, usually one or three years.

Value at Risk (VaR) (audited)

VaR

–VaR indicates the losses that we might suffer because of unfavourable changes in the markets under normal (non-stressed) market conditions.

We run a historical simulation using historical daily price moves to find how much we might lose, normally at a 99% confidence level.

The limitations of VaR

VaR is a useful and important market standard measure of risk, but it does have some limitations. These include:

–VaR assumes what happened in the past is a reliable way to predict what will happen in the future. This may not always be the case

–VaR is based on positions at the end of the business day so it doesn’t include intra-day positions

–VaR does not predict how big the loss could be on the 1% of trading days that it is greater than the VaR

–Using a time horizon of one day means VaR does not tell us everything about exposures that we cannot liquidate or hedge within a day, or products with

infrequent pricing.

Back-testing – comparing VaR estimates with reality

To check that the way we estimate VaR is reasonable, we back-test our VaR by comparing it against both actual and hypothetical profits and losses, using a one-

day time horizon. Back-testing allows us to identify exceptions – times when the predictions were out of line with what happened. We can then look for trends in

these exceptions, which can help us decide whether we need to recalibrate our VaR model.

Stress testing

Stress testing is an essential part of our risk management. It helps us to measure and evaluate the potential impact on portfolio values of more extreme, although

plausible, events or market moves. We express limits as on how much we could lose in a stress event, and this restricts how much risk we take.

Stress testing scenarios

Simple stress tests (like parallel shifts in relevant curves) give us clear measures of risk and a consistent starting point for setting limits. More complex, multi-

factor and multi-time period stress tests give us information about specific potential events. They can also test outcomes that we might not capture through

parallel stresses or VaR-type measures. We use stress tests to estimate losses in extreme market events beyond the confidence level used in VaR models.

We can adapt our stress tests to reflect current concerns such as climate change risk, the Covid-19 pandemic and other macroeconomic events or changing market

conditions. We run individual business area stresses and Santander UK-wide scenarios.

Other ways of measuring risk

As well as using sensitivities and stress tests, we can measure non-traded market risk using net notional positions. This can give us a simple view of our exposure,

although we generally need to combine it with other risk measures to cover all aspects of a risk profile, such as projected changes over time. Other metrics we can

use include Earnings at Risk (EaR). EaR is like VaR but captures changes in income rather than value. We use this approach for example to generate a one-year EaR

measure to assess Basis risk.

Risk mitigation (audited)

We typically hedge the interest rate risk of the securities we hold for liquidity and investment purposes with interest rate swaps. We retain spread exposures, and

these are the key drivers of the VaR and stress tests we use to assess the risk of the portfolio. We mitigate Income Statement volatility mainly through hedge

accounting. We monitor any hedge accounting ineffectiveness that might lead to Income Statement volatility with a VaR measure and trigger, reported monthly.

For our accounting policies for derivatives and hedge accounting, see Note 1 to the Consolidated Financial Statements.

We hedge our foreign currency funding positions back to sterling, so our foreign exchange positions tend to be residual exposures that remain after hedging. These

exposures could be, for example, to ‘spot’ foreign exchange rates or to cross currency basis. We monitor foreign exchange risk against absolute net exposures and

VaR-based limits and triggers.

For more on this, see ‘Funding strategy‘ and ‘Term issuance’ in the ‘Liquidity risk’ section.

Risk monitoring and reporting (audited)

We monitor our non-traded market risks using sensitivities, VaR and stress tests. We report them against limits and triggers to senior management daily and to

ALCO and ERCC each month. The VaR we report captures all key sources of volatility (including interest rate and spread risks) to fully reflect potential volatility.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 95

NON-TRADED MARKET RISK REVIEW

Interest rate risk

Yield curve risk

The table below shows how our net interest income would be affected by a parallel shift (both up and down) applied instantaneously to the yield curve at 31

December 2022 and 31 December 2021 In 2022, we moved to focus on 100 basis points (bps) from previously disclosed sensitivities of 50bps and 25bps. The shift

reflects a more realistic stress in the current rate environment. We have replaced the previously disclosed sensitivities of 50bps and 25bps for 2021 with 100 bps

sensitivities for consistency with 2022.


2022
	+100bps	-100bps	+100bps	-100bps
	£m	£m	£m	£m
NII sensitivity (audited)(1)	241	(197)	318	(440)
EVE sensitivity	(487)	635	(431)	184

Based on modelling assumptions of repricing behaviour.

Basis risk

We report basis risk using the EaR approach.


	2022	2021
	£m	£m
Basis risk EaR	2	2

Interest rate repricing gap

The table below shows the interest rate repricing gap of our balance sheet by repricing buckets.


	3 months	1 year	3 years	5 years	>5years	Not sensitive	Total
2022	£m	£m	£m	£m	£m	£m	£m
Assets	106,980	44,748	79,006	52,489	5,249	14,123	302,595
Liabilities	135,801	30,262	58,526	51,161	3,833	25,023	304,606
Off-balance sheet	31,378	(16,133)	(16,972)	723	3,015	—	2,011
Net gap	2,557	(1,647)	3,508	2,051	4,431	(10,900)	—


2021
Assets	111,211	45,979	77,726	44,418	7,191	16,930	303,455
Liabilities	190,649	17,328	25,735	16,108	28,733	25,551	304,104
Off-balance sheet	27,369	(18,508)	(19,842)	3,447	8,183	—	649
Net gap	(52,069)	10,143	32,149	31,757	(13,359)	(8,621)	—

Spread risk

The table below shows the risk metrics covering the portfolios of securities we hold for liquidity and investment purposes.


	2022	2021
	£m	£m
VaR	3	4
Worst three month stressed loss	46	56

2022 compared to 2021

We regularly review our risk models and metrics including underlying modelling assumptions to ensure they continue to reflect the risks inherent in the current

rate environment and incorporate regulatory expectations.

NII Sensitivity to a -100bps stress reduced to £(197)m (2021: £(440)m) as the risk of margin compression as a result of customer deposit rates becoming floored

reduced in the higher rate environment. The NII sensitivity to a +100bps parallel stress reduced to £241m (2021: £318m), as the mix of customer liabilities

changed in the higher rate environment.

EVE Sensitivity to a +100bps stress increased to £(487)m (2021: £(431)m) in the higher rate environment. This was driven by changes in the mix of customer

liabilities, offset by a reduction in the profile of the structural position and customer behaviour in response to higher rates.

TRADED MARKET RISK

We have no significant traded market risk exposure. Our only exposure to traded market risk comes from providing permitted financial services to permitted

customers. Our exposures are affected by market movements in interest rates, credit spreads, and foreign exchange rates. Traded market risk can reduce our net

income. We hedge risks from client trades, and our books are as close to back-to-back as possible, with market risk hedged with Banco Santander SA or CCPs. This

is required by Banking Reform legislation. We have two trading desks. The Link Desk transacts derivatives with our corporate clients that are permitted under the

ring-fencing regime. The Retail Structured Products desk (RSP) sells investments to retail investors, through our UK branches and other channels. We calculate

market risk capital using standard rules.

The Internal VaR for exposure to traded market risk at 31 December 2022 was less than £1m (2021: less than £1m).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 96

Liquidity risk


	Overview Liquidity risk is the risk that we do not have sufficient liquid financial resources available to meet our obligations when they fall due, or we can only secure such resources at excessive cost. In this section, we describe our sources and uses of liquidity and how we manage liquidity risk. We also analyse our key liquidity metrics, including our LCRs and our eligible liquidity pools. We then explain our funding strategy and structure and we analyse our wholesale funding. Finally, we analyse how we have encumbered some of our assets to support our funding activities.			Key metrics LCR of 157% (2021: 168%) DoLSub LCR of 152% (2021: 166%) Wholesale funding with maturity <1 year £11.0bn (2021: £10.2bn) DoLSub LCR eligible liquidity pool of £46.3bn (2021: £51.4bn)

OUR KEY LIQUIDITY RISKS (audited)

Through our LRA framework, we manage our funding or structural contingent and market liquidity risks wherever they arise. This can be in retail and corporate

deposit outflows, wholesale secured and unsecured liquidity outflows and off-balance sheet activities. Other risks our framework covers include funding

concentrations, intra-day cash flows, intra-group commitments and support, franchise retention and cross currency risk.

Our main sources of liquidity

Customer deposits finance most of our customer lending. Although these funds are mostly callable, in practice they give us a stable and predictable core of

funding. This is due to the nature of retail accounts and the breadth of our retail customer relationships.

We have a strong wholesale funding investor base, diversified across product types and geographies. Through the wholesale markets, we have active relationships

in many sectors including banks, other financial institutions, corporates and investment funds. We access the wholesale funding markets through the issuance of

capital, senior unsecured debt, covered bonds, structured notes and short-term funding. We also access these markets through securitisations of certain assets of

Santander UK plc and our operating subsidiaries. For more on our programmes, see Notes 14, 26 and 27 in the Consolidated Financial Statements.

We generate funding on the strength of our own balance sheet, our own profitability and our own network of investors. In addition, we have access to UK

Government funding schemes. We comply with rules set by the PRA, other regulators, and Banco Santander standards. While we manage, consolidate and

monitor liquidity risk centrally, we also manage and monitor it in the business area it comes from.

Our main uses of liquidity

Our main uses of liquidity are to fund our lending in Retail Banking, Consumer Finance and Corporate & Commercial Banking, to pay interest and dividends, and to

repay debt. Our ability to pay dividends depends on various factors. These include our regulatory capital needs, the level of our distributable reserves, and our

financial performance. We also use liquidity to pay for business combinations.

LIQUIDITY RISK MANAGEMENT

Introduction

We manage liquidity risk on a consolidated basis in our CFO division, which is our centralised function for managing funding, liquidity and capital. We created our

governance, oversight and control frameworks, and our LRA, on the same consolidated basis.

Under the PRA’s liquidity rules, Santander UK plc and its subsidiary Cater Allen Limited form the RFB Domestic Liquidity Sub-group (the RFB DoLSub), which allows

them to collectively meet regulatory requirements to manage liquidity risk. Each member of the RFB DoLSub will support the other by transferring surplus liquidity

in times of stress.

Risk appetite

Our LRA is based on the principles of liquidity management we use to manage our balance sheet. It also supports our need to meet or exceed regulatory rules. In

line with our liquidity management principles, we avoid an over-reliance on funding from a single product, customer or counterparty. We also maintain enough

unencumbered customer assets to support current and future funding and collateral requirements and maintain enough capacity to monetise liquid assets and

other counterbalancing capacity on a timely basis.

Our LRA is proposed to the Risk division and the Board, which is then approved under advice from the Board Risk Committee. Our LRA, in the context of our overall

Risk Appetite, is reviewed and approved by the Board each year, or more often if needed.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 97

Risk measurement

We use a number of metrics to manage liquidity risk. These include metrics that show the difference between cash and collateral inflows and outflows in different

periods. They also include structural metrics, such as our level of encumbered assets.

Ongoing business management

Within our framework of prudent funding and liquidity management, we manage our activities to our liquidity risk appetite. We have clear responsibilities for

short-term funding, medium-term funding, encumbrance, collateral and liquid asset management. This ensures we manage liquidity risks as part of our daily

operations, strategy and planning.

Our liquidity management framework is split between short-term and strategic activities. Our short-term activities focus on intra-day collateral; management and

maintaining liquid assets to cover unexpected demands on cash in a stress, such as large and unexpected deposit withdrawals by customers and loss of wholesale

funding. Our strategic activities focus on ensuring we are not over reliant on any one source for funding and that we avoid excessive concentrations in the maturity

of our funding.

We regularly test the liquidity of our eligible liquidity pool, in line with PRA and Basel rules. We do this by realising some of the assets by repurchase or outright

sale to the market. We make sure that over any 12-month period we realise a significant part of our eligible liquidity pool. As well as our eligible liquidity pool, we

always hold a portfolio of unencumbered liquid assets. Our LRA and PRA requirements determine the size and composition of this portfolio. These assets give us a

source of contingent liquidity, as we can realise some of them in a stress to create liquidity by repurchase or outright sale to the market.

Stress testing

Our liquidity stress testing framework is central to our LRA measurement and monitoring. To fit with our risk appetite, the liquidity outflows that come from these

stress tests must be fully covered with high-quality liquid assets, other liquid assets and appropriate management actions.

Our Risk division runs a range of stress tests. Our LRA stress test is a combination of three tests that cover idiosyncratic, market-wide and combined scenarios.

Our other tests consider scenarios such as a global economic slowdown that results in reduced confidence in banks, a slowdown in a major economy or a decline in

access to liquidity. These are considered on both an acute and protracted basis. We also run severe combined stress tests which look at both a deep and prolonged

UK recession that results in a reduction in wholesale funding availability and an idiosyncratic shock that would lead to retail and commercial outflows. We run a

climate change stress, that assumes severe physical risks results in a reduction in retail deposits, increased use of corporate lending facilities and an increase in

mortgage defaults.

We also conduct sensitivity analysis and reverse stress testing for instant liquidity shocks by each key liquidity risk. We do this to understand the impacts they

would have on our LRA and our regulatory liquidity metrics.

We monitor our LCR to ensure we continue to meet the requirements. We also monitor the Net Stable Funding Ratio (NSFR), which was implemented on 1 January

2022.

Risk mitigation (audited)

The Board aims to make our balance sheet resilient at all times and for it to be perceived as such by stakeholders. This preserves our short and long-term viability.

The Board recognises that as we are involved in maturity transformation, we cannot hold enough liquidity to cover all possible stress scenarios. The Board requires

us to hold enough liquidity to make sure we will survive three plausible but severe stress scenarios (our LRA stress test, described above). We do this by

maintaining a prudent balance sheet structure and approved liquid resources.

Recovery and Resolution framework

The CFO is the accountable SMF for recovery and resolution and the related work is managed by the CFO division. They are overseen by the Board Audit Committee

and the Board.

We review and refresh our recovery plan each year. It sets out the risks, the indicators we use to monitor these risks, and the actions we can take to mitigate a

capital, liquidity or combined stress event. We are confident that we have sufficient credible and executable options to respond to a wide variety of stresses, be

they market-wide or idiosyncratic, in a timely and effective manner. Recovery indicators are both qualitative and quantitative and are embedded into risk

frameworks. We monitor recovery capacity, headroom to recovery triggers and recovery indicators regularly. If necessary, we would invoke recovery early to

mitigate the effects of a stress and restore our financial position and balance sheet strength.

We submitted our first self-assessment of our resolvability to the PRA in October 2021 and made targeted updates to it in February 2022. On 10 June 2022 we

published our first resolvability public disclosure. This concludes that we have put in place capabilities that enable us to meet the Bank of England’s resolution

outcomes and that these are sufficiently flexible, so that they can be adapted to the specifics of failure as it unfolds, in order to credibly support the resolution in

practice. Our capabilities are underpinned by comprehensive governance, testing and assurance arrangements, which seek to ensure that our resolution readiness

is maintained and, where appropriate, enhanced on an ongoing basis. On the same day, the Bank of England published its own assessment of UK major banks’

resolvability arrangements. The Santander UK specific section of the Bank of England’s disclosure confirms that the Bank of England has not identified any material

issues in relation to our approach to achieving the three resolution outcomes set out in the Resolvability Assessment Framework.

Risk monitoring and reporting (audited)

We monitor liquidity risk daily, weekly and monthly. We do this through different committees and levels of management, including ALCO and the BRC.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 98

LIQUIDITY RISK REVIEW

Liquidity Coverage Ratio

This table shows our LCR at 31 December 2022 and 31 December 2021.


RFB DoLSub LCR(1)
	2022	2021
	£bn	£bn
Eligible liquidity pool (liquidity value)(2)	46.2	51.3
Net stress outflows	(30.4)	(30.9)
Surplus	15.8	20.4
Eligible liquidity pool as a percentage of anticipated net cash flows	152%	166%

(1) The RFB LCR was 157% (2021:168%).

(2) The liquidity value is calculated as applying an applicable haircut to the carrying value.

LCR eligible liquidity pool

This table shows the carrying value of our eligible liquidity pool assets at 31 December 2022 and 31 December 2021. It also shows the weighted average carrying

value in the year.


RFB DoLSub	Carrying value						Weighted average carrying value in the year
	2022			2021			2022	2021
	Level 1	Level 2	Total	Level 1	Level 2	Total	Total	Total
	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Cash and balances at central banks	42.1	—	42.1	45.9	—	45.9	43.5	40.6
Government bonds	2.9	—	2.9	4.2	—	4.2	3.8	7.0
Supranational bonds and multilateral development banks	0.3	—	0.3	0.2	—	0.2	0.1	0.3
Covered bonds	0.1	0.9	1.0	0.8	—	0.8	0.9	1.1
Asset-backed securities	—	—	—	—	0.3	0.3	0.1	0.4
Equities	—	—	—	—	—	—	—	—
	45.4	0.9	46.3	51.1	0.3	51.4	48.4	49.4

Currency analysis

This table shows the carrying value of our eligible liquidity pool by major currencies at 31 December 2022 and 31 December 2021. The composition of the pool is

consistent with the currency profile of our net liquidity outflows.


RFB DoLSub	US Dollar	Euro	Sterling	Other	Total
	£bn	£bn	£bn	£bn	£bn
2022	0.8	1.3	44.2	—	46.3
2021	0.8	0.4	50.2	—	51.4

Net Stable Funding Ratio (NSFR)

The NSFR was implemented on 1 January 2022.


NSFR	RFB DoLSub
2022	135%

2022 compared to 2021

We remain in a strong liquidity position. We hold sufficient liquid resources and have adequate governance and controls in place to manage the liquidity risks

arising from our business and strategy. At 31 December 2022, the LCR and NSFR significantly exceeded regulatory requirements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 99

FUNDING RISK MANAGEMENT

Funding strategy

Our funding strategy continues to be based on maintaining a conservatively structured balance sheet and diverse sources of funding to meet the needs of our

business strategy and plans. The CFO Division maintains a funding plan that complies with the LRA and regulatory liquidity and capital requirements.

Most of our funding comes from customer deposits. We source the rest from a mix of secured and unsecured funding in the wholesale markets. Overall, this

means that we do not rely too heavily on wholesale funds. We manage funding requirements by targeting a specific Liquidity Coverage Ratio, we ensure maturities

are prefunded and capital/Minimum Requirements for Eligible Liabilities (MREl) requirements are prioritised. We also have checks and controls to limit our asset

encumbrance from our secured funding operations.

As part of maintaining a diverse funding base, we raise funding in a number of currencies, including EUR and USD, and convert it into sterling through currency

swaps to fund our commercial assets which are largely sterling denominated.

Our base of stable retail and corporate deposits is a key funding source for us. We leverage our large and diverse customer base to offer products that give us a

long-term sustainable source of funding. We do this by focusing on building long-term relationships. Over 85% of our total core retail customer liabilities are

covered by the Financial Services Compensation Scheme (the FSCS).

Behavioural maturities

The contractual maturity of our balance sheet assets and liabilities highlights the maturity transformation that underpins the role of banks to lend long term, but to

fund themselves mainly with shorter-term liabilities, like customer deposits. We do this by diversifying our funding operations across a wide customer base, both

in numbers and by type of depositor. In practice, the behavioural profiles of many liabilities show more stability and longer maturity than their contractual

maturity. This is especially true of many retail and corporate deposits that, while they may be repayable on demand or at short notice, have shown good stability

even in times of stress. We model behaviour profiles using our experience of customer behaviour. We use this data to determine the funds transfer pricing rates at

which we reward and charge our business units for sources and uses of funds. We apply this rate until a customer changes to a different product or service offered

by us or by one of our competitors.

We continue to maintain the quality of our retail, commercial and wholesale deposits. We aim to deepen our customer relationships across all customer

segments. We do this to lengthen the contractual and behavioural profile of our liability base.

Deposit funding

We mainly fund our Retail Banking, Consumer Finance and Corporate & Commercial Banking activities by customer deposits. We fund the rest through wholesale

markets.

Wholesale funding

Composition of wholesale funding

We are active in the wholesale markets and we have direct access to both money market and long-term investors through our funding programmes. This makes

our wholesale funding well diversified by product, maturity, geography and currency. This includes currencies available across a range of channels from money

markets, repo markets, senior unsecured, secured, medium-term and capital. For details of our main programmes, see the Funding Information section of our

website www.santander.co.uk/uk/about-santander-uk/investor-relations/funding-information.

Santander UK plc is our main operating company issuer of senior unsecured debt, structured notes, short-term funding and covered bonds.

Our immediate parent Santander UK Group Holdings plc is the issuer of capital and MREL/Total Loss Absorbing Capacity (TLAC) eligible senior unsecured debt.

Under CRR II, G-SIBs have been subject to the MREL standard. As part of this, UK resolution entities that are G-SIBs or are part of a G-SIB, including our immediate

parent Santander UK Group Holdings plc, are required to meet the MREL minimum requirements, implemented through the Bank of England Statement of Policy

on MREL in the UK. From 1 January 2020, the MREL requirement is the higher of (i) two times the Pillar 1 capital requirements and one times their Pillar 2A add-

ons; (ii) 6% of CRR leverage exposures or (iii) two times the minimum leverage ratio requirement. The MREL requirements have been fully implemented from 1

January 2022.

The Company is subject to internal MREL as it meets the requirements of a material subsidiary of our ultimate parent Banco Santander SA.

We also access the wholesale markets through securitisations of certain assets of our operating subsidiaries. We also have access to UK Government funding

schemes. Eligible collateral for these schemes includes all collateral that is eligible in the Bank of England’s Discount Window Facility. We ensure that enough

collateral is placed and available at the Discount Window.

Issuance model and resolution

Banco Santander is a multiple point of entry resolution group. This means that should it fail, it would be split up into parts. Healthy parts might be sold or be kept

as a residual group without their distressed sister companies. The resolution or recapitalisation of the distressed parts might be effected via ‘bail in’ of bonds that

had been issued to the market by a regional intermediate holding company.

Santander UK is a single point of entry resolution group. This means that resolution would work downwards from the group’s holding company i.e. Santander UK

Group Holdings plc. Losses in subsidiaries would first be transferred up to Santander UK Group Holdings plc. If the holding company is bankrupt as a result, the

group is deemed to be failing or likely to fail, it will be put into resolution. The ‘bail in’ tool is applied to the holding company, with the equity being written off and

bonds written off or converted into equity as needed to recapitalise the group. Those bondholders would become the new owners, and the group would stay

together.

Santander UK Group Holdings plc is the immediate holding company of Santander UK plc but does not guarantee its debts or other obligations. This structure is a

Bank of England recommended configuration which aims to ensure the activities of the operating company are not disrupted as the Santander UK group goes

through resolution, thereby maintaining continuity of services for customers.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 100

FUNDING RISK REVIEW

Reconciliation of wholesale funding to the balance sheet (audited)

This table reconciles our wholesale funding to our balance sheet at 31 December 2022 and 31 December 2021.


		Balance sheet line item
	Funding analysis	Deposits by banks(3)	Deposits by customers(1)	Repurchase agreements - non trading	Financial liabilities designated at fair value	Debt securities in issue	Subordinated liabilities	Other equity instruments(2)
2022	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Deposits by banks	0.5	0.5	—	—	—	—	—	—
Certificates of deposit and commercial paper	4.7	—	—	—	—	4.7	—	—
Senior unsecured – public benchmark	14.3	—	4.6	—	—	9.7	—	—
–privately placed	0.6	—	0.1	—	0.4	0.1	—	—
Covered bonds	14.9	—	—	—	—	14.9	—	—
Securitisation and structured issuance	1.0	—	—	—	—	1.0	—	—
TFSME	25.0	25.0	—	—	—	—	—	—
Subordinated liabilities and equity	3.9	—	—	—	—	—	1.9	2.0
Total wholesale funding	64.9	25.5	4.7	—	0.4	30.4	1.9	2.0
Repos	8.0	—	—	8.0	—	—	—	—
Foreign exchange and hedge accounting	1.6	—	0.1	—	—	1.1	0.4	—
Other	3.4	3.0	—	—	0.4	—	—	—
Balance sheet total	77.9	28.5	4.8	8.0	0.8	31.5	2.3	2.0

2021
Deposits by banks	0.2	0.2	—	—	—	—	—	—
Certificates of deposit and commercial paper	5.1	—	—	—	—	5.1	—	—
Senior unsecured – public benchmark	12.3	—	5.8	—	—	6.5		—
–privately placed	0.6	—	0.1	—	0.5	—	—	—
Covered bonds	12.5	—	—	—	—	12.5	—	—
Securitisation and structured issuance	0.7	—	—	—	—	0.7	—	—
TFSME	31.9	31.9	—	—	—	—	—	—
Subordinated liabilities and equity	4.1	—	—	—	—	—	1.9	2.2
Total wholesale funding	67.4	32.1	5.9	—	0.5	24.8	1.9	2.2
Repos	11.7	—	—	11.7	—	—	—	—
Foreign exchange and hedge accounting	1.1	—	0.1	—	—	0.7	0.3	—
Other	2.1	1.8	—	—	0.3	—	—	—
Balance sheet total	82.3	33.9	6.0	11.7	0.8	25.5	2.2	2.2

(1)This is included in our balance sheet total of £195,568m (2021: £192,926m).

(2)Consists of £nil (2021: £nil ) fixed/floating rate non-cumulative callable preference shares, £0m (2021: £235m) Step-up Callable Perpetual Reserve Capital Instruments and £1,956m (2021: £1,956m) Perpetual

Capital Securities. See Notes 44 and 33 to the Consolidated Financial Statements.

(3)Other consists of items in the course of transmission and other deposits. See Note 24 to the Consolidated Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 101

Maturity profile of wholesale funding (audited)

This table shows our main sources of wholesale funding. It does not include securities finance agreements. The table is based on exchange rates at issue and

scheduled repayments and call dates. It does not reflect the final contractual maturity of the funding.

For details of the maturities of financial liabilities and off-balance sheet commitments, see Note 39 to the Consolidated Financial Statements.


	≤ 1 month	>1 and ≤ 3 months	>3 and ≤ 6 months	>6 and ≤ 9 months	>9 and ≤ 12 months	Sub-total ≤ 1 year	>1 and ≤ 2 years	>2 and ≤ 5 years	>5 years	Total
2022	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn	£bn
Downstreamed from Santander UK Group Holdings plc to Santander UK plc(1)
Senior unsecured – public benchmark	0.8	0.7	—	0.6	0.8	2.9	1.6	6.4	1.6	12.5
–privately placed	—	—	—	—	—	—	—	0.1	—	0.1
Subordinated liabilities and equity (incl. AT1)	—	—	—	—	—	—	0.5	1.2	1.0	2.7
	0.8	0.7	—	0.6	0.8	2.9	2.1	7.7	2.6	15.3
Other Santander UK plc
Deposits by banks	0.2	0.3	—	—	—	0.5	—	—	—	0.5
Certificates of deposit and commercial paper	1.2	3.2	0.3	—	—	4.7	—	—	—	4.7
Senior unsecured – public benchmark	0.3	—	—	—	—	0.3	0.9	0.3	0.3	1.8
–privately placed	—	—	—	—	—	—	0.1	0.2	0.2	0.5
Covered bonds	—	1.0	0.1	0.9	—	2.0	3.4	8.4	1.1	14.9
Securitisation & structured issuance(2)	0.1	—	0.1	—	—	0.2	0.1	0.6	0.1	1.0
TFSME	—	—	—	—	—	—	—	25.0	—	25.0
Subordinated liabilities	—	—	—	—	0.4	0.4	—	—	0.8	1.2
	1.8	4.5	0.5	0.9	0.4	8.1	4.5	34.5	2.5	49.6
Other group entities
Securitisation & structured issuance(3)	—	—	—	—	—	—	—	—	—	—

Total at 2022	2.6	5.2	0.5	1.5	1.2	11.0	6.6	42.2	5.1	64.9
Of which:
–Secured	0.1	1.0	0.2	0.9	—	2.2	3.5	34.0	1.2	40.9
–Unsecured	2.5	4.2	0.3	0.6	1.2	8.8	3.1	8.2	3.9	24.0

2021
Total at 2021	3.1	3.2	2.8	0.2	0.9	10.2	5.9	40.7	10.6	67.4
Of which:
–Secured	0.2	—	0.9	0.1	0.9	2.1	2.1	33.7	7.2	45.1
–Unsecured	2.9	3.2	1.9	0.1	—	8.1	3.8	7.0	3.4	22.3

(1)95% of senior unsecured debt issued from Santander UK Group Holdings plc has been downstreamed to Santander UK plc as ‘secondary non-preferential debt’ in line with the guidelines from the Bank of England

for Internal MREL.

(2)Includes funding from mortgage-backed securitisation vehicles where Santander UK plc is the asset originator.

(3)Includes funding from asset-backed securitisation vehicles where entities other than Santander UK plc are the asset originator.

2022 compared to 2021

–Together with our immediate parent, Santander UK Group Holdings plc, our overall funding strategy remains to develop and sustain a diversified funding base.

We also need to fulfil regulatory requirements as well as support our credit ratings.

–Our funding costs improved with maturities refinanced at lower cost. Total wholesale funding decreased in 2022.

–We repaid £6.9bn of TFSME, with £25.0bn outstanding at year-end. In 2022, we utilised TFSME drawings to support mortgage lending in H122, but a successful

retail funding campaign towards the end of the year and above-planned secured funding meant we were able to repay drawings. We expect similar annual

repayments over the next 3 years.

–We issued a total of £8.6bn. Maturities in 2022 were £5.3bn.

–At 31 December 2022, 83% (2021:85%) of wholesale funding had a maturity of greater than one year, with an overall residual duration of 37 months (2021: 47

months).

–Our structural hedge position increased, with an average of £110bn over the last 12 months, and an average duration of c2.5 years.

–Our level of encumbrance from external and internal issuance of securitisations and covered bonds decreased again in 2022.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 102

Currency composition of wholesale funds (audited)

This table shows our wholesale funding by major currency at 31 December 2022 and 31 December 2021.


	2022				2021
	Sterling	US Dollar	Euro	Other	Sterling	US Dollar	Euro	Other
	%	%	%	%	%	%	%	%
Downstreamed from Santander UK Group Holdings plc to Santander UK plc
Senior unsecured – public benchmark	18	58	24	—	9	59	32	—
–privately placed	—	—	—	100	—	—	—	100
Subordinated liabilities and equity (incl. AT1)	75	25	—	—	73	27	—	—
	27	52	20	1	22	52	25	1
Other Santander UK plc
Deposits by banks	29	71	—	—	32	68	—	—
Certificates of deposit and commercial paper	56	42	2	—	45	53	2	—
Senior unsecured – public benchmark	18	62	20	—	14	46	40	—
–privately placed	95	—	5	—	92	—	6	2
Covered bonds	43	12	45	—	44	8	48	—
Securitisation & structured issuance	100	—	—	—	74	26	—	—
TFSME	100	—	—	—	100	—	—	—
Subordinated liabilities	48	52	—	—	57	43	—	—
	74	12	14	—	77	10	13	—

Total	63	21	16	—	66	18	15	1

Term issuance (audited)

In 31 December 2022, our external term issuance (sterling equivalent) was:


	Sterling	US Dollar	Euro	Other	2022	2021
	£bn	£bn	£bn	£bn	£bn	£bn
Downstreamed from Santander UK Group Holdings plc to Santander UK plc
Senior unsecured – public benchmark	1.2	2.1	0.6	—	3.9	2.8
Subordinated debt and equity (inc. AT1)	0.8	—	—	—	0.8	0.2
	2.0	2.1	0.6	—	4.7	3.0
Other Santander UK plc
Securitisations and other secured funding	0.6	—	—	—	0.6	—
Covered bonds	1.8	0.8	1.4	—	4.0	—
Senior unsecured – public benchmark	—	—	—	—	—	—
–privately placed	0.1	—	—	—	0.1	0.1
TFSME	—	—	—	—	—	20.2
	2.5	0.8	1.4	—	4.7	20.3
Total gross issuances	4.5	2.9	2.0	—	9.4	23.3

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 103

Encumbrance

We encumber an asset if we pledge or transfer it as collateral against a liability. This means it is no longer available to secure funding, meet our collateral needs or

be sold to reduce funding needs. Being able to pledge or transfer assets as collateral is a key part of a bank’s operations. The main ways we encumber assets are

that we: enter into securitisation, covered bonds, and repurchase agreements to access medium and long-term funding; enter into short-term funding transactions

(including repurchase agreements and stock borrowing) as part of our liquidity management; pledge collateral as part of participating in payment and settlement

systems; and post collateral as part of derivatives activity. We control levels of encumbrance by setting a minimum level of unencumbered assets after we factor in

our funding plans, whether we can use our assets for our future collateral needs, the impact of a stress and our current encumbrance level.

Assets classified as readily available for encumbrance include cash and securities in our eligible liquidity pool. They also include other unencumbered assets that

give us a source of contingent liquidity. We do not rely on these extra unencumbered assets in our LRA, but we might use them in a stress. We can create liquidity

by using them as collateral for secured funding or through outright sale. This includes excess collateral already in a secured funding structure and collateral pre-

positioned at central banks that is available for use in secured funding. All other loans and advances are classified as not readily available for encumbrance,

however, they may still be suitable for use in secured funding structures.

Encumbrance of customer loans and advances

We have issued securitised products to a diverse investor base through our prime mortgage-backed and other asset-backed funding programmes. We have raised

funding with mortgage-backed notes, both issued to third parties and retained – the latter being central bank eligible collateral for funding purposes in other Bank

of England facilities. We also have a covered bond programme, under which we issue securities to investors secured by a pool of residential mortgages. For more

on these programmes, see Notes 14 and 26 to the Consolidated Financial Statements.

On-balance sheet encumbered and unencumbered assets (audited)


	Encumbered with counterparties other than central banks				Assets positioned at central banks(3)		Unencumbered assets not pre- positioned with central banks
	Covered bonds	Securitis- ations	Other	Total	Assets positioned at central banks(3)	Readily available	Other available assets	Cannot be encumbered	Total	Total assets
2022	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Cash and balances at central banks(1)(2)		—	1,330	1,330	893	41,967	—	—	42,860	44,190
Financial assets at FVTPL:
–Derivative financial instruments	—	—	—	—	—	—	—	2,407	2,407	2,407
–Other financial assets at FVTPL	—	—	—	—	—	—	—	129	129	129
Financial assets at amortised cost:
–Loans and advances to customers	21,304	2,851	56	24,211	68,535	91,761	18,284	16,925	195,505	219,716
–Loans and advances to banks	—	—	163	163	—	—	—	829	829	992
–Repurchase agreements – non trading	—	—	—	—	—	—	—	7,348	7,348	7,348
–Other financial assets at amortised cost	—	—	48	48	—	108	—	—	108	156
Financial assets at FVOCI	—	—	4,365	4,365	—	1,659	—	—	1,659	6,024
Interests in other entities	—	—	—	—	—	—	—	252	252	252
Intangible assets	—	—	—	—	—	—	—	1,550	1,550	1,550
Property, plant and equipment	—	—	—	—	—	—	1,513	—	1,513	1,513
Current tax assets	—	—	—	—	—	—	—	478	478	478
Retirement benefit assets	—	—	—	—	—	—	—	1,050	1,050	1,050
Other assets	—	—	—	—	—	—	—	(592)	(592)	(592)
Total assets	21,304	2,851	5,962	30,117	69,428	135,495	19,797	30,376	255,096	285,213


2021
Cash and balances at central banks(1)(2)	—	—	1,580	1,580	918	45,641	—	—	46,559	48,139
Financial assets at FVTPL:
–Derivative financial instruments	—	—	—	—	—	—	—	1,681	1,681	1,681
–Other financial assets at FVTPL	—	—	—	—	—	—	—	185	185	185
Financial assets at amortised cost:
–Loans and advances to customers	15,713	3,720	100	19,533	80,624	74,890	18,893	16,154	190,561	210,094
–Loans and advances to banks	—	—	478	478	—	—	—	691	691	1,169
–Repurchase agreements – non trading	—	—	—	—	—	—	—	12,683	12,683	12,683
–Other financial assets at amortised cost	—	—	—	—	—	506	—	—	506	506
Financial assets at FVOCI	—	—	4,363	4,363	—	1,488	—	—	1,488	5,851
Interests in other entities	—	—	—	—	—	—	—	201	201	201
Intangible assets	—	—	—	—	—	—	—	1,545	1,545	1,545
Property, plant and equipment	—	—	—	—	—	—	1,548	—	1,548	1,548
Current tax assets	—	—	—	—	—	—	—	347	347	347
Retirement benefit assets	—	—	—	—	—	—	—	1,572	1,572	1,572
Other assets	—	—	—	—	—	—	—	1,577	1,577	1,577
Total assets	15,713	3,720	6,521	25,954	81,542	122,525	20,441	36,636	261,144	287,098

(1)Encumbered cash and balances at central banks include minimum cash balances we have to hold at central banks for regulatory purposes.

(2)Readily realisable cash and balances at central banks are amounts held at central banks as part of our liquidity management activities.

(3)Comprises pre-positioned assets and encumbered assets.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 104

Capital risk


	Overview Capital risk is the risk that we do not have an adequate amount or quality of capital to meet our business objectives, regulatory requirements and market expectations. In this section, we set out how we are regulated. We explain how we manage capital on a standalone basis as a subsidiary in the Banco Santander group. We then analyse our capital resources and key capital ratios including our RWAs.			Key metrics CET1 capital ratio of 15.4% (2021: 16.1%) Total qualifying regulatory capital of £14.3bn (2021: £14.8bn)

THE SCOPE OF OUR CAPITAL ADEQUACY

Regulatory supervision

For capital purposes, we are subject to prudential supervision by the PRA, as a UK banking group, and by the European Central Bank (ECB) as part of the Banco

Santander group. The ECB supervises Banco Santander as part of the Single Supervisory Mechanism (SSM). Although we are part of the Banco Santander group, we

do not have a guarantee from Banco Santander SA and we operate as a standalone subsidiary. As we are part of the UK sub-group regulated by the PRA, we have to

meet the PRA capital requirements on a standalone basis. We also have to show the PRA that we can withstand capital stress tests without the support of our

parent. Reinforcing our corporate governance framework, the PRA exercises oversight through its rules and regulations on the Board and senior management

appointments.

Santander UK Group Holdings plc is the holding company of Santander UK plc and is the head of the Santander UK group for regulatory capital and leverage

purposes. Santander UK plc is the head of the ring-fenced bank sub-group and is subject to regulatory capital and leverage rules in relation to that sub-group. Our

basis of consolidation for our capital disclosures is substantially the same as for our Consolidated Financial Statements.

CAPITAL RISK MANAGEMENT

The Board is responsible for capital management strategy and policy and ensuring that we monitor and control our capital within regulatory and internal limits.

We manage our funding and maintain capital adequacy on a standalone basis. We operate within the capital risk framework and appetite approved by our Board.

This reflects the environment we operate in, our strategy for each material risk and the potential impact of adverse scenarios or stresses on our capital.

Management of capital requirements (audited)

Our capital risk appetite aims to maintain capital levels appropriate to the level of stress applied, and the expected regulatory response. In:

–An adverse economic stress, which we expect once in 20 years, the firm should remain profitable and exceed all regulatory capital minimums at all times.

–A very severe economic stress, which we expect once in 100 years, and which has been designed to test any specific weaknesses of a firm’s business model, the

firm should meet all regulatory capital minimums at all times. This is subject to using regulatory buffers designed to absorb losses in such a stress.

Management of capital resources (audited)

We use a mix of regulatory and EC ratios and limits, internal buffers and restrictions to manage our capital resources. We also take account of the costs of differing

capital instruments and capital management techniques. We also use these to shape the best structure for our capital needs. We decide how to allocate our capital

resources as part of our strategic planning process. We base this in part on the relative returns on capital using both EC and regulatory capital measures. We plan

for severe stresses and we set out what action we would take if an extremely severe stress threatened our viability and solvency. This could include not paying

dividends, selling assets, reducing our business and issuing more capital.

Risk measurement

We apply Banco Santander’s approach to capital measurement and risk management for CRD IV. Santander UK plc is classified as a significant subsidiary of Banco

Santander SA. For more on the CRD IV risk measurement of our exposures, see Banco Santander’s Pillar 3 report. For more on our capital, see our Additional Capital

and Risk Management Disclosures on our website aboutsantander.co.uk.

Key metrics

The main metrics we use to measure capital risk are CET1 capital ratio and total capital ratio. We continue to be in excess of overall capital requirements, minimum

leverage requirements and minimum requirements for own funds and eligible liabilities (MREL).

Stress testing

Each year we create a capital plan, as part of our ICAAP. We share our ICAAP with the PRA. The PRA then tells us how much capital (Pillar 2A), and of what quality, it

thinks we should hold on top of our Pillar 1 requirements and buffer levels. We also develop a series of economic scenarios to stress test our capital needs and

confirm that we have enough regulatory capital to meet our projected and stressed capital needs and to meet our obligations as they fall due.

In 2022, we developed a Climate Internal Scenario Analysis (CISA) to help understand better the potential impact of climate change on our business portfolios and

balance sheet. The CISA outputs will form the basis of our 2022 ICAAP for climate risk by helping show if we need to hold more capital for climate risks and help us

prioritise our actions for the next five years.

We augment our regulatory minimum capital with internal buffers. We hold buffers to ensure we have enough time to take action against unexpected changes.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 105

Risk mitigation

We designed our capital risk framework, policies and procedures to ensure that we operate within our Risk Appetite. We manage capital transferability between

our subsidiaries in line with our business strategy, our risk and capital management policies, UK laws and regulations. There are no legal restrictions on us moving

capital resources promptly, or repaying liabilities, between the Company and its subsidiaries except for distributions between Santander UK entities in the ring-

fenced bank sub-group and Santander UK entities that are not members of the ring-fenced bank sub-group, where the PRA is required to assess the impact of

proposed distribution prior to payment. For details on our Recovery framework in the event of a capital stress, see 'risk mitigation' in the ‘Liquidity risk’ section.

At 31 December 2022, Santander UK plc (RFB), Cater Allen Limited, Santander ISA Managers Limited and certain other non-regulated subsidiaries within the RFB

were party to the RFB Sub-Group Capital Support Deed dated 17 December 2021. These parties were permitted by the PRA to form a core UK group, as defined in

the PRA Rulebook, a permission which will expire on 31 December 2024. Exposures of each of the regulated entities to other members of the core UK group were

exempt from large exposure limits that would otherwise apply. These intra-group exposures were risk-weighted at 0% and excluded from leverage exposure on a

solo as well as consolidated basis. The purpose the Deed was to facilitate the prompt transfer of available capital resources from, or repayment of liabilities by, the

non-regulated parties to any of the regulated parties in the RFB Sub-Group in the event that one of the regulated parties breached or was at risk of breaching its

capital resources or risk concentrations requirements. For more details, see Note 31.

Risk monitoring and reporting

We monitor and report regularly against our capital plan. We do this to identify any change in our business performance that might affect our capital. Each month,

we also review the economic assumptions we use to create and stress test our capital plan. We do this to identify any potential reduction in our capital.

CAPITAL RISK REVIEW

Meeting evolving capital requirements

We target a CET1 management buffer of sufficient size to absorb volatility in CET1 deductions, capital supply and capital demand whilst remaining above the

current and expected future regulatory CET1 requirement. Distribution restrictions would be expected to be applied if we were unable to meet both our minimum

requirement, which consists of the Pillar 1 minimum plus Pillar 2A, the CRD IV buffers consisting of the Capital Conservation Buffer (CCB), the Countercyclical

Capital Buffer (CCyB), and the Other Systemically Important Institutions Buffer (O-SII). Expected future regulatory CET1 requirements are impacted by the

projected increase in the UK CCyB to 2% in July 2023.

Impact of IFRS 9 on regulatory capital

Our ECL methodology takes account of forward-looking data and covers a range of possible economic outcomes, and so provision movements may result in

increased pro-cyclicality of risk-based capital and leverage ratios. However, the impact is currently mitigated by our surplus of IRB model regulatory expected

losses over provisions for exposures using the IRB approach. For such exposures (which include residential mortgages) the adverse impact on CET1 capital of

provision increases from reserve movements is offset by the related reduction of the negative CET1 capital adjustment for regulatory expected loss amounts.

Furthermore, the UK CRR transitional rules for the capital impact of IFRS 9 mean that adverse CET1 effects from increases in ECL-based provisions from the level of

such provisions at 1 January 2018 are partly reduced until the end of 2024.

We reflect projections of ECL provisions in our capital position forecasting under base case and stress scenarios for ICAAP and capital management purposes. We

also consider the dynamics of ECL in how we assess and manage capital risk. A period of economic instability, such as that seen in early 2020 due to the impacts of

the Covid-19 pandemic, could significantly impact our results and our financial assets. It could also impact the amount of capital we have to hold. We take into

account the volatility of ECL in our capital planning strategy.

Key capital ratios


	2022	2021
	%	%
CET1 capital ratio	15.4	16.1
AT1	2.8	2.9
Grandfathered Tier 1	—	0.2
Tier 2	2.2	2.7
Total capital ratio	20.4	21.9

The total subordination available to Santander UK plc senior unsecured bondholders was 20.4% (2021: 21.9%) of RWAs. Return on assets - profit after tax divided

by average total assets was 0.49% (2021: 0.48%).

2022 compared to 2021

The CET1 capital ratio decreased 70bps to 15.4%. This was largely due to regulatory changes that took effect on 1 January 2022, and a special dividend paid in

December 2022. The regulatory changes included the reintroduction of the full CET1 software asset deduction, and implementation of new definition of default

regulatory guidance. The impact of increased RWAs £71.2bn (£68.1bn) and the special dividend were partially offset by post dividend retained earnings. We

remain strongly capitalised with significant headroom to minimum requirements and MDA.

Total capital ratio decreased by 150bps to 20.4%, due to the lower CET1 capital ratio as outlined above and the reduction in AT1 and Tier 2 capital securities

recognised following the end of the CRR Grandfathering period on 1 January 2022.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 106

Regulatory capital resources (audited)

This table shows our qualifying regulatory capital:


	2022	2021
	£m	£m
CET1 capital	10,799	10,820
AT1 capital	1,956	2,119
Tier 1 capital	12,755	12,939
Tier 2 capital	1,548	1,816
Total regulatory capital(1)	14,303	14,755

(1)Capital resources include a transitional IFRS 9 benefit at 31 December 2022 of £19m(2021: £21m).

AT1 capital

These are preference shares and innovative/hybrid Tier 1 securities. None of the instruments we issued before 1 January 2014 fully meet the CRD IV AT1 capital

rules, which apply from that date. The instruments contribution to Tier 1 capital was phased out by CRD IV rules in 2021. The £750m Fixed Rate Reset Perpetual

AT1 Capital Securities (net of issuance costs), the £800m Perpetual Capital Securities and the £500m Perpetual Capital Securities we issued since then fully meet

the CRD IV AT1 capital rules.

Tier 2 capital

These are fully CRD IV eligible Tier 2 instruments and grandfathered Tier 2 instruments whose recognition as capital was phased out under CRD IV in 2021.

MREL recapitalisation

As at the end of 2022, we have down streamed £11.7bn of senior unsecured bonds from Santander UK Group Holdings plc as Internal MREL compliant, secondary

non-preferential debt to Santander UK plc.

Risk-weighted assets

Total Risk-weighted assets at 31 December 2022 were £70.1bn (2021: £67.1bn), which are consistent with our regulatory filings.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 107

Pension risk


	Overview Pension risk is the risk caused by our statutory contractual or other liabilities with respect to a pension scheme (whether set up for our employees or those of a related company or otherwise). It also refers to the risk that we will need to make payments or other contributions with respect to a pension scheme due to some other reason. In this section, we explain how we manage and mitigate pension risk, including our investment and hedging strategies. We also discuss our key metrics and developments in the year.			Key metrics Funding Deficit at Risk was £860m (2021: £1,190m) Funded defined benefit pension scheme accounting surplus was £1,050m (2021: £1,572m)

OUR KEY PENSION RISKS

Sources of risk

Pension risk is one of our key financial risks. Santander UK plc is the sponsor of the Santander (UK) Group Pension Scheme (the Scheme), a defined benefit scheme.

Our risk is that over the long-term the Scheme’s assets are not enough to meet its liabilities as they fall due. If this happens, we could have to (or choose to) make

extra contributions. We might also need to hold more capital to reflect this risk.

The Scheme, risk metrics and regulatory capital can be sensitive to changes in the assumptions of the key risk factors shown below.


Key risks	Description
Interest rate risk	The risk that a decrease in (long-term) interest rates causes an increase in the value of the Scheme’s liabilities that are not matched by an increase in the value of its assets.
Inflation risk	Annual pension increases are directly linked to RPI or CPI. The risk is that an increase in inflation causes an increase in the value of the Scheme’s liabilities that are not matched by an increase in the value of its assets.
Longevity risk	The Scheme’s liabilities are in respect of current and past employees and are expected to stretch beyond 2080 due to the long-term nature of the obligation. Therefore, the Scheme’s liabilities are also impacted by changes to the life expectancy of Scheme members over time.
Investment risk	The risk that the return on the Scheme’s assets is insufficient to meet the liabilities.

For more on our defined benefit schemes, including sensitivity analysis of our key actuarial assumptions, see Note 30 to the Consolidated Financial Statements.

Defined contribution schemes

We also have defined contribution schemes for some of our employees. These schemes carry far less market risk for us, although we are still exposed to

operational and reputational risks. For more on our defined contribution schemes, see Note 30 to the Consolidated Financial Statements.

The impact of our defined benefit schemes on capital

We take account of the impact of pension risk on our capital as part of our planning and stress testing process, considering measures such as the impact on CET1

and Pillar 2A, and also where relevant the impact on the related measures such as the leverage ratio.

Our defined benefit pension schemes affect capital in two ways:

–We treat an IAS 19 deficit as a liability on our balance sheet. We recognise deficit movements in Other Comprehensive Income, so this reduces shareholders’

equity and CET1 capital. We treat an IAS 19 surplus as an asset. This increases shareholders’ equity, but it is deducted in determining CET1 capital. An IAS 19

surplus/deficit is partially offset by a deferred tax liability/asset. These may be recognised for calculating CET1 capital depending on our overall tax position.

–The PRA takes pension risk into account in the Pillar 2A capital assessment in the annual ICAAP exercise. Pillar 2A is part of our overall regulatory requirement for

CET1 capital, Tier 1 capital and total capital. For more on our regulatory requirements, see the ‘Capital risk’ section.

PENSION RISK MANAGEMENT

Scheme governance

For details of how the Scheme is governed and operates, see Note 30 to the Consolidated Financial Statements.

Risk appetite

Our risk appetite is a key consideration in all decisions and risk management activities related to the Scheme. Our pension risk appetite is reviewed by our Pensions

Committee at least once a year. It is then sent to the Board for approval. We measure pension risk on both a technical provisions (funding) basis and an accounting

(IAS 19) basis. We manage pension risk on both the accounting and the funding basis. Both bases are inputs into our capital calculations.

Risk measurement

Our key risk metrics include:


Key risk metrics	Description
Funding Deficit at Risk	We use a VaR and a forward-looking stress testing framework to model the Scheme’s assets and liabilities to show the potential deterioration in the funding position.
Required Return	This estimates the return required from the Scheme’s assets each year to reach a pre-defined funding target by a fixed date in the future.
Pensions Volatility	We use a VaR and a forward-looking stress testing framework to model the volatility in the pension-related capital deduction.

The Scheme invests in certain assets whose values are not based on market observable data, such as investments in private equity funds and property. See Note 30

to the Consolidated Financial Statements for more details. The risks of these assets are included in the metrics described above.

We perform stress tests for regulators, including for ICAAPs and PRA stress tests. For more on our stress testing, see the 'Risk governance' section.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 108

Climate change scenario testing was developed in 2021 and refined in 2022 giving us the capacity to simulate risk exposures over an extended time horizon. The

Trustee adopted a target of net zero by 2050. This target is now factored into Trustee decision making.

Risk mitigation

The key tools we use to maintain the above key risk metrics within appetite are:


Key tools	Description
Investment strategies	The Trustee developed the following investment objectives to reflect their main duty to act in the best interests of Scheme beneficiaries: –To maintain a diversified portfolio of assets of appropriate quality, security, liquidity and profitability to generate income and capital growth to meet, with new contributions from members and employers, the cost of current and future benefits that the Scheme provides –To limit the risk that the assets fail to meet the liabilities –To invest in a manner appropriate to the nature and duration of the expected future retirement benefit payments under the Scheme –To minimise the Scheme's long-term costs by maximising asset returns net of fees and expenses whilst reflecting the objectives above. The investment strategy is regularly reviewed, and its impact on Funding Deficit at Risk is considered.
Hedging strategies	The Trustee employs asset-liability matching arrangements including the use of liability driven investment strategies, and has a hedging strategy to reduce key market risks, mainly interest rate and inflation risk, but also currency risk. We monitor available collateral and liquidity with the objective of ensuring we have sufficient collateral and/or liquidity available to meet any margin calls.
Environmental, social and governance (ESG)	The Trustee has established a Sustainability Committee which is responsible for overseeing the Scheme’s policies, regulatory obligations and priorities in respect of climate change and wider ESG related matters.

We look at the impact on our risk metrics when determining the appropriateness of the investment and hedging strategies.

Risk monitoring and reporting

We monitor pension risk each month and report on it at Pension Risk Forum, ERCC, Pensions Committee and, where thresholds are exceeded (or likely to be), to the

Board Risk Committee and the Board in line with our pension risk appetite. We discuss any remedial action with the Trustee.

In addition, we monitor the performance of third parties who support the valuation of the Scheme’s assets and liabilities.

PENSION RISK REVIEW

2022 compared to 2021

Asset de-risking continued in 2022 as part of the long-term goal to reduce the risk of the Scheme, in particular with listed equities being sold and investment grade

corporate bonds being purchased. In 2022, the Scheme purchased a second annuity policy and entered into a second longevity swap. These covered most

pensioners in the Scheme who retired since the first annuity purchase and longevity swap. There was also a significant focus on ensuring sufficient liquidity and

collateral levels in the Scheme and securing a positive outcome for the 2022 triennial actuarial valuation with the Trustee.

Risk monitoring and measurement

Our main focus is to ensure the Scheme achieves the right balance between risk and reward whilst minimising the impact on our capital and financial position. At

31 December 2022, the Funding Deficit at Risk decreased to £860m (2021: £1,190m), mainly due to actions such as interest rate and inflation hedging, and the

sale of growth assets, including listed equities, hedge funds and commercial property.

The impact from variations in the IAS 19 position on CET1 capital was not significant in 2022. For more on the impact of our defined benefit schemes on capital, see

the ‘Capital risk’ section.

Accounting position

The accounting position deteriorated over 2022. The Scheme sections in surplus had an aggregate surplus of £1,050m at 31 December 2022 (2021: £1,572m)

while there were no sections in deficit (2021: none). The overall funded position was a £1,050m surplus (2021: £1,572m surplus). There were also unfunded

liabilities of £25mat 31 December 2022 (2021: £37m). The overall deterioration was mainly driven by negative asset returns over the period, partially offset by an

increase in the discount rate due to rising gilt yields, and deficit contributions paid into the Scheme.

There remains considerable market uncertainty and while the actions above mitigate some of the impact of market movements on yields, our position could

change materially over a short period.

For more on our pension schemes, including the asset allocation and our accounting assumptions, see Note 30 to the Consolidated Financial Statements.

Maturity profile of undiscounted benefit payments

The Scheme’s obligation to make benefit payments extends over the long-term. This is expected to stretch beyond 2080. The graph below shows the maturity

profile of the undiscounted benefit payments expected to be paid from the Scheme over its life at 31 December 2022:

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 109

Operational risk & resilience


	Overview Operational risk is the risk of loss or adverse impact due to inadequate or failed internal processes, people and systems, or external events. Operational resilience is the ability to prevent disruption occurring to the extent practicable; adapt systems and processes to continue to provide services and functions in the event of an incident; return to normal running promptly when a disruption is over; and learn and evolve from both incidents and near misses. The combined ‘Operational Risk & Resilience Framework’ reflects the importance of operational resilience and the intrinsically close links between the management of operational risk and the operational resilience of the organisation - Operational Resilience is the outcome of executing sound Operational Risk practices. In this section, we explain how we manage operational risk, with a focus on our top operational risks. These top operational risks may change each year depending on the relative movement in importance among all operational risks. We also describe our operational risk event losses and developments in the year.			Key metrics Operational risk losses (over £10,000, and excluding PPI) increased by 160% compared to 2021

OUR KEY OPERATIONAL RISKS

Operational risk is inherent in our business. As a result, we aim to manage it down to as low a level as possible, rather than eliminate it entirely. Operational risk

events can have a financial impact and can also affect our business objectives, customer service and regulatory obligations. These events can include product mis-

selling, fraud, process failures, system downtime and damage to assets or external events.

Our top operational risks are:


Key risks	Description
Cyber	We rely extensively on the use of technology to support our customers and to run our business. While technology allows us to develop and improve the way we serve our customers, it is critically important that we protect our customers’ data and provide them with a secure environment in which to deal with us. Failure to protect the data of Santander UK and its customers against theft, damage or destruction from cyber-attacks could cause operational disruption, unauthorised access, loss or misuse of data, breach of regulations, negative customer outcomes, financial loss or reputational damage. The value of the data itself, especially personal details of customers and employees is a focus of cyber criminals along with systems that enable cyber attacks to be monetised. It is therefore critical that we are resilient to cyber-attacks and can quickly recover from them.
Data Management	We use data in all of our services and products. Data Management risk is where this data does not support the business outcomes, either through incorrect decisions or offerings, due to issues with its data quality. Data quality issues may be caused by technology incidents or processing errors.
Fraud	Fraud can be committed by first parties (our customers), second parties (people known to our customers or us), third parties (people unknown to our customers or us), and internally by our staff. We are committed to protecting ourselves and our customers from fraud and to mitigating our fraud risk in an ever-evolving external fraud environment.
IT	As noted in Cyber, technology is vital to our processes and operations, and in providing service to our customers. IT risk arises from any event related to the use of technology supporting business processes, where the event may result in the unavailability or failure of systems or in processing errors that impact our customers or operations. This includes hardware or software failures, or issues caused by change.
People	People risks include all risks related to employees and third parties working for us, covering resource management, health, safety and wellbeing and employee relations. People risk is a transverse risk as resource capacity, capability, and engagement challenges impact all risk types. As we develop our working practices and adapt to changing circumstances, people impacts and risks continue to be key considerations.
Third party	We rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of services and goods. These include outsourced services, such as IT infrastructure including increasing use of the Cloud, software development and banking operations. Regulations require us to classify other legal entities in the Banco Santander group as external suppliers, so we manage them as third parties. Many suppliers are also shared across the sector and this could increase risk due to complexity and capacity issues at the third parties. The failure of a supplier may cause operational disruption, breach of data security or regulations, negative customer impact, financial loss or reputational damage.
Transformation and Change	Change risk arises in any activity that transforms our business strategy, operating environment, or products and services we provide to our customers. Management of change risks is an integral part of our governance and our focus, given the potential for impacts across all areas of non-financial risk. Failure to ensure change is appropriately considered, funded, executed and managed could result in operational disruption, poor customer outcomes, financial loss, reputational damage and may impede our ability to meet regulatory requirements.

We are also exposed to tax risk which, even though it is a lower risk for us, is still a high-profile risk and may include legacy items. We adopted the Code of Practice

on Taxation for Banks in 2010. For more, see our Taxation Strategy on our website aboutsantander.co.uk.

OPERATIONAL RISK MANAGEMENT

Risk appetite

We set our operational risk appetite at a Santander UK group level and we express it through measures approved by the Board. These include risk statements and

metrics set against our main non-financial risk event types. We also set lower level triggers, qualitative parameters and quantitative thresholds across our

business. We monitor our risk profile and performance against the risk appetite under several key risk areas, and we have processes to identify, assess, manage

and report risks and events. We incorporate Banco Santander group principles and standards, regulatory requirements and best practice, where applicable.

Coverage across the seven CRD IV loss event types is comprehensive and aligns to the key risk areas approved by ERCC.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 110

Risk measurement

The key components of the operational risk toolset we use to measure and mitigate risk are:


Operational risk toolset	Description
Operational risk and control assessments	Our business units identify and assess their operational risks to ensure they manage and control them within our operational risk appetite, and prioritise actions needed. Every area must identify and record their material risks, assess their controls for adequacy and then accept the risk or plan to address any deficiencies. We also use operational risk assessments and risk rating tools as key parts of change risk management.
Risk scenario analysis	We perform this across business units. It involves a top down assessment of our key operational risks. We update our scenarios each year. The analysis gives us insight into rare but high impact events and allows us to understand potential impacts and address issues.
Key indicators	Key indicators and their tolerance levels give us an objective view of risk exposure or the strength of a control at any point in time. They also show trends and give us early warning of potential increasing risk exposures. Of primary importance are our business-wide risk appetite indicators which show adherence to our risk appetite statements.
Operational risk event and loss management	Operational risk events occur when our controls do not operate as we planned and this leads to customer impact, financial loss, regulatory impacts and/or damage to our reputation. We use data from these processes to identify and correct any control weaknesses. We also use root cause analysis to identify emerging themes, to prevent or reduce the impacts of recurrence and to support risk and control assessments, scenario analysis and risk reporting. Our operational risk loss appetite sets the level of total operational risk loss (expected and unexpected) in any given year (on a 12-month rolling basis) that we consider to be acceptable. We track actual losses against our appetite, and we escalate as needed.
Risk based insurance	Where appropriate, we use insurance to complement other risk mitigation measures.

Risk mitigation

We mitigate our key operational risks in the following ways:


Key risks	Risk mitigation
Cyber	Protecting our customers, systems and data remains a top priority for us. We operate a layered defence approach which we regularly assess to ensure that it addresses the prevailing threats. We validate our controls using tests designed to replicate real-world cyber-attacks. Our cyber security experts assess our overall cyber security posture and report to management each month, and to ExCo, ERCC, BRC and Board at least twice a year. We assess cyber controls and risks each quarter using Banco Santander's Holistic Cyber Risk Framework. Keeping our systems secure is a bank-wide responsibility and we continue to enhance our staff training to support this. We also have targeted training for Board members, senior management and other employees. We continue to work with other banks through the Cyber Defence Alliance, where we share intelligence on cyber threats and effective strategies to counter them. We campaign to raise awareness and give customers the knowledge they need to avoid becoming victims of cyber attacks. As part of this, we run customer education campaigns, and we offer advice through our online security centre. We also have a cyber insurance policy to give us comprehensive cover to respond and recover losses and damages from security or system failures and any impact of a data breach.
Data	We continue to monitor and mitigate data risk through enhanced governance structures and processes supported by effective deployment of our risk and control library. We assess Data risk each year as part of the Risk and Control Self-Assessment (RCSA) process and update our risk profile as needed. Our data management programme is a key enabler to ensuring our data is fit for purpose and making improvements to our underlying processes and data governance. We are also embedding Data Marketplace as a holistic system for data management across the bank, ensuring a more robust and comprehensive approach for managing data.
Fraud	We operate layered security controls combining prevention and detection controls, to mitigate risks. The current fraud environment is incredibly challenging, and as such our current Fraud Transformation programme contains several projects that are designed to reduce the risks to us and our customers. We are committed to taking a more preventative approach to mitigate these risks. To help support customers, over the past five years we have created a series of fraud education and media campaigns, many of which focus on drawing public attention to common frauds, such as purchase scams, investment fraud, and money mules, and how to avoid them.
IT	We proactively monitor technology platforms and applications through automated alerts to detect events that may impact their performance or availability. We investigate material events to identify the root cause and remedial actions needed. We escalate these events as needed through the Santander Early Escalation Notification (SEEN) Process, and we review them each quarter to identify trends we need to remediate. We assess IT risk each year as part of the RCSA process and update our risk profile as needed.
People	We monitor people risks through the use of a broad range of operational risk indicators covering capacity, capability, engagement and diversity and inclusion. These are reviewed and refreshed annually to track and monitor all people related measures. We mitigate people risk through adopting various attraction and retention strategies throughout the employee lifecycle, and by delivering a competitive employee value proposition including hybrid working. All significant people-related change initiatives must have Operational Risk Assessments conducted. We also have processes to capture and assess people-related events.
Third party	We identify and assess the risk profile of each of our third party arrangements before onboarding and throughout the relationship. We also identify and measure key third party risks within our operational risk and control assessments. We capture and assess related events, and use operational risk indicators to measure the third party risk profile of the business. We aim to ensure that our suppliers meet our risk and control standards beginning with on-boarding, throughout our relationship with them, and during off-boarding.
Transformation and change	Risk management of Transformation and Change is integrated within our project governance framework, known as One Governance, which brings together project planning and prioritisation, cost discipline and risk management of all project portfolios under one unified system environment. Projects are initially subject to rigorous review to ensure that demand funded is prioritised based on what the bank should, needs and wants to do for the benefit of our customers clients, colleagues and franchise, a process which incorporates risk and regulatory considerations. At an individual initiative level, the key risk management requirements are supported by an initial Project Risk Rating (PRR) which considers the risk an initiative poses to us and allows application of risk-based governance. An Executive Risk Summary (ERS) and an Operational Risk Assessment (ORA) are completed for all but very low risk rated projects. Our Change Risk Oversight Group assesses and manages risks at portfolio level. We continue to take a measured approach to executing risk and delivering cost savings, with a focus on prioritisation and capacity management.

Risk monitoring and reporting

Reporting is a key part of how we manage risk. We can identify exposures through our operational risk and control assessments, risk scenario analysis, key

indicators, operational risk assessments and incidents and events. We report exposures for each business unit through regular risk and control forums. These

include details of risk exposures and how we plan to mitigate them. We prioritise and highlight events that have a material impact on our customers, reputation or

finance by reporting them to key executives and committees. We use The Standardised Approach (TSA) to calculate our Pillar 1 operational risk capital. We use an

internal model aligned to the CRD IV advanced measurement approach to validate our Pillar 2 capital needs.

Our crisis management framework covers all levels of the business. It sets out possible triggers and how we will manage a crisis, and we test it at least annually. If

an event occurs, our business continuity plans help us recover as quickly as possible and we undertake post incident reviews to identify learnings.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 111

OPERATIONAL RISK REVIEW

2022 compared to 2021

Operational risk event losses

The table below shows our operational losses in 2022 and 2021 for reportable events with an impact over £10,000, excluding conduct risk events (which we

discuss separately in the ‘Conduct and regulatory risk’ section), by CRD IV loss event types.


	2022		2021
	Value %	Volume %	Value %	Volume %
External fraud	27	95	30	89
Clients, products and business practices(1)	77	1	41	2
Business disruption and systems failures	(3)	—	14	1
Execution, delivery, and process management	(1)	4	15	8
	100	100	100	100

(1) 2% volume in 2021 was previously categorised as Employment practices and workplace safety

The value of our operational risk losses (events over £10,000) increased by 160% in 2022 largely due to the AML penalty and the continued increase in Fraud

losses. In line with general industry trends, the value and volumes of losses due to cases of External Fraud increased by 138% and 119% respectively. We continue

to enhance our anti-fraud measures to help protect our customers. Additionally, we have observed a rise in the number of events and losses prompted by the

increasing level of change, resulting from delivery of regulation, industry developments and the need to further digitalise the business.

Cyber risk

Information and cyber security remain a top risk and a priority. We experienced no notable data and cyber security incidents in 2022. We continue to see increasing

ransomware attacks across all sectors driven by compromises in supply chain tools and we expect this trend to continue. We continue to invest in the right skills

and resources to manage data and cyber risk. We also continue to monitor the cyber threat from the conflict in Ukraine.

Data risk

in 2022, we continued to monitor data management risk through the enhanced governance structures and processes put in place by our Chief Data Officer. Our

Data Programme is progressing with clearly defined deliverables that will improve our ability to manage data and enhance our data management capabilities, in

line with our approved Data Strategy.

Fraud risk

Fraud against our customers and the bank remains a top risk and a priority. Fraud levels across UK banks continued to rise in 2022. Social engineering techniques

used by fraudsters are a significant threat to customers and outside of the bank’s controls. As such, in line with peers, Authorised Push Payment (APP) fraud is our

largest fraud type. We are focused on preventative measures and in response to increasing fraud attacks, we designed new fraud prevention tools to complement

our existing prevention and detection systems and controls. We continue to deploy dynamic ‘scam warnings’ in our online banking payment process, enhancing

fraud prevention controls for high-risk digital payments, presenting customers with tailored questions and warnings specific to their payment journey. We play an

actively collaborate on fraud management with industry partners, through UK Finance and Stop Scams UK. In 2022, we continued our customer awareness

campaigns on the most common frauds and scams.

IT risk

The importance of IT continued to be reiterated by some outages to customer services in 2022 and we continue progressing a wide programme to address the root

causes and further reduce key risks within our IT estate. The programme is expected to deliver risk reduction over a three year horizon and progress is closely

monitored though our risk governance.

People risk

This risk continues to be compounded by changes in operating models and the execution of our strategies. We continue to adapt and respond to these risks; in

particular, the people risks associated with the phased relocation of our Head Office to Unity Place in Milton Keynes, which are under close monitoring and

management. 2022 saw lower wellbeing-related absence but, in line with our peers, we continue to see raised attrition levels reflecting a more buoyant job

market. Potential impacts on productivity are supported with our wellbeing and inclusion strategy, centred on helping colleagues through change. As appropriate,

we advocate hybrid working to encourage colleagues to return to offices, and are providing support as external economic factors impact some colleagues.

Third party risk

We continue to rely extensively on third parties, both within the Banco Santander group and outside of it, for a range of goods and services. In 2022, we continued

to evolve our processes. This included implementing a new Third Party Risk Management process and amending contracts with suppliers.

Transformation and change

The way in which we operate, the technology we rely on, and how we interact with our customers and stakeholders is constantly evolving, and consequently, our

ability as an organization to meet this change is a key priority. In 2022, we continued our transformation to simplify the bank, digitise processes and customer

journeys, reduce cost, extend internal capabilities and ensure a resilient operating model. This included reducing our property footprint and significant delivery

against a diverse transformation agenda with specific focus on a migration to the cloud, further digitalisation and managing obsolescence. Ensuring change does

not result in unacceptable impacts on our risk profile underpins our strategic decisions and is robustly managed.

Operational Resilience

We have committed that, by 2025, we will address the vulnerabilities identified in the first operational resilience self-assessment approved by the Board and

submitted to our regulators in March 2022. Achieving this will enhance our resilience, i.e. the ability of Santander UK to recover its Important Business Services

(IBS) within Impact Tolerance levels to avoid intolerable harm to customers, the firm, or the market, with focus on vulnerable customers. In 2022, we focused on

enhancing and testing our firm-wide recovery strategies and readiness to respond to a range of potential external events. Our operational resilience programme

was subject to independent external review in January 2022 and received a satisfactory rating from Internal Audit in July 2022. A programme is in progress to

remediate identified asset vulnerabilities which could directly affect our ability to recover our IBS within Impact Tolerances in the event of an outage. We have

introduced resilience assessments across technology, data, people, third parties, and premises, which enhance our ability to monitor, oversee and action issues.

Input to these assessments include scenario test outputs, post incident reviews, metrics, RCSAs, and event data. The Board continues to be actively engaged in the

operational resilience journey and in March 2023 are to approve our annual operational resilience self-assessment.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 112

Conduct and regulatory risk


	Overview We manage conduct and non-financial regulatory risk types in one framework to reflect their similarities. Conduct risk is the risk that our decisions and behaviours lead to detriment or poor outcomes for our customers. It also refers to the risk that we fail to maintain high standards of market behaviour and integrity. Regulatory risk is the risk of financial or reputational loss, or imposition of or conditions on regulatory permission, as a result of failing to comply with applicable codes, regulator’s rules, guidance and regulatory expectations. In this section, we explain how we manage conduct and regulatory risk. We also describe our main conduct and regulatory provisions.			Key metrics Customer remediation provision was £90m (2021: £44m) Litigation and other regulatory provision was £136m (2021: £166m)

OUR KEY CONDUCT AND REGULATORY RISKS

Our purpose is to help customers and businesses prosper. To achieve this, we are committed to ensuring conduct strategy is embedded in our business, good

outcomes for our customers is at the heart of what we do and that our proposition and initiative approval process, and systems, operation and controls are well

designed and operating effectively. We see our key exposure to conduct and regulatory risk through the risk of errors in our product design, sales practices, post-

sale servicing, operational processes, complaint handling, and the failure to supervise, monitor or control the activities of our employees. All of these may result in

the risk that we do not meet our customers’ needs, align to the expectations of our regulators, deliver the expected outcomes or observe required standards of

market behaviour.

Our Conduct and Regulatory Framework is built on the following risks:


Key risks	Description
Regulatory	The risk that we fail to adhere to laws, regulations and codes which could have serious financial, reputational and customer impacts, including the risk that we may be adversely impacted by changes and uncertainty around UK and international regulations. We categorise regulatory risk into financial and non-financial risk aligned to our main regulators - the PRA and FCA - and other UK regulators and authorities. As part of the Banco Santander group, we are also impacted indirectly through regulation by the Banco de España (the Bank of Spain) and by the ECB through the SSM. We also fall within the scope of US regulation.
Product	The risk that we offer products and services that do not result in good outcomes for our customers.
Sales	The risk that we sell products and services without giving customers enough information to make an informed decision, that we do not provide appropriate advice, or that we fail to take account of customer vulnerability.
After-sale and servicing	The risk that failures of our operations, processes, IT or controls result in poor customer outcomes. This includes the risks that we do not give appropriate after-sale communications to customers, make it difficult for customers to contact us, or that we fail to take account of customer vulnerability. It also includes the risk that our systems and controls do not prevent or detect fraud.
Culture	The risk that we do not maintain a culture that encourages appropriate behaviours and puts the customer at the heart of what we do.
Competition	The risk of financial harm, criminal liability, customer harm or reputational damage that we may incur because we fail to comply with relevant competition law or being involved in any competition law investigation or proceedings.
Controls	The risk that we do not supervise our employees effectively or that our systems and controls do not prevent or detect misconduct.

CONDUCT AND REGULATORY RISK MANAGEMENT

Risk appetite

We aim to comply with all regulatory requirements, and we have no appetite to make decisions or operate in a way that leads to poor customer outcomes or which

negatively impacts the market. Our Board approves our risk appetite each year, or more often if needed, and we cascade it to our business units through our risk

framework and policies. We also agree lower level risk tolerance thresholds at least annually.

Risk measurement

Due to the links between our conduct, regulatory and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply

where exposures have a conduct or regulatory risk impact.

We support our conduct and regulatory risk framework and policies with tools that aim to identify and assess new and emerging conduct risks. These include:


Key tools	Description
Strategy and business planning	We align our overall corporate strategy, financial plans, risk appetite and operational capabilities through our annual process to set our strategy. We derive our business unit plans from our corporate strategy and they contain a view of conduct and regulatory risk.
Quality assurance	We subject sales and processes to internal quality assurance and, as needed, external monitoring.
Operational risk and control assessments	Our business and business support units assess our operational risks, systems and controls to give us a consolidated risk view across all our business areas. We complete the assessments through a central tool to evaluate and manage our residual risk exposures.
Scenario testing and horizon scanning	We consider conduct and regulatory risk in our scenario testing and review possible root causes and assumptions to determine the likelihood and impact, with actions to enhance our controls where required.
Conduct risk reporting	We use dashboards to give us a view of conduct risks across our business and manage conduct risk in line with our risk appetite.
Compliance monitoring	We carry out an annual conduct and regulatory risk assurance programme approved by the Board and tracked throughout the year.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 113

Risk mitigation

Our conduct and regulatory risk framework and policies set out the principles, standards, roles and responsibilities and governance for conduct and regulatory risk,

such as:


Policies	Description
Product approval	Our product approval process aims to minimise our conduct, regulatory or reputational risks in the design, marketing, sales and servicing of products and services. We assess our products and services within a formal framework to ensure they meet the needs and expectations of our customers, are within our risk appetite and agreed metrics, and to ensure processes and controls are in place.
Suitable advice and information for customers	We give guidance to advisers and staff on the key principles, requirements and ethical behaviours they must follow. This ensures our customers are sufficiently informed when they consider or make a buying decision.
Training and competence	We train our staff and require them to maintain a suitable level of competence to ensure customers can achieve appropriate outcomes. We invest in all our people to ensure that we achieve our mandatory risk objectives and that everyone acknowledges their personal responsibility to manage risk. We place focus on ensuring our colleagues are trained to recognise and support customers who may be vulnerable, or who may be experiencing financial stress, financial difficulty or financial abuse. We also have a dedicated Specialist Support Team that offers guidance to colleagues helping customers who may need more tailored solutions.
Fair treatment of vulnerable customers	Some customers may be impacted financially or personally as a result of their circumstances. Our Vulnerable Customer Policy gives business units a clear and consistent view of what vulnerability can mean and situations when customers may need more support. Our guidelines focus on identifying characteristics of vulnerability, understanding customer needs and the support and flexibility we can give to help. In addition to mandatory training, we train our customer-facing staff using real customer scenarios to enable our colleagues to deal with a wide range of sensitive issues. Our online Vulnerable Customer Support Tool gives our people more guidance and support, and our Specialist Support Team provides guidance for the most complex situations. We also consider vulnerability in every initiative, and adapt our technology to the needs of customers with vulnerability characteristics in our design and testing stages. We work with charities, authorities, trade associations and other specialists to develop our understanding of vulnerability.

Risk monitoring and reporting

We consider conduct and regulatory risk in all our business decisions. Our material conduct and regulatory risk exposures are subject to, and reported against, our

conduct and regulatory risk appetite statement, as well as lower level triggers and thresholds for action. We monitor the position to ensure we provide appropriate

outcomes and meet regulatory expectations. We have specific fora and committees such as our Conduct and Compliance Forum, and business specific risk

management fora to make decisions on conduct and regulatory risks and we report to the ERCC and BRBC. Our risk and control fora support management to

control risks in their business units. Reporting includes conduct risk dashboards, with metrics across common areas. These include policy breaches logged, quality

assurance and complaints, and commentary on trends and root causes to enable us to take effective action.

CONDUCT AND REGULATORY RISK REVIEW

2022 compared to 2021

To fully consider customer and conduct impacts across our business, we maintain a strong focus on robust oversight and control of the customer journey across all

our products and services. In 2022, we continued to build on our progress and remain vigilant in taking a customer-focused approach in developing strategy,

products, services and policies that support fair customer outcomes and market integrity, in particular in the context of regulator and government driven initiatives.

As part of this, we:

–Assessed the views and new policy areas in the FCA’s 2022/23 Business Plan. The key focus is on three main areas: reducing and preventing serious consumer

harm; setting and testing higher standards; and promoting competition and positive change. We continue to consider and address these in our controls, product

and service processes and frameworks, and we continue to adapt in line with the evolution of a digital economy.

–Delivered change to meet the evolving regulatory landscape, including changes brought about by the PSR: Confirmation of Payee Phase 2, Open Banking and

PSD2, and the FCA consumer protection agenda.

–Following the implementation of the Contingent Reimbursement Model, a voluntary code to deal with authorised push payment (APP) fraud, we continue to

engage with the industry and authorities, giving input and support to further develop the code's framework. We also considered the latest PSR proposals to give

greater protection for consumers against APP scams.

–Further evolved our Financial Support team and SME support, with more investment in people and IT to ensure we continue to drive fair outcomes and can

provide tailored support, whilst managing the anticipated increased inflow of customers affected by the rising cost of living. This included reviewing related FCA

and LSB publications.

–Proactively contacted over 2 million customers who may be experiencing early signs of financial stress, to support them and try to help avoid longer term

financial difficulty. We refer customers to internal and external sources of support and have ongoing customer engagement and support plans.

–Continued focus on financial support for our business customers as Pay As You Grow options have been exhausted for many BBLS customers and 3 year CBILS

overdrafts are reaching maturity.

–Successfully transitioned to alternate reference rates for the vast majority of LIBOR agreements. Our focus remains on transitioning a small group of customers

whose agreements still reference either synthetic Sterling LIBOR or USD LIBOR. We continue to contribute to FCA consultation papers on both.

–Continued to actively participate in schemes to ensure the long term future of access to cash, including supporting the set up of shared banking hubs and wider

engagement with LINK and industry partners.

–Continued our Consumer Duty implementation programme remaining focused on ensuring that our product and services, communications, and control

frameworks are enhanced to continue to support good customer outcomes.

Like all UK banks, we continue to see a demanding regulatory agenda focused on consumer outcomes and customer vulnerability, including Consumer Duty, and

continue to evaluate the evolving regulatory environment, particularly in light of the FSM Bill, and the government's Edinburgh Reforms. Conduct risks will likely

continue to rise in the near and medium-term, as banks deal with increasing numbers of personal and business borrowers who are impacted by the rising cost of

living. When implementing change, we focus on ensuring that our strategy, leadership, governance arrangements, and approach to managing and rewarding staff

does not lead to a detrimental impact on our customers, competition, or to market integrity. We also remain committed to protecting the personal data we collect

and use, and respecting the data protection rights of our customers, our people and others associated with us.

For an update on key movements in our financial crime risk profile, see the 'Financial crime risk review' section.

Accounting position

For more on our provisions, see Note 29 to the Consolidated Financial Statements. For more on our contingent liabilities, see Note 31 to the Consolidated Financial

Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 114

Financial crime risk


	Overview Financial crime risk is the risk that we are used to further financial crime, including money laundering, sanctions evasion, terrorist financing, facilitation of tax evasion, bribery and corruption. In this section, we describe our key financial crime risks and explain how we manage and mitigate financial crime risk. We also describe developments in the year.

FINANCIAL CRIME RISK

OUR KEY FINANCIAL CRIME RISKS

We recognise that financial crime and associated illegal activity damages the customers and communities we serve. Criminals use the financial system to launder

the profits of illegal activity such as human trafficking and to fund terrorism. Financial crime is therefore a high priority risk for us and we remain committed in our

efforts to counter it by maintaining the highest ethical standards and conducting business in accordance with regulatory and legal requirements. We have adopted

a bank wide anti-financial crime strategy (AFC) that sets out the principles of ‘Deter, Detect and Disrupt’ and invested in training our colleagues in how to identify

and prevent financial crime.

We believe that having a comprehensive and effective financial crime risk management framework is a business imperative and a positive investment that protects

us from legal, regulatory and reputational risks. This includes implementing policies, procedures, and maintaining effective systems and controls to prevent and

detect financial crime. We may be adversely affected if we fail to effectively mitigate the risk that third parties or our employees facilitate, or that our products and

services are used to facilitate financial crime. We adopt a risk-based approach in line with UK and international laws and standards, and we work with government,

law enforcement and the private sector to help meet our commitments and to inform our AFC strategy.

Our key financial crime risks are:


Key risks	Description
Money laundering	We are used by criminals to transform the proceeds of crime into seemingly legitimate money or other assets.
Terrorist financing	We are used by terrorists to deposit, distribute or collect funds that are used to fund their activity.
Sanctions	We do not identify payments, customers or entities that are subject to economic or financial sanctions.
Bribery and corruption	We fail to put in place effective controls to prevent or detect bribery and corruption.
Facilitation of tax evasion	We fail to put in place effective systems and controls to prevent the facilitation of tax evasion.

FINANCIAL CRIME RISK MANAGEMENT

Risk appetite

Financial crime risk appetite is the level of financial crime risk we are prepared to accept in carrying out our activities. This is approved at Board level and shared

across the business, with limits specified to control exposures and activities that have material risk implications for us and the communities we are part of. Our

customers and shareholders will be impacted if we do not mitigate the risk that we are being used to facilitate financial crime. We seek to comply with applicable

UK and international sanctions laws and other regulations and make sure our risk appetite adapts to external events. We have minimal tolerance for residual

financial crime risk, bribery and corruption risk, facilitation of tax evasion risk and zero tolerance for non-compliance with sanctions laws and regulations. We

require employees and third parties acting on our behalf to act with integrity, due diligence and care. We have no appetite for non-compliance with financial crime

laws or regulations by employees or persons acting for or on our behalf.

Risk measurement

We measure our exposure to financial crime risk regularly. Our AFC strategy and frameworks set the strategic direction for risk management by defining standards,

objectives and responsibilities for all areas of the business. It supports senior management in effective risk management and developing a strong risk culture. We

screen and risk rate all our customers and monitor activity to identify potential suspicious behaviour. We complete ad-hoc reviews based on key trigger events. Our

Financial Intelligence Unit assesses specific types of threat, drawing on data from law enforcement and public authorities.

Risk mitigation

We take a proactive approach to mitigating financial crime risk. Our financial crime risk frameworks are supported by policies and standards which explain the

requirements for mitigating money laundering, terrorist financing, sanctions compliance risks, bribery and corruption, and facilitation of tax evasion risks. We

update these regularly to ensure they reflect new requirements and industry best practice. We support our colleagues to make sure they can make the right

decisions at the right time. We raise awareness and provide role-specific training to build knowledge of emerging risks.

Key elements of our financial crime risk mitigation approach are that we:

–Undertake customer due diligence measures for new and existing customers, which include understanding their activities and banking needs

–Conduct risk assessments of customers, products, businesses, sectors and geographic risks to tailor our mitigation efforts

–Ensure all our staff complete mandatory financial crime training and, where required, role-based specialist training

–Deploy new systems to better capture, analyse and act on data to mitigate financial crime risks

–Partner with public authorities, the Home Office and the wider financial services industry to pool expertise and data. We are also involved in partnerships such as

the Joint Money Laundering Intelligence Taskforce (JMLIT) which supports public-private collaboration to tackle financial crime.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 115

Risk monitoring and reporting

We use key risk indicators to monitor our exposure to financial crime risks, and we report all issues in a timely manner. We work closely with subject matter

experts across the business on all risk management and monitoring activities alongside more effective communication of policy changes. Regulators around the

world continue to emphasise the importance of effective risk culture, personal accountability and the adoption and enforcement of risk-based requirements and

adequate internal reporting processes and procedures. We continue to develop and enhance our financial crime operating and governance model to ensure that

our control environment evolves at pace, keeping up with new or amended laws, regulations or industry guidance.

We adhere to a strong governance and reporting schedule to our ERCC and Financial Crime Committee, including analysis of the risks on the horizon, key risk

indicators and a directional indication of the risk profile. Throughout 2022, management continued to update the risk committees on management and mitigation

of financial crime risks including our activities to understand and address emerging challenges. We enhanced our financial crime risk indicators for effective risk

reporting to senior management. We also regularly report to the Board Risk Committee on financial crime risk, the impact on the business and the actions we are

taking to mitigate the risk.

FINANCIAL CRIME RISK REVIEW

2022 compared to 2021

Protecting the communities we serve from the social and economic impacts of financial crime remains a top priority for Santander. The financial crime landscape

continues to be complex, with evolving regulatory and legal requirements, geo-political factors and changing criminal methods influencing the risks we face.

Changes to UK and global sanctions regimes in 2022, most notably those arising from the global response to the conflict in Ukraine, added significant complexity

and operational demand upon our financial crime controls in a compressed period. This complexity is anticipated to continue in 2023 and we continue to monitor

external developments and respond to their impacts on our financial crime controls, and have increased our resources to do so.

FCA settlement on historical Business Banking AML controls

In December 2022, the FCA concluded an investigation in relation to anti-money laundering controls in our Business Banking division in the period 31 December

2012 to 18 October 2017 following the payment of a £108m financial penalty.

The FCA’s investigation focused on the identification, assessment and management of higher risk customers in our Business Banking division, including Money

Services Businesses. It has now concluded, and no further action is anticipated by the FCA or any other authority in respect of this matter.

Santander UK takes its responsibilities regarding financial crime extremely seriously. For more, see Note 31. The Banco Santander group, including Santander UK, is

fully committed to the fight against financial crime and will continue to meet all applicable financial crime regulations and legislation internationally and ensure

effectiveness in our control environment.

Financial Crime Transformation Programme

Senior management and the Board engagement in the management of financial crime risk remains high, proportionate with one of our top risks. We continue to

enhance our financial crime risk management capabilities across data, systems and subject matter expertise through our multiyear financial crime transformation

and remediation programme. Continued areas of focus during 2022 includes;

–Ongoing training of colleagues in identifying, assessing, managing and reporting financial crime. Uplifting specialist role competencies through our Economic

Crime Academy (ECA), enhancing the skill sets, knowledge and qualifications of key staff.

–Remediated data gaps in our customer records through back door remediation o help us manage financial crime risks.

–Maturing our Financial Crime Centre of Excellence to increase integration of financial crime risk management operations across our organisation.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 116

Other key risks


	Overview
	In this section, we describe how we manage our other key risks and discuss developments in the year. Our other key risks are: –Model risk: the risk that the prediction of our models may be inaccurate, causing us to make sub-optimal decisions, or that a model may be used inappropriately. –Legal risk: the risk of loss arising from legal deficiencies in contracts; failure to protect assets; failure to manage legal disputes appropriately; failure to assess or implement the requirements of a change of law; or failure to comply with law or regulation or to		discharge duties or responsibilities created by law or regulation. –Strategic and business risk: the risk of significant loss or underperformance against planned objectives; damage arising from strategic decisions or their poor implementation that impact the long- term interests of our key stakeholders, or from an inability to adapt to external developments. –Reputational risk: the risk of damage to the way our reputation and brand are perceived by the public, clients, government, colleagues, investors, or any other interested party.

MODEL RISK

Generally, we consider a model to be a repeatable method that relies on assumptions to produce estimates of uncertain outcomes. Our key model risks arise from

weaknesses and limitations in our models, or the incorrect use of a model. They include risks stemming from model data, systems, development, performance and

governance. The most material models we use help us calculate our regulatory capital and credit losses, and perform stress tests.


Model risk management	Description
Risk appetite	We express our model risk appetite through risk assessments of our material models. The Board is asked to agree this at least annually.
Risk measurement	We consider the percentage of models that have been independently assessed and the outcome of those reviews in measuring model risk. All models have assumptions and in general the more limitations those assumptions have, the higher the uncertainty and model risk.
Risk mitigation	We mitigate model risk through controls over how we use models throughout their life. We maintain a central model inventory that includes data on owners, uses and model limitations. We assess how important each model is to our business, and we track and resolve actions from independent reviews. We also maintain a clear approval path for new models and changes to existing models.
Risk monitoring and reporting	We report model risks and issues using management and control forums. We escalate issues when needed, or if our risk appetite is breached or showing adverse trends that could lead to future issues.

2022 compared to 2021

We maintain a risk-based approach to management and control, focusing on model monitoring and independent model reviews on our more material models,

such as those for credit losses or those with specifically defined regulatory standards. We remain focused on all our models given the recent changes in economic

factors, with a particular focus on inflation and Bank Rate.

In 2022, we significantly developed our regulatory models, focusing on capital adequacy, to comply with new regulatory technical standards for banks. We expect

this trend to continue over the next two years in line with supervisory expectations. We also developed new models for ECL reporting, with a focus on residential

mortgages and commercial lending. The new models are designed to improve the overall control environment and accuracy of our risk measurement. They will

also enable us to eliminate some long-standing Judgemental Adjustments required due to limitations in prior models.

Changes to models due to the cessation of LIBOR were completed. All model updates were governed in line with the complexity of change and the materiality of

underlying models. We also focused on the models we used to support the BoE climate change stress test. These were new types of models with much longer

forecast horizons. We expect work to continue in this area in the coming years. We updated our toolsets to help manage and control model risk, implementing a

tool that supports the end-to-end model risk lifecycle. The tool provides a register for all models and their uses, automated reporting and governance workflow.

The tool also has full traceability.

LEGAL RISK

Legal risk includes the legal consequences of operational risk, such as breach of contract, and operational risk with legal origins, such as a legally defective

contract. We manage legal risk as a standalone risk type to reflect the continued pace and breadth of regulatory change across financial services.


Risk management	Description
Risk appetite	We aim to make decisions and operate in a way that does not lead to legal risk. We have a low tolerance for residual legal risk.
Risk measurement	Due to the close links between our legal and operational risk frameworks, our tools to identify, assess, manage and report operational risks also apply where such exposures have a legal risk impact.
Risk mitigation	The Legal teams provide specialist advice and support to all business units to ensure we effectively manage legal risk. They help to implement a strong legal risk culture and decide whether legal advice should be sourced internally or externally.
Risk monitoring and reporting	Our internal legal risk reporting framework gives visibility of the Santander UK-wide legal risk profile. We provide regular updates of our key legal risks, issues or breaches, to senior management and the Board through our Legal & Corporate Governance Division.

2022 compared to 2021

Our legal risk profile remained heightened but broadly stable in 2022, reflecting the high number and value of legal risks that we continue to manage. We

continued to evaluate the evolving legal and regulatory environment, particularly in light of the Financial Services and Markets Bill and other changes set out in the

Government’s Edinburgh Reforms and the implications of the FCA’s new Consumer Duty. We continued to align our outsourcing and material contracts to ensure

EBA Outsourcing compliance, PRA/FCA requirements on operational resiliency and continuity, and Schrems II. We focused on the mitigation of legal and

reputational risk relating to the FCA enforcement investigation into historical anti-money laundering systems and controls in our Business Banking division which

concluded in December 2022. While litigated PPI claim volumes stabilised, there remains on-going large scale complex PPI related litigation brought by AXA, and a

German criminal and tax investigation relating to historical dividend tax arbitrage transactions. We continue to manage our legal risk in relation to thematic Court

actions and FOS complaints related to fraud, mortgages and commissions. In January 2023, the Legal risk framework was retired following a structural change

when the Legal function moved to the CFO Division, as described in 'How we define risk' in 'Risk Framework' in the 'Risk governance' section.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 117

STRATEGIC AND BUSINESS RISK

Strategic and business risk could impact our long-term success if it caused our business model to become out of date, ineffective, or inconsistent with our goals.

This could arise if we fail to identify threats arising from the economy, regulation, competitors and/or changes in technology and customer expectations. It could

also arise if we misjudge our capabilities, or ability to implement our strategy, or pursue initiatives that do not fit with our business model or miss opportunities we

could benefit from.


Risk management	Description
Risk appetite	We have a low to moderate appetite for strategic and business risk. This limits the risks we are prepared to take to achieve our strategic objectives and is aligned to our balanced, customer-centric business model.
Risk measurement	Our Board and senior management regularly review potential risks in our operations and plans to ensure we stay within risk appetite.
Risk mitigation	We manage strategic and business risk by having a clear and consistent strategy that takes account of external factors and our own capabilities. We have an effective planning process which ensures we adapt our strategy to reflect changes in key risks and opportunities.
Risk monitoring and reporting	We closely track our business environment, including long-term trends that might affect us in the future. As part of this, we report a range of indicators.

2022 compared to 2021

Our business environment is always changing, and this affects how we do business. The post Covid-19 economic recovery was unexpectedly halted by the conflict

in Ukraine bringing in geo-political uncertainties and exacerbating the cost of living crisis. We prudently managed our balance sheet in an increasing interest rate

environment and are simplifying our operating model to offset pressures of the deteriorating macro environment. Mortgage volumes dropped post mini-budget

and mortgage prices increased given increasing interest rates. We proactively reached out to our mortgage customers and gave them financial support where

needed. We helped our customers manage their finances in a rising inflation environment by providing them with budget planning and management tools, as well

as tips to cut spending. We will continue to work with all our customers through these difficult times and provide them targeted and practical support that they

need.

We continue to face a demanding regulatory agenda and in July 2022, the FCA published the new Consumer Duty rules, which we are on track to deliver.

Climate change is a key part of our business decisions. In 2022, we complied with all climate change related regulation including engaging in the BoE's CBES. As

part of the Banco Santander group, we have also set ourselves Green Finance targets until 2025.

Competitive pressures continued in 2022, mainly from established players. We remained competitive by launching new products such as a market leading e-Saver

account, fixed rate ISA products and the Edge current account for our retail customers, and helping our business customers grow through the Santander Navigator

and SME Toolkit. We also improved our digital capabilities through enhanced mobile app features like My Money Manager and Santander Boosts. We will continue

to invest in our technology to provide a high-quality customer experience.

Overall, we remain focused on supporting customer needs, improving efficiency, and building a responsible and sustainable business, while continuing to progress

with our agenda to tackle climate change. This will enable us to meet the changing needs of our customers and deliver improved returns over the long-term.

REPUTATIONAL RISK

Reputational risks can arise from internal and external factors. We seek to manage our reputation proactively, underpinned by our aim to be a responsible bank,

and through our reputational risk framework. Reputational risk is not static; today’s decisions may be judged by different standards tomorrow. We build this into

our risk culture, evaluation and sanction procedures.


Risk management	Description
Risk appetite	We have a low appetite for reputational risk, which is agreed by the Board at least each year.
Risk measurement	We assess our exposure to reputational risk daily. We base this on expert judgement and analysis of social, print, and broadcast media, and the views of political and market commentators. We also commission independent third parties to analyse our activities and those of our UK peers to identify reputational events, a decline in our reputation, and sector or thematic issues that impact our business. We also measure the perception of Santander UK by key stakeholders through regular interactions and review staff sentiment each year.
Risk mitigation	Our business units consider reputational risk as part of their operational risk and control assessments. We also consider it as part of our new product reviews. Our Corporate Communications and Responsible Banking, Legal and Regulatory Affairs and Marketing team helps business units to mitigate the risk and agree action plans as needed, as part of their role to protect our brand and reputation.
Risk monitoring and reporting	We monitor and report reputational risks and issues on a timely basis. Our Reputational Risk Forum reviews and escalates key issues to ERCC, RBC and the Board. We also report regularly to ExCo on Sustainability and Responsible Banking, and Public Affairs policies.

Our Reputational and ESCC risk policies define how we create long-term value while managing those risks. Our ESCC policy covers Oil & Gas, Power Generation &

Transmission, Mining & Metals and Soft Commodities. For example, financing is prohibited for project-related financing for new CFPP projects worldwide and we

will only work with new clients with CFPPs to provide specific financing for renewable energy projects.

2022 compared to 2021

In 2022, our key reputational risks arose from the economic slowdown and the cost of living crisis. To manage this, we regularly and proactively shared

information with key external stakeholders on the actions we took to support customers, colleagues and communities. Particular areas of external focus included

our support for customers facing financial difficulties and increasing mortgage payments.

We also worked to explain how our processes and controls have changed and improved since the period related to the FCA penalty for historical shortcomings in

our AML controls, settled in December 2022.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 118


Financial statements
	Contents
	Audit report	120
	Primary financial statements	129
	Consolidated Income Statement	129
	Consolidated Statement of Comprehensive Income	130
	Consolidated Balance Sheet	131
	Consolidated Cash Flow Statement	132
	Consolidated Statement of Changes in Equity	133
	Company Balance Sheet	134
	Company Cash Flow Statements	135
	Company Statement of Changes in Equity	136
	Notes to the financial statements	137

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 119

Independent auditors’ report to the members of

Santander UK plc

Report on the audit of the financial statements

Opinion

In our opinion, Santander UK plc’s group financial statements and company financial statements (the “financial statements”):

–give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2022 and of the group’s profit and the group’s and company’s

cash flows for the year then ended;

–have been properly prepared in accordance with UK-adopted international accounting standards as applied in accordance with the provisions of the Companies

Act 2006; and

–have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual Report, which comprise: the Consolidated and Company Balance Sheets as at 31 December

2022; the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Cash Flow Statements and the

Consolidated and Company Statements of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the

material accounting policies.

Our opinion is consistent with our reporting to the Board Audit Committee.

Separate opinion in relation to IFRSs as issued by the IASB

As explained in note 1 to the financial statements, the group and company, in addition to applying UK-adopted international accounting standards, have also

applied international financial reporting standards (IFRSs) as issued by the International Accounting Standards Board (IASB).

In our opinion, the group and company financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are

further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have

obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which

includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these

requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided.

Other than those disclosed in note 7 to the financial statements, we have provided no non-audit services to the company or its controlled undertakings in the

period under audit.

Our audit approach

Context

This is the first year that it has been my responsibility to form this opinion on behalf of PricewaterhouseCoopers LLP ("PwC"), who you first appointed on 31 March

2016 in relation to that year’s audit. In addition to forming this opinion, in this report we have also provided information on how we approached the audit, how it

changed from the previous year and details of the significant discussions that we had with the Board Audit Committee. We approached our audit by considering

what would be considered to be material to the users of the financial statements.

Overview

Audit scope

–The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the financial significance of

components and other qualitative factors (including history of misstatement through fraud or error).

–We performed audit procedures over components considered to be financially significant in the context of the group (full scope audit) or in the context of

individual primary statement account balances (audit of specific account balances).

–Our audit plan was discussed with the Board Audit Committee in June 2022 and updates were provided at later stages of the audit. We executed the planned

approach and concluded based on the results of our testing ensuring that sufficient audit evidence had been obtained to support our opinion. We discussed our

approach and the results of our audit with the Board Audit Committee. We also discussed the key audit matters at the conclusion of the audit.

Key audit matters

–Expected credit loss allowance for loans and advances to customers (group and parent)

–Valuation of defined benefit pension surplus (group and parent)

–Impairment assessment of goodwill (group and parent)

–Legal and regulatory matters (group and parent)

Materiality

–Overall group materiality: £100 million (2021: £59 million) based on 5% of adjusted profit before tax (2021: 3% of adjusted profit before tax).

–Overall company materiality: £90 million (2021: £50 million) based on 5% of adjusted profit before tax (2021: 4% of adjusted profit before tax), capped at the

level which is used for the audit of the company as a component of the overall group.

–Performance materiality: £75 million (2021: £44 million) (group) and £67 million (2021: £37 million) (company).

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 120

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.

Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current

period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had

the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any

comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our

opinion thereon, and we do not provide a separate opinion on these matters.

This is not a complete list of all risks identified by our audit.

The key audit matters below are consistent with last year.


Key audit matter	How our audit addressed the key audit matter
Expected credit loss allowance for loans and advances to customers (group and parent)
Refer to the Board Audit Committee Chair’s report, credit risk section of the risk review, note 1 (Accounting Policies) and note 13 (Loans and Advances to customers). Credit Impairment allowances represent management’s best estimate of the expected credit loss (ECL) within each portfolio at the balance sheet date. The identification and the determination of allowances is inherently judgemental. Management uses a number of models and judgemental adjustments (JAs) to achieve compliance with the requirements of IFRS 9. The determination of ECLs is complex and a number of significant judgments are involved in the estimation process. Recovery from the COVID-19 pandemic has seen the release of the remaining COVID based JAs, however, there continues to be significant economic uncertainty driven by a number of factors including a high inflationary environment, rising interest rates, the war in Ukraine and ongoing supply chain issues. Given that further economic uncertainty exists, particularly in relation to high inflation and cost of living pressures, we consider the judgements and assumptions used in the determination of forward looking macroeconomic scenarios and the probability weights applied in relation to the residential mortgage and corporate loan portfolios to be significant. In addition, there are a number of in model and post model JAs to respond to the economic uncertainty not fully captured by the models, and also to address data and model limitations. Given the level of judgement involved we also deem the risk associated with the sufficiency and appropriateness of the following in model and post model JAs to be significant; –Corporate sector staging risks JAs related to supply chain and other factors, which move certain Stage 1 corporate loans to Stage 2 and increase the probability of default (PD) on certain Stage 2 loans; –JAs to recognise that the repossession rates in the model are not representative of expected repossessions (Long-term indeterminate arrears and 12+ months in arrears JAs); –In model JAs to uplift the repossession rates for certain interest only mortgages; –The JAs to assess affordability of unsecured lending repayments; and –The mortgage affordability JA. In the corporate loan portfolios, individual impairment assessments are performed for certain credit impaired loans and advances which are categorised as Stage 3. Estimates are required to assess the level of any allowance. Our focus was on the principal assumptions applied by management in estimating impairment allowances such as the valuation of collateral and the net present value of forecast cash flows.	Testing of key management controls We understood and evaluated the design of the key controls over the determination of ECLs and tested their operating effectiveness. These controls included: –Model performance monitoring controls, including testing model estimates against actual outcomes; –Controls over the accuracy of calculations and completeness & accuracy of data used within significant in model and post model JAs; –The Asset and Liability Committee’s review and approval of the base case economic assumptions; and –The Credit Risk Provisions Forum's review and approval of the outer economic scenarios and weightings, significant judgements & estimates and the overall assessment of ECL modelled outputs. We noted no significant exceptions in the design or operating effectiveness of the above controls. In addition, we performed the substantive procedures described below. Forward looking economic scenarios and scenario probability weightings We used economics experts and credit risk modelling specialists to critically assess the reasonableness of the multiple economic scenarios and scenario probability weightings adopted by management. We considered external economic data and consensus forecasts to assess whether management’s forecasts appropriately reflect the different possible paths that the economy could take, including the consequences of a high interest rate environment, persistently high inflation,, an extended Russia / Ukraine conflict and the remaining Covid-19 and Brexit related risk issues. As part of our testing of the scenarios and the probability weightings, we compared the base scenario assumptions to other external consensus forecasts and we considered the inferred GDP ‘time to recovery’ for each scenario based on historical distributions and made a comparison to other external consensus forecasts. Management made updates to the scenarios and weightings in 2022 to reflect a more severe downturn with a slower recovery. The weightings applied continue to recognise the uncertainties posed by high inflation, higher interest rates and the impact of the UK leaving the EU. We found that the changes to scenario weights appropriately captured the economic uncertainty and the non-linear distribution of losses across a reasonable range, and are broadly consistent with external forecasts. Overall, we concluded that management’s scenarios and associated weights were reasonable.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 121


Key audit matter	How our audit addressed the key audit matter
	In model and post model JAs We considered whether management had identified in model and post model judgemental adjustments where material risks were not captured in the modelled loss allowances, and whether appropriate methodologies were applied in their calculation. This included adjustments in place to address modelling and operational limitations highlighted by the economic conditions caused by high inflationary environment, rising interest rates, the Russia / Ukraine conflict and supply chain issues. Corporate post model JAs Corporate loan JAs totalling £61m were used to adjust for sector specific risks that were not sufficiently captured by the rating models, or to account for the time delay between the most recent risk rating and the period end, as the stage 2 provision may otherwise be understated. The JAs seek to identify customers and sectors with higher risk classifications and transfer these loans from stage 1 to stage 2, or increase the PDs of loans in higher risk industries already in stage 2. We critically assessed management’s JA methodologies and sector analysis used in the calculations. We used our economics and restructuring experts to provide input on sector risks. We have assessed the reasonableness of those sectors and counterparties classified as higher risk, as well as the risk classifications identified to be moved to stage 2. Where customers were transferred into stage 2, we assessed the coverage ratio of ECL in the stage 2 population pre and post the JA, to assess whether the increase in ECL applied by management was appropriate. For customers in stage 2 receiving a PD uplift, we tested this by identifying alternative stress scenarios to verify that the uplift applied by management was within a reasonable range. We also tested the accuracy of management's calculation of both JAs. Retail in model and post model JAs We critically assessed management's in model and post model JAs, using our modelling specialists to assess the appropriateness of the significant assumptions and methodologies used in the adjustments for the Retail portfolios. We independently re- performed the calculations for a sample of the judgemental adjustments, in particular to challenge the appropriateness of: –In model JAs used to address data limitations in the mortgages model in relation to expected write-offs for accounts that are interest only, Buy-to-Let or in long-term arrears; and –JAs introduced to assess the impact of affordability pressures on mortgages and unsecured lending repayments. We also tested the accuracy of management's calculation of the retail JAs. Individually assessed corporate Stage 3 cases For a sample of credit impaired loans we evaluated the specific circumstances of the borrower and determined whether key judgements were appropriate. We tested the valuation of collateral held, and challenged management on subjective estimates and assumptions. Where applicable, we engaged our real estate experts to critically assess the collateral valuation. We also re-performed management’s impairment calculations and tested key inputs. Overall, we were satisfied with the sufficiency and appropriateness of the JAs included in the estimate of ECL.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 122


Key audit matter	How our audit addressed the key audit matter
Valuation of defined benefit pension surplus (group and parent)
Refer to the Board Audit Committee Chair’s report, note 1 (Accounting Policies), note 30 (Retirement Benefit Plans). The group operates a number of defined benefit pension schemes. The main scheme is the Santander (UK) Group Pension Scheme (the scheme). The scheme is in a net surplus position of £1,050m as at 31 December 2022. Defined benefit obligations: The valuation of the defined benefit obligations of the scheme is dependent on a number of forward looking assumptions, the most sensitive of which are the discount rate, price inflation and life expectancy. These assumptions are unobservable and complex to estimate due to the long duration of the pension obligations. Small changes in these assumptions can have a material impact on the valuation. Management refreshes the valuation methodology and assumptions each year with the assistance of external experts. During 2022, management revised the methodology used to calculate the discount rate and price inflation. It continues to use section specific discount and inflation rates in order to reflect the duration and profile of each section of the scheme. Additionally, mortality rates were updated to reflect the latest data for life expectancy. The valuation of the defined benefit obligation is complex and judgemental and therefore represents a key audit matter. Illiquid pension assets: The pension scheme assets include certain illiquid assets, including direct property investments and complex pooled investment vehicles (“PIVs”) consisting of unquoted equities, unquoted corporate bonds and other assets not quoted in active markets. The valuation of these assets are derived from inputs or data that are unobservable. The directly held property is valued using bespoke valuation methods taking both the nature of the properties and the tenancy schedules as inputs to derive their fair value. The complex PIVs include private equity investments and infrastructure and property assets, and there can be a time lag in obtaining valuations. Each complex PIV is valued by the respective investment manager on either a Bid or Net Asset Value (NAV) basis. Where there is a time lag between the NAV and the balance sheet date, management adjusts the value of the assets for any cash movements where necessary and considers if any other adjustments for movements in fair value are needed. The lack of observable prices and the bespoke valuation methods for the directly held property, as well the unobservable nature of the assets in the complex PIVs, give rise to a high level of estimation uncertainty and complexity in the valuation and therefore represent a key audit matter.	Testing of key management controls We understood and evaluated the design and operating effectiveness of the key controls over the determination of the significant actuarial assumptions used in calculating the valuation of future pension obligations and the valuation of the scheme’s illiquid assets. These controls included: –The Annual Review and approval of key methodologies and assumptions; –The Quarterly review and approval of the financial and demographic assumptions based on the actuary’s report and other data inputs; –Assessing the reliability of investment manager valuations by comparing the prior year unaudited NAV statements against the funds' corresponding audited financial statements; –Assessing the reasonableness of the property valuations recognised at period ends, as obtained from the custodian, by comparing them on a quarterly basis against the valuation obtained from management’s property valuer expert. Differences are analysed and investigated; –Assessing the appropriateness of lagged valuations and potential fair value movements since the last valuation date with reference to relevant market information, such as industry indices; and –Assessing controls performed at certain third party experts and performing complementary end user controls. We noted no significant exceptions in the design or operating effectiveness of the above controls. We also performed the following substantive procedures: Defined benefit obligations: –We engaged our actuarial experts to evaluate the estimates made by management in determining the key financial and life expectancy assumptions used in the calculation of the liability. We assessed the reasonableness of the methodologies and assumptions adopted using our knowledge of market practice and industry developments, independently developed benchmarks and external market data. We used sensitivity analysis to determine the impact of alternative assumptions; –We considered the objectivity and competence of management’s actuarial expert. We reviewed the expert’s IAS 19 report and discussed with the expert the methods adopted to determine the valuation of the obligations; and –We evaluated the appropriateness of financial statement disclosures. Illiquid pension assets: –For direct property, we obtained the valuation report prepared by management's expert and, with the support of our own expert, assessed the reasonableness of the methodology and key assumptions used by the valuer. We reviewed the reasonableness of the valuation for a sample of properties; –For complex PIVs, we obtained third-party confirmations directly from investment managers and compared these against management’s reported valuations. We recalculated management’s valuation and compared it to the third-party confirmations, and we understood and tested material capital changes in the period between the valuation and the entity’s balance sheet date where there was a time lag; –We assessed whether there was evidence which corroborated or contradicted the valuation. For example; we agreed NAV statements from investment managers to audited fund financial statements where they were available, analysed potential fair value movements since the last valuation date with reference to relevant market information, such as quoted indices and recent transactions, and reviewed controls reports for the investment managers where available; –We considered the objectivity and competence of management’s property valuation expert and the investment managers. Based on the evidence obtained, we found the valuation of the Scheme’s defined benefit obligations and the valuation of the Scheme’s illiquid assets to be reasonable. We read and assessed the disclosures made in the financial statements, including the disclosures of the assumptions, and found them to be appropriate.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 123


Key audit matter	How our audit addressed the key audit matter
Impairment assessment of goodwill (group and parent)
Refer to the Board Audit Committee Chair’s report, note 1 (Accounting Policies) and note 20 (Intangible Assets). The group has a goodwill balance of £1.2bn at 31 December 2022, which relates to the Personal Financial Services Cash Generating Unit (CGU) within Santander UK plc (SUK). The UK economy and banking market is impacted by the rising interest rate environment. Specifically, the bank has seen an improving net interest margin, offset to an extent by the impact of inflationary pressures and the cost of living crisis on the cost base and expected credit losses. The carrying value of this asset is contingent upon future cash flows, the value of which has been impacted by these developments. Management performed impairment assessments using a value in use methodology and concluded that no impairment existed as at 31 December 2022. The impairment assessment is complex and involves subjective assumptions, specifically, the forecast cash flows, the discount rate and the terminal growth rate assumptions and the method for determining the amount of regulatory capital and carrying value of the Personal Financial Services CGU are judgemental. Due to the magnitude of this balance and these judgements, this impairment assessment represents a key audit matter.	We challenged and tested the reasonableness of management's methodology and key assumptions. Our work included the following: –We engaged our own expert to assist in the assessment of the reasonableness of the methodology and key assumptions over the determination of the carrying value of the Personal Financial Services CGU, the amount of capital to be retained in the business, the discount rate and the terminal growth rate. –We agreed the cash flow forecasts to the Board approved three-year plans and tested the reasonableness of adjustments to the plans included in the value in use model. –Evaluating the reasonableness of the forecasted cash flows, including comparing performance in recent years to the budgets and 3 year plans for the equivalent periods to assess the historical accuracy of the budgeting and forecasting process. Based on the procedures performed and evidence obtained, we found management’s conclusion that no impairments existed at 31 December 2022 to be appropriate. We assessed the disclosures made in the financial statements. We are satisfied that these disclosures are appropriate and in compliance with the accounting requirements.
Legal and regulatory matters (group and parent)
Refer to the Board Audit Committee Chair’s report, note 1 (Accounting Policies), note 29 (Provisions), note 31 (Contingent Liabilities and Commitments). Included within Provisions is the group’s best estimate of the cost of present obligations related to past events, including the impact of legal actions and regulatory investigations. Significant judgement may be required when accounting for provisions, including in determining whether a present obligation exists and in estimating the probability and amount of any outflows. These judgements are based on the specific facts available and often require specialist professional advice. There can be a wide range of possible outcomes and uncertainties, particularly in relation to legal actions and regulatory investigations. As a result it is sometimes not possible to make reliable estimates of the likelihood and amount of any potential outflows. The key matters are a dispute with a third party in relation to liability for PPI redress in respect of a specific portfolio and an investigation by German authorities into tax arbitrage transactions. The potential cost to the group of each of these matters is material and the assessment of present obligations involves judgement. These matters have been the subject of ongoing monitoring by those charged with governance. The provisions and disclosures in respect of these exposures represents a key audit matter.	We evaluated and challenged the provisioning methodologies and underlying assumptions used by management. Where no provision was made, we challenged management’s conclusion in the context of the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Our work included: –We understood the risks facing the group, the status of the investigations and the legal case. –We evaluated management’s assessment of the potential outcomes and associated probabilities. –We evaluated the advice received from management's external legal experts. We held discussions with these experts to confirm our understanding of their views on certain judgements applied by management and obtained a written confirmation of the key facts and status of each case. –We reviewed reports provided to governance committees and we discussed the status of the key matters with the Board Audit Committee. –We considered market practice in dealing with similar matters. Based on the procedures performed and evidence obtained, we found management’s conclusions to be reasonable. Given the uncertainty associated with the calculation of the provisions and the contingent liabilities, we evaluated the disclosures made in the financial statements. In particular, we focused on challenging management around whether the disclosures were sufficiently clear in highlighting the uncertainties. We considered the completeness of information disclosed, in particular where management concluded that it was not possible to determine a loss reliably, or that it was seriously prejudicial to disclose certain information. We evaluated the disclosures against the requirements of IAS 37. We found the disclosures to be appropriate.

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into

account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate.

The group comprises the company and a number of subsidiaries which predominantly operate within the UK. The company is the principal operating subsidiary

within the group. We considered which entities (“components”) required a full scope audit either due to being individually financially significant (defined as 15% of

adjusted profit before tax) or due to their risk characteristics, including a consideration of the history of misstatements due to fraud or error, in the context of the

group’s consolidated financial statements. We identified the significant audit risks and key audit matters which all relate to the company. Ultimately, we

determined that we would perform a full scope audit of the company. For this component the work is largely performed by PwC UK engagement teams, led by the

group audit partner, with the team structured in line with the Group’s operating segments.

We then considered the components in the group that had either financially significant or unusual account balances and therefore were required to be included in

our scope. Where this was the case, we performed an audit over these specific financial statement line items. We adopted this approach for Santander Consumer

(UK) plc, Cater Allen limited and Abbey National Property Investments.

Certain processes and controls supporting the group’s operations are performed as part of Banco Santander S.A.’s wider processes and controls in Spain, including

the hosting and monitoring of certain IT systems. In such instances, we instructed PwC Spain to perform certain audit procedures over these group operations.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 124

As part of the planning and execution of the audit, we worked closely with PwC Spain and the PwC UK component auditors throughout the year to ensure that the

procedures performed on our behalf were sufficient for our purposes. We reviewed the results of their work and held meetings with the auditors to discuss their

findings.

The procedures which we performed over the reporting units accounted for 92.9% of total operating income and 90.7% of total assets of the group.

The impact of climate risk on our audit

The group, in alignment with their parent company, Banco Santander S.A., has set out commitments to be a net zero bank by 2050. Further information on this

commitment is provided in the Sustainability and Responsible Banking section on page 11.

In planning and executing our audit, we considered the group’s governance framework and preliminary risk assessment processes. This, together with our

discussions with our own climate change experts, provided us with an understanding of the potential impact of climate change on the financial statements. We

specifically considered the potential impact on the mortgage lending, corporate lending and consumer finance portfolios. We determined that the key financial

statement line items and estimates which were more likely to be materially impacted by climate risks were those associated with expected credit losses and future

cash flows. In the current reporting period, the group concluded that there is no material impact on the financial statements and the more notable impacts of

climate change on the business are expected to arise in the medium to long term.

Whilst the group is targeting net zero carbon emissions by 2050, they are continuing to refine their plans to achieve this. The group has started to quantify some of

the impacts that may arise; however, the future financial impacts are uncertain given the medium to long term time horizon. We discussed with management and

the Audit Committee that the estimated financial impacts of climate change will need to be frequently reassessed and our expectation is that climate change

disclosures will continue to evolve as greater understanding of the actual and potential impacts on the group’s future operations is obtained.

Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative

considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line

items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:


	Financial statements - group	Financial statements - company
Overall materiality	£100 million (2021: £59 million).	£90 million (2021: £50 million).
How we determined it	5% of adjusted profit before tax (2021: 3% of adjusted profit before tax).	5% of adjusted profit before tax (2021: 4% of adjusted profit before tax), capped at the level which is used for the audit of the company as a component of the overall group.
Rationale for benchmark applied	We set materiality using a benchmark of profit before tax (PBT), adjusted for certain non-recurring items, as these items do not reflect the underlying business performance and are not expected to recur. PBT is a primary measure used by the shareholder in assessing the performance of the group and is a generally accepted benchmark for determining audit materiality.This benchmark is standard for listed entities and consistent with the wider industry. The prior year materiality benchmark was set at 3% of actual adjusted PBT, which was based on forecasted adjusted PBT and not subsequently revised upwards when actual results exceeded forecast.	We set materiality using a benchmark of profit before tax (PBT), adjusted for certain non-recurring items and other transactions not reflective of the underlying business of the company. The materiality was then capped at the level which is used to audit the company as a component of the overall group. PBT is a primary measure used by the shareholder in assessing the performance of the company and is a generally accepted benchmark for determining audit materiality. This benchmark is standard for listed entities and consistent with the wider industry. The prior year materiality benchmark was set at 4% of actual adjusted PBT, which was based on forecasted adjusted PBT, and not subsequently revised upwards when actual results exceeded forecast.

For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated

across components was between £10 million and £90 million.

We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds

overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances,

classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% (2021: 75%) of overall materiality,

amounting to £75 million (2021: £44 million) for the group financial statements and £67 million (2021: £37 million) for the company financial statements.

In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the

effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.

We agreed with the Board Audit Committee that we would report to them misstatements identified during our audit above £4 million (group audit) (2021: £4

million) and £4 million (company audit) (2021: £4 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative

reasons.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 125

Conclusions relating to going concern

Our evaluation of the directors’ assessment of the group's and the company’s ability to continue to adopt the going concern basis of accounting included:

–A risk assessment to identify factors that could impact the going concern basis of accounting, including the current and forecast financial performance,

regulatory metrics and the sector in which the group operates;

–Understanding and evaluation of the group's three year plan and the group’s stress testing of liquidity and regulatory capital performed by management;

–Review of regulatory correspondence and reports provided to governance forums, and testing of the total capital resources and liquidity financing facilities;

–Consideration of credit rating agency ratings; and

–Reviewing the appropriateness of the disclosures made in the Annual report in relation to going concern.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast

significant doubt on the group's and the company’s ability to continue as a going concern for a period of at least twelve months from when the financial

statements are authorised for issue.

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial

statements is appropriate.

However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the group's and the company's ability to continue as

a going concern.

In relation to the directors’ reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation

to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

Reporting on other information

The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are

responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit

opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information

is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an

apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the

financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material

misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.

With respect to the Strategic report and Directors' report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.

Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.

Strategic report and Directors' report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors' report for the year ended 31

December 2022 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.

In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material

misstatements in the Strategic report and Directors' report.

Corporate governance statement

ISAs (UK) require us to review the directors’ statements in relation to going concern, longer-term viability and that part of the corporate governance statement

relating to the company’s compliance with the provisions of the UK Corporate Governance Code, which the Listing Rules of the Financial Conduct Authority specify

for review by auditors of premium listed companies. Our additional responsibilities with respect to the corporate governance statement as other information are

described in the Reporting on other information section of this report.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included

within the Directors' report is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to

add or draw attention to in relation to:

–The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks;

–The disclosures in the Annual Report that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these

are being managed or mitigated;

–The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing

them, and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from

the date of approval of the financial statements;

–The directors’ explanation as to their assessment of the group's and company’s prospects, the period this assessment covers and why the period is appropriate;

and

–The directors’ statement as to whether they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they

fall due over the period of its assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 126

Our review of the directors’ statement regarding the longer-term viability of the group and company was substantially less in scope than an audit and only

consisted of making inquiries and considering the directors’ process supporting their statement; checking that the statement is in alignment with the relevant

provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and

understanding of the group and company and their environment obtained in the course of the audit.

In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is

materially consistent with the financial statements and our knowledge obtained during the audit:

–The directors’ statement that they consider the Annual Report, taken as a whole, is fair, balanced and understandable, and provides the information necessary for

the members to assess the group’s and company's position, performance, business model and strategy;

–The section of the Annual Report that describes the review of effectiveness of risk management and internal control systems; and

–The section of the Annual Report describing the work of the Board Audit Committee.

We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the company’s compliance with the Code does not

properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.

Responsibilities for the financial statements and the audit

Responsibilities of the directors for the financial statements

As explained more fully in the Statement of Directors' responsibilities, the directors are responsible for the preparation of the financial statements in accordance

with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they

determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing,

as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the

company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for presenting and marking up the consolidated financial statements in compliance with the requirements set out in the Delegated

Regulation 2019/815 on European Single Electronic Format (“ESEF Regulation”).

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud

or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted

in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,

individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to

detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including

fraud, is detailed below.

Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of

banking laws and regulations, including regulatory reporting requirements and conduct of business, and we considered the extent to which non-compliance might

have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the

Companies Act 2006 and relevant tax legislation. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial

statements (including the risk of override of controls), and determined that the principal risks were related to management bias through judgements and

assumptions in significant accounting estimates. The group engagement team shared this risk assessment with the component auditors so that they could include

appropriate audit procedures in response to such risks in their work. Audit procedures performed by the group engagement team and/or component auditors

included:

–Discussions with management, including the Chief Financial Officer, Internal Audit and those charged with governance in relation to known or suspected

instances of non-compliance with laws and regulation and fraud;

–Evaluation of the completeness of matters identified by management which might impact financial reporting, including but not restricted to the procedures

below;

–Evaluation and testing of the operating effectiveness of certain management’s entity level controls designed to prevent and detect irregularities, in particular

their code of conduct and whistleblowing helpline;

–Assessment of matters reported on the group’s whistleblowing helpline and the results of management’s investigation of such matters;

–Observing the effectiveness of key governance forums, reviewing management information presented and reviewing minutes of executive management

meetings;

–Reviewing key correspondence with the Financial Conduct Authority and Prudential Regulation Authority and meeting with these regulators during the year;

–Challenging assumptions and judgements made by management in their significant accounting estimates, in particular in relation to the expected credit loss

allowance for loans and advances to customers, legal and regulatory matters, the valuation of the defined benefit pension surplus and the impairment

assessment of goodwill and investments in subsidiaries (see related key audit matters above);

–Identifying and testing journal entries, in particular any journal entries posted by senior management and period end adjustments; and

–Incorporating unpredictability into the nature, timing and/or extent of our testing.

There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and

regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due

to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional

misrepresentations, or through collusion.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 127

Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically

involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based

on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is

selected.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This

description forms part of our auditors’ report.

It is also our responsibility to assess whether the consolidated financial statements have been prepared, in all material respects, in compliance with the

requirements laid down in the ESEF Regulation.

Use of this report

This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies

Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this

report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

Companies Act 2006 exception reporting

Under the Companies Act 2006 we are required to report to you if, in our opinion:

–we have not obtained all the information and explanations we require for our audit; or

–adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or

–certain disclosures of directors’ remuneration specified by law are not made; or

–the company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Report on other legal and regulatory requirements

We have checked the compliance of the consolidated financial statements of the Group as at 31 December 2022 with the relevant statutory requirements set out

in the ESEF Regulation that are applicable to financial statements. That is, for the Group:

–The consolidated financial statements are prepared in a valid xHTML format;

–The XBRL markup of the consolidated financial statements uses the core taxonomy and the common rules on markups specified in the ESEF regulation.

In our opinion, the consolidated financial statements of the Group as at 31 December 2022, identified as PTCQB104N23FMNK2RZ28-2022-12-31.zip, have been

prepared, in all material respects, in compliance with the requirements laid down in the ESEF Regulation.

Appointment

Following the recommendation of the Board Audit Committee, we were appointed by the members on 31 March 2016 to audit the financial statements for the

year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted engagement is 7 years, covering the years ended 31 December

2016 to 31 December 2022.

Other matter

Other Code provisions

The directors have prepared a corporate governance statement and requested that we review it as though the company were a premium listed company. We have

nothing to report in respect of the requirement for the auditors of premium listed companies to report when the directors’ statement relating to the company’s

compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the

auditors.

Ian Godsmark (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

1 March 2023

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 128

Consolidated Income Statement

For the years ended 31 December


		2022	2021	2020
	Notes	£m	£m	£m
Interest and similar income	3	6,708	4,762	5,031
Interest expense and similar charges	3	(2,283)	(813)	(1,643)
Net interest income		4,425	3,949	3,388
Fee and commission income	4	839	697	680
Fee and commission expense	4	(509)	(411)	(361)
Net fee and commission income		330	286	319
Other operating income	5	201	264	145
Total operating income		4,956	4,499	3,852
Operating expenses before credit impairment (charges)/write-backs, provisions and charges	6	(2,343)	(2,510)	(2,390)
Credit impairment (charges)/write-backs	8	(320)	233	(638)
Provisions for other liabilities and charges	8	(419)	(377)	(264)
Total operating credit impairment (charges)/write-backs, provisions and charges		(739)	(144)	(902)
Profit from continuing operations before tax		1,874	1,845	560
Tax on profit from continuing operations	9	(480)	(492)	(121)
Profit from continuing operations after tax		1,394	1,353	439
Profit from discontinued operations after tax	42	—	31	32
Profit after tax		1,394	1,384	471

Attributable to:
Equity holders of the parent		1,394	1,365	452
Non-controlling interests		—	19	19
Profit after tax		1,394	1,384	471

The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 129

Consolidated Statement of Comprehensive Income

For the years ended 31 December


	2022	2021	2020
	£m	£m	£m
Profit after tax	1,394	1,384	471
Other comprehensive (expense)/income that may be reclassified to profit or loss subsequently:
Movement in fair value reserve (debt instruments):
- Change in fair value	(278)	(111)	114
- Income statement transfers	247	110	(107)
- Taxation	11	(2)	(2)
	(20)	(3)	5
Cash flow hedges:
- Effective portion of changes in fair value	425	(873)	971
- Income statement transfers	(2,129)	358	(809)
- Taxation	469	141	(52)
	(1,235)	(374)	110
Currency translation on foreign operations	—	—	—
Net other comprehensive (expense)/income that may be reclassified to profit or loss subsequently	(1,255)	(377)	115
Other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently:
Pension remeasurement:
- Change in fair value	(722)	1,264	(505)
- Taxation	267	(419)	133
	(455)	845	(372)
Own credit adjustment:
- Change in fair value	29	—	(3)
- Taxation	(9)	—	—
	20	—	(3)
Net other comprehensive (expense)/income that will not be reclassified to profit or loss subsequently	(435)	845	(375)
Total other comprehensive (expense)/income net of tax	(1,690)	468	(260)
Total comprehensive (expense)/income	(296)	1,852	211

Attributable to:
Equity holders of the parent	(296)	1,833	194
Non-controlling interests	—	19	17
Total comprehensive (expense)/income	(296)	1,852	211

The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 130

Consolidated Balance Sheet(1)

At 31 December


		2022	2021
	Notes	£m	£m
Assets
Cash and balances at central banks		44,190	48,139
Derivative financial instruments	11	2,407	1,681
Other financial assets at fair value through profit or loss	12	129	185
Loans and advances to customers	13	219,716	210,094
Loans and advances to banks		992	1,169
Reverse repurchase agreements - non trading	16	7,348	12,683
Other financial assets at amortised cost	17	156	506
Macro hedge of interest rate risk		(2,657)	77
Financial assets at fair value through other comprehensive income	18	6,024	5,851
Interests in other entities	19	252	201
Intangible assets	20	1,550	1,545
Property, plant and equipment	21	1,513	1,548
Current tax assets		478	347
Retirement benefit assets	30	1,050	1,572
Other assets		2,016	1,500
Assets held for sale	42	49	—
Total assets		285,213	287,098
Liabilities
Derivative financial instruments	11	951	777
Other financial liabilities at fair value through profit or loss	22	803	803
Deposits by customers	23	195,568	192,926
Deposits by banks	24	28,525	33,855
Repurchase agreements - non trading	25	7,982	11,718
Debt securities in issue	26	31,531	25,520
Subordinated liabilities	27	2,332	2,228
Macro hedge of interest rate risk		95	122
Other liabilities	28	2,581	2,067
Provisions	29	378	364
Deferred tax liabilities		35	579
Retirement benefit obligations	30	25	37
Total liabilities		270,806	270,996
Equity
Share capital	32	3,105	3,105
Share premium	32	5,620	5,620
Other equity instruments	33	1,956	2,191
Retained earnings		4,848	5,053
Other reserves		(1,122)	133
Total shareholders’ equity		14,407	16,102
Total equity		14,407	16,102
Total liabilities and equity		285,213	287,098

(1) For more information on balance sheet amounts restated see Note 44.

The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.

The Financial Statements were approved and authorised for issue by the Board on 1 March 2023 and signed on its behalf by:


Mike Regnier	Madhukar Dayal
Chief Executive Officer	Chief Financial Officer
Company Registered Number: 2294747

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 131

Consolidated Cash Flow Statement(1)

For the years ended 31 December


	2022	2021	2020
	£m	£m	£m
Cash flows from operating activities
Profit before tax	1,874	1,888	605

Adjustments for:
Non-cash items included in profit:
– Depreciation and amortisation	296	501	562
– Provisions for other liabilities and charges	419	381	273
– Impairment losses	284	(228)	672
– Other non-cash items	1,497	(147)	(267)
– Pension charge/(credit) for defined benefit pension schemes	28	38	38
	2,524	545	1,278
Net change in operating assets and liabilities:
– Cash and balances at central banks	275	(659)	(52)
– Derivative assets	(726)	1,725	(90)
– Other financial assets at fair value through profit or loss	877	1,007	1,603
– Loans and advances to banks and customers	(9,966)	(971)	(2,654)
– Reverse repurchase agreements - non trading	6,818	7,024	3,924
– Other assets	(574)	324	(340)
– Deposits by banks and customers	(3,128)	10,735	19,977
– Repurchase agreements - non trading	(4,145)	(7,550)	(2,958)
– Derivative liabilities	174	(807)	136
– Other financial liabilities at fair value through profit or loss	(973)	(1,109)	(1,618)
– Debt securities in issue	3,120	(329)	(223)
– Other liabilities	(98)	(603)	(921)
	(8,346)	8,787	16,784
Corporation taxes paid	(405)	(427)	(159)
Effects of exchange rate differences	1,383	(542)	410
Net cash flows from operating activities	(2,970)	10,251	18,918
Cash flows from investing activities
Purchase of property, plant and equipment and intangible assets	(496)	(613)	(373)
Proceeds from sale of property, plant and equipment and intangible assets	159	437	166
Purchase of financial assets at amortised cost and financial assets at FVOCI	(2,884)	(1,256)	(3,015)
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at FVOCI	3,023	4,509	9,858
Net cash flows from investing activities	(198)	3,077	6,636
Cash flows from financing activities
Issue of other equity instruments	750	210	—
Issue of debt securities and subordinated notes	4,794	2,878	5,614
Issuance costs of debt securities and subordinated notes	(16)	(6)	(13)
Repayment of debt securities and subordinated notes	(3,076)	(11,914)	(12,037)
Disposal of non-controlling interests	—	(181)	—
Repurchase of other equity instruments	(985)	(210)	—
Dividends paid on ordinary shares	(1,014)	(1,358)	(129)
Dividends paid on preference shares and other equity instruments	(150)	(147)	(148)
Dividends paid on non-controlling interests	—	—	(15)
Principal elements of lease payments	(26)	(25)	(45)
Net cash flows from financing activities	277	(10,753)	(6,773)
Change in cash and cash equivalents	(2,891)	2,575	18,781
Cash and cash equivalents at beginning of the year	49,254	46,697	27,871
Effects of exchange rate changes on cash and cash equivalents	121	(18)	45
Cash and cash equivalents at the end of the year	46,484	49,254	46,697

Cash and cash equivalents consist of:
Cash and balances at central banks	44,190	48,139	41,250
Less: restricted balances	(2,223)	(2,498)	(1,839)
	41,967	45,641	39,411

Other cash equivalents: Loans and advances to banks - Non trading	904	1,074	1,435
Other cash equivalents: Reverse repurchase agreements	3,613	2,539	5,851
Cash and cash equivalents at the end of the year	46,484	49,254	46,697

(1) For more information on cash flows and amounts restated see Note 34.

The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 132

Consolidated Statement of Changes in Equity


				Other reserves					Non- controlling interests
	Share capital	Share premium	Other equity instruments	Fair value	Cash flow hedging	Currency translation	Retained earnings
	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 2022	3,105	5,620	2,191	25	107	1	5,053	16,102	—	16,102
Profit after tax	—	—	—	—	—	—	1,394	1,394	—	1,394
Other comprehensive (expense)/income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	(20)	—	—	—	(20)	—	(20)
- Cash flow hedges	—	—	—	—	(1,235)	—	—	(1,235)	—	(1,235)
- Pension remeasurement	—	—	—	—	—	—	(455)	(455)	—	(455)
- Own credit adjustment	—	—	—	—	—	—	20	20	—	20
Total comprehensive income	—	—	—	(20)	(1,235)	—	959	(296)	—	(296)
Issue of other equity instruments	—	—	750	—	—	—	—	750	—	750
Repurchase of other equity instruments	—	—	(985)	—	—	—	—	(985)	—	(985)
Dividends on ordinary shares	—	—	—	—	—	—	(1,014)	(1,014)	—	(1,014)
Dividends on preference shares and other equity instruments	—	—	—	—	—	—	(150)	(150)	—	(150)
At 31 December 2022	3,105	5,620	1,956	5	(1,128)	1	4,848	14,407	—	14,407

At 1 January 2021	3,105	5,620	2,191	28	481	1	4,348	15,774	162	15,936
Profit after tax	—	—	—	—	—	—	1,365	1,365	19	1,384
Other comprehensive (expense)/income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	(3)	—	—	—	(3)	—	(3)
- Cash flow hedges	—	—	—	—	(374)	—	—	(374)	—	(374)
- Pension remeasurement	—	—	—	—	—	—	845	845	—	845
Total comprehensive income	—	—	—	(3)	(374)	—	2,210	1,833	19	1,852
Issue of other equity instruments	—	—	210	—	—	—	—	210	—	210
Repurchase of other equity instruments	—	—	(210)	—	—	—	—	(210)	—	(210)
Disposal of non-controlling interests	—	—	—	—	—	—	—	—	(181)	(181)
Dividends on ordinary shares	—	—	—	—	—	—	(1,358)	(1,358)	—	(1,358)
Dividends on preference shares and other equity instruments	—	—	—	—	—	—	(147)	(147)	—	(147)
At 31 December 2021	3,105	5,620	2,191	25	107	1	5,053	16,102	—	16,102

At 1 January 2020	3,105	5,620	2,191	23	371	1	4,546	15,857	160	16,017
Profit after tax	—	—	—	—	—	—	452	452	19	471
Other comprehensive (expense)/income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	5	—	—	—	5	—	5
- Cash flow hedges	—	—	—	—	110	—	—	110	—	110
- Pension remeasurement	—	—	—	—	—	—	(370)	(370)	(2)	(372)
- Own credit adjustment	—	—	—	—	—	—	(3)	(3)	—	(3)
Total comprehensive income	—	—	—	5	110	—	79	194	17	211
Dividends on ordinary shares	—	—	—	—	—	—	(129)	(129)	—	(129)
Dividends on preference shares and other equity instruments	—	—	—	—	—	—	(148)	(148)	—	(148)
Dividends on non-controlling interests	—	—	—	—	—	—	—	—	(15)	(15)
At 31 December 2020	3,105	5,620	2,191	28	481	1	4,348	15,774	162	15,936

The accompanying Notes to the Financial Statements form an integral part of these Consolidated Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 133

Company Balance Sheet(1)

At 31 December


		2022	2021
	Notes	£m	£m
Assets
Cash and balances at central banks		44,190	48,139
Derivative financial instruments	11	2,593	1,875
Other financial assets at fair value through profit or loss	12	59	94
Loans and advances to customers	13	235,071	222,861
Loans and advances to banks		992	1,200
Reverse repurchase agreements – non trading	16	7,348	12,683
Other financial assets at amortised cost	17	1,707	2,090
Macro hedge of interest rate risk		(2,932)	(283)
Financial assets at fair value through other comprehensive income	18	6,024	5,833
Interests in other entities	19	1,232	1,247
Intangible assets	20	1,529	1,524
Property, plant and equipment	21	918	935
Current tax assets	9	557	445
Deferred tax assets		76	—
Retirement benefit assets	30	1,050	1,572
Other assets		1,914	1,405
Assets held for sale	42	49	—
Total assets		302,377	301,620
Liabilities
Derivative financial instruments	11	2,024	1,242
Other financial liabilities at fair value through profit or loss	22	803	804
Deposits by customers	23	209,094	205,034
Deposits by banks	24	34,184	38,845
Repurchase agreements – non trading	25	7,982	11,718
Debt securities in issue	26	30,721	24,554
Subordinated liabilities	27	2,336	2,233
Macro hedge of interest rate risk		(5)	—
Other liabilities	28	2,396	1,938
Provisions	29	374	364
Deferred tax liabilities	9	—	598
Retirement benefit obligations	30	25	37
Total liabilities		289,934	287,367
Equity
Share capital	32	3,105	3,105
Share premium	32	5,620	5,620
Other equity instruments	33	1,956	2,191
Retained earnings		2,552	3,303
Other reserves		(790)	34
Total shareholders’ equity		12,443	14,253
Total liabilities and equity		302,377	301,620

(1) For more information on balance sheet amounts restated see Note 44.

The accompanying Notes to the Financial Statements form an integral part of these Financial Statements.

The profit after tax of the Company attributable to shareholders was £848m (2021: £786m). As permitted by Section 408 of the UK Companies Act 2006, the

Company’s individual Income Statement has not been presented.

The Financial Statements were approved and authorised for issue by the Board on 1 March 2023 and signed on its behalf by:


Mike Regnier	Madhukar Dayal
Chief Executive Officer	Chief Financial Officer

Company Registered Number: 2294747

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 134

Company Cash Flow Statement(1)

For the years ended 31 December


	2022	2021	2020
	£m	£m	£m
Cash flows from operating activities
Profit before tax	1,000	1,113	378

Adjustments for:
Non-cash items included in profit:
– Depreciation and amortisation	219	373	454
– Provisions for other liabilities and charges	419	385	264
– Impairment losses	284	(205)	609
– Other non-cash items	2,165	215	(238)
– Pension charge/(credit) for defined benefit pension schemes	25	29	26
	3,112	797	1,115
Net change in operating assets and liabilities:
– Cash and balances at central banks	275	(659)	(52)
– Derivative assets	(718)	1,694	(66)
– Other financial assets at fair value through profit or loss	857	984	1,584
– Loans and advances to banks and customers	(12,466)	4,449	(3,100)
– Reverse repurchase agreements – non trading	6,818	7,024	3,924
– Other assets	(594)	475	(310)
– Deposits by banks and customers	(1,034)	2,160	18,689
– Repurchase agreements – non trading	(4,145)	(7,546)	(2,956)
– Derivative liabilities	782	(1,507)	397
– Other financial liabilities at fair value through profit or loss	(973)	(1,108)	(1,645)
– Debt securities in issue	3,123	(380)	(52)
– Other liabilities	13	(534)	(790)
	(8,062)	5,052	15,623
Corporation taxes paid	(353)	(360)	(86)
Effects of exchange rate differences	1,406	(557)	430
Net cash flows from operating activities	(2,897)	6,045	17,460
Cash flows from investing activities
Investments in other entities	15	—	—
Purchase of property, plant and equipment and intangible assets	(305)	(327)	(184)
Proceeds from sale of property, plant and equipment and intangible assets	30	52	44
Purchase of financial assets at amortised cost and financial assets at FVOCI	(2,884)	(1,256)	(3,185)
Proceeds from sale and redemption of financial assets at amortised cost and financial assets at FVOCI	3,036	7,010	10,141
Net cash flows from investing activities	(108)	5,479	6,816
Cash flows from financing activities
Issue of other equity instruments	750	210	—
Issue of debt securities and subordinated notes	4,191	2,876	5,610
Issuance costs of debt securities and subordinated notes	(13)	(4)	(10)
Repayment of debt securities and subordinated notes	(2,636)	(10,282)	(10,782)
Repurchase of other equity instruments	(985)	(210)	—
Dividends paid on ordinary shares	(1,014)	(1,358)	(129)
Dividends paid on preference shares and other equity instruments	(150)	(147)	(148)
Principal elements of lease payments	(24)	(23)	(43)
Net cash flow from financing activities	119	(8,938)	(5,502)
Change in cash and cash equivalents	(2,886)	2,586	18,774
Cash and cash equivalents at beginning of the year	49,254	46,686	27,867
Effects of exchange rate changes on cash and cash equivalents	116	(18)	45
Cash and cash equivalents at the end of the year	46,484	49,254	46,686

Cash and cash equivalents consist of:
Cash and balances at central banks	44,190	48,139	41,250
Less: regulatory minimum cash balances	(2,223)	(2,498)	(1,839)
	41,967	45,641	39,411
Other cash equivalents: Loans and advances to banks - Non trading	904	1,074	1,424
Other cash equivalents: Reverse repurchase agreements	3,613	2,539	5,851
Cash and cash equivalents at the end of the year	46,484	49,254	46,686

(1) For more information on cash flows and amounts restated see Note 34.

The accompanying Notes to the Financial Statements form an integral part of these Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 135

Company Statement of Changes in Equity

For the years ended 31 December


				Other reserves
	Share capital	Share premium	Other equity instruments	Fair value	Cash flow hedging	Retained earnings	Total
	Share capital	Share premium	Other equity instruments	Fair value	Cash flow hedging	Retained earnings	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2022	3,105	5,620	2,191	26	8	3,303	14,253
Profit after tax	—	—	—	—	—	848	848
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	(21)	—	—	(21)
- Cash flow hedges	—	—	—	—	(803)	—	(803)
- Pension remeasurement	—	—	—	—	—	(455)	(455)
- Own credit adjustment	—	—	—	—	—	20	20
Total comprehensive income	—	—	—	(21)	(803)	413	(411)
Issue of other equity instruments	—	—	750	—	—	—	750
Repurchase of other equity instruments	—	—	(985)	—	—	—	(985)
Dividends on ordinary shares	—	—	—	—	—	(1,014)	(1,014)
Dividends on preference shares and other equity instruments	—	—	—	—	—	(150)	(150)
At 31 December 2022	3,105	5,620	1,956	5	(795)	2,552	12,443

At 1 January 2021	3,105	5,620	2,191	29	267	3,177	14,389
Profit after tax	—	—	—	—	—	786	786
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	(3)	—	—	(3)
- Cash flow hedges	—	—	—	—	(259)	—	(259)
- Pension remeasurement	—	—	—	—	—	844	844
- Own credit adjustment	—	—	—	—	—	1	1
Total comprehensive income	—	—	—	(3)	(259)	1,631	1,369
Issue of other equity instruments	—	—	210	—	—	—	210
Repurchase of other equity instruments	—	—	(210)	—	—	—	(210)
Dividends on ordinary shares	—	—	—	—	—	(1,358)	(1,358)
Dividends on preference shares and other equity instruments	—	—	—	—	—	(147)	(147)
At 31 December 2021	3,105	5,620	2,191	26	8	3,303	14,253

At 1 January 2020	3,105	5,620	2,191	25	143	3,563	14,647
Profit after tax	—	—	—	—	—	261	261
Other comprehensive income, net of tax:
- Fair value reserve (debt instruments)	—	—	—	4	—	—	4
- Cash flow hedges	—	—	—	—	124	—	124
- Pension remeasurement	—	—	—	—	—	(367)	(367)
- Own credit adjustment	—	—	—	—	—	(3)	(3)
Total comprehensive income	—	—	—	4	124	(109)	19
Dividends on ordinary shares	—	—	—	—	—	(129)	(129)
Dividends on preference shares and other equity instruments	—	—	—	—	—	(148)	(148)
At 31 December 2020	3,105	5,620	2,191	29	267	3,177	14,389

The accompanying Notes to the Financial Statements form an integral part of these Financial Statements.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 136

1. ACCOUNTING POLICIES

These financial statements are prepared for Santander UK plc (the Company) and the Santander UK plc group (the Santander UK group) under the UK Companies

Act 2006. The principal activity of the Santander UK group is the provision of a wide range of banking and financial services to personal, business and corporate

customers. Santander UK plc is a public company, limited by shares and incorporated in England and Wales having a registered office at 2 Triton Square, Regent’s

Place, London, NW1 3AN. It is an operating company undertaking banking and financial services transactions.

Basis of preparation

These financial statements incorporate the financial statements of the Company and entities it controls (its subsidiaries) made up to 31 December each year. The

consolidated financial statements have been prepared on the going concern basis using the historical cost convention, except for financial assets and liabilities that

have been measured at fair value. An assessment of the appropriateness of the adoption of the going concern basis of accounting is disclosed in the statement of

going concern in the Directors’ report.

Compliance with International Financial Reporting Standards (IFRS)

The consolidated financial statements of the Santander UK group and the separate financial statements of the Company comply with UK-adopted International

Accounting Standards (IAS). The financial statements are also prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB),

including interpretations issued by the IFRS Interpretations Committee, as there are no applicable differences from IFRS as issued by the IASB for the periods

presented.

Disclosures required by IFRS 7 ‘Financial Instruments: Disclosure’ relating to the nature and extent of risks arising from financial instruments, and IAS 1

‘Presentation of Financial Statements’ relating to objectives, policies and processes for managing capital, have been included in the Risk review section of this

Annual Report. This information forms an integral part of these financial statements by this cross reference, is marked as audited, and is covered by the

Independent auditor's report.

Climate change

Santander UK continues to develop its assessment of the potential impacts that climate change and the transition to a low carbon economy may have on the assets

and liabilities recognised and presented in its financial statements.

Santander UK is mindful of its responsibilities as a responsible lender and is focused on ways to meet the objectives of the Paris Agreement on climate change and

to support the UK’s transition to a climate-resilient, net zero economy.

Santander UK's current climate change strategy focuses on three main areas to achieve Banco Santander's ambition to reach net zero emissions by 2050:

1. Managing climate risks by integrating climate considerations into risk management frameworks, screening and stress testing our portfolio for climate related

financial risks, and setting risk appetites to help steer our portfolio in line with the Paris Agreement,

2. Supporting our customers’ transition by developing products and services that promote a reduction in CO2 emissions, and

3. Reducing emissions in our operations and supply chain by focusing on continuous improvement in our operations, and environmental and energy management

systems in accordance with ISO14001 and 15001, promoting responsible procurement practices and employee engagement.

Santander UK's current climate change strategy and its view of the risks associated with climate change and the transition to a low carbon economy are reflected in

its critical judgements and accounting estimates, although climate change risk did not have a significant impact at 31 December 2022 and 2021, consistent with

management's assessment that climate change and the transition to a low carbon economy are not currently expected to have a meaningful impact on the viability

of the Santander UK group in the medium term.

At 31 December 2022 and 2021, management specifically considered the potential impact of climate change and the transition to a low carbon economy on:

–Loans and advances to customers (see Note 13 and the credit risk section of the Risk review). Some climate change risks arise due to the requirements of IFRS 9

and others relate to specific portfolios and sectors: 5 years,For Mortgages in Retail Banking and Commercial Real Estate lending in Corporate & Commercial

Banking, the value of property collateral might be affected by physical impacts related to the frequency and scale of extreme weather events, such as flood and

subsidence risk, or changing environmental performance standards for property.

–For automotive loans in Consumer Finance, the residual value of automotive vehicles might be impacted by diesel obsolescence and the transition to electric

vehicles.

–For corporate lending in Corporate & Commercial Banking, certain sectors give rise to fossil fuel exposures, such as Oil & Gas, Mining & Extraction and Power

Generation.

–Goodwill impairment assessment (see Note 20). Estimates underpinning the determination of whether or not goodwill balances are impaired are partly based

on forecast business performance beyond the time horizon for management's detailed plans.

Future changes to Santander UK's climate change strategy may impact Santander UK's critical judgements and accounting estimates and result in material

changes to financial results and the carrying values of certain assets and liabilities in future reporting periods.

Recent accounting developments

Disclosure of Accounting Policies – Amendments to IAS 1 and IFRS Practice Statement 2

In February 2021, the IASB amended IAS 1 Presentation of Financial Statements to require entities to disclose their material rather than their significant accounting

policies. To support this amendment, the IASB also amended IFRS Practice Statement 2 Making Materiality Judgements to provide guidance on how to apply the

concept of materiality. The amendments are effective for annual periods beginning on or after 1 January 2023 with earlier application permitted. The amendments

have been applied in preparing these financial statements and, consequently, only material accounting policy information is disclosed.

Future accounting developments

At 31 December 2022, for the Santander UK group, there were no other 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.

Comparative information

As required by US public company reporting requirements, these financial statements include two years of comparative information for the consolidated income

statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and related

notes.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 137

Material accounting policy information

The following material accounting policies have been applied in preparing these financial statements. For material accounting policies which involve the

application of judgements or accounting estimates that are determined to be critical to the preparation of these financial statements see 'Critical judgements and

accounting estimates'.

Consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by it and its

subsidiaries.

The acquisition method of accounting is used to account for the acquisition of subsidiaries which meet the definition of a business.

Business combinations between entities under common control (i.e. fellow subsidiaries of Banco Santander SA, the ultimate parent) are outside the scope of IFRS 3

– ‘Business Combinations’, and there is no other guidance for such transactions under IFRS. The Santander UK group elects to account for business combinations

between entities under common control at their book values in the acquired entity by including the acquired entity’s results from the date of the business

combination and not restating comparatives. Reorganisations of entities within the Santander UK group are also accounted for at their book values.

Credit protection entities established as part of significant risk transfer (SRT) transactions are not consolidated by the Santander UK group in cases where third

party investors have the exposure, or rights, to all of the variability of returns from the performance of the entities.

Revenue recognition

a) Interest income and expense

Interest and similar income comprise interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI and

interest income on hedging derivatives. Interest expense and similar charges comprises interest expense on financial liabilities measured at amortised cost, and

interest expense on hedging derivatives. Interest income on financial assets measured at amortised cost, investments in debt instruments measured at FVOCI and

interest expense on financial liabilities other than those at fair value through profit or loss (FVTPL) is determined using the effective interest rate method.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have

subsequently become credit-impaired (i.e. Stage 3), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e. net of

the ECL provision). For more information on stage allocations of credit risk exposures, see ‘Significant increase in credit risk’ in the ‘Santander UK group level –

credit risk management’ section of the Risk review.

b) Fee and commission income and expense

Fees and commissions that are not an integral part of the effective interest rate are recognised when the service is performed. Most fee and commission income is

recognised at a point in time. Certain commitment, upfront and management fees are recognised over time but are not material. For retail and corporate products,

fee and commission income consists principally of collection services fees, commission on foreign currencies, commission and other fees received from retailers

for processing credit card transactions, fees received from other credit card issuers for providing cash advances for their customers through the Santander UK

group’s branch and ATM networks, annual fees payable by credit card holders and fees for non-banking financial products.

For insurance products, fee and commission income consists principally of commissions and profit share arising from the sale of building and contents insurance

and life protection insurance. Commissions arising from the sale of buildings and contents insurance are recognised over the period of insurance cover, adjusted to

take account of cancelled policies. Profit share income from the sale of buildings and contents insurance which is not subject to any adjustment is recognised when

the profit share income is earned. Commissions and profit share arising from the sale of life protection insurance is subject to adjustment for cancellations of

policies within 3 years from inception.

Fee and commission income which forms an integral part of the effective interest rate of a financial instrument (for example certain loan commitment fees) is

recognised as an adjustment to the effective interest rate and recorded in ‘Interest income’.

c) Other operating income

Other operating income includes all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss

(comprising financial assets and liabilities held for trading, trading derivatives and other financial assets and liabilities at fair value through profit or loss), together

with related interest income, expense, dividends, and changes in fair value of any derivatives managed in conjunction with these assets and liabilities. Changes in

fair value of derivatives in a fair value hedging relationship are also recognised in other operating income. Other operating income also includes income from

operating lease assets, and profits and losses arising on the sales of property, plant and equipment and subsidiary undertakings.

Defined benefit pension schemes (see 'Critical judgements and accounting estimates')

A defined benefit scheme is a pension scheme that guarantees an amount of pension benefit to be provided, usually as a function of one or more factors such as

age, years of service or compensation. Pension costs are charged to ‘Administration expenses’, within the line item ‘Operating expenses before impairment losses,

provisions and charges’ with the net interest on the defined benefit asset or liability included within ‘Net interest income’ in the income statement. The asset or

liability recognised in respect of defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date, less the fair value

of scheme assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The assets of the schemes

are measured at their fair values at the balance sheet date.

The present value of the defined benefit obligation is estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary

growth to the date of pension payment, then discounted to present value using the yield applicable to high-quality AA rated corporate bonds of the same currency

and which have terms to maturity closest to the terms of the scheme liabilities, adjusted where necessary to match those terms. In determining the value of

scheme liabilities, demographic and financial assumptions are made by management about life expectancy, inflation, discount rates, pension increases and

earnings growth, based on past experience and future expectations. Financial assumptions are based on market conditions at the balance sheet date and can

generally be derived objectively.

Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data. Any surplus or deficit of scheme assets

over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered

through reduced contributions in the future or through refunds from the scheme.

Share-based payments

The Santander UK group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its

employees. Shares of the Santander UK group’s parent, Banco Santander SA are purchased in the open market by the Santander UK group (for the Employee

Sharesave scheme) or are purchased by Banco Santander SA or another Banco Santander subsidiary (including awards granted under the Long-Term Incentive Plan

and the Deferred Shares Bonus Plan) to satisfy share options or awards as they vest.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 138

Options granted under the Employee Sharesave scheme and awards granted under the Transformation Incentive Plan are accounted for as cash-settled share-

based payment transactions. Awards granted under the Long-Term Incentive Plan and Deferred Shares Bonus Plan are accounted for as equity-settled share-based

payment transactions.

The fair value of the options granted under the Employee Sharesave scheme is determined using an option pricing model, which takes into account the exercise

price of the option, the current share price, the risk-free interest rate, the expected volatility of the Banco Santander SA share price over the life of the option and

the dividend growth rate. The fair value of the awards granted for the Long-Term Incentive Plan was determined at the grant date using an option pricing model,

which takes into account the share price at grant date, the risk-free interest rate, the expected volatility of the Banco Santander SA share price over the life of the

award and the dividend growth rate.

Goodwill and other intangible assets (for goodwill see 'Critical judgements and accounting estimates')

Goodwill represents the excess of the cost of an acquisition, as well as the fair value of any interest previously held, over the fair value of the share of the

identifiable net assets of the acquired subsidiary, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in

intangible assets. Goodwill is tested for impairment annually, or more frequently when events or changes in circumstances dictate and carried at cost less

accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business

sold.

Other intangible assets are recognised if they arise from contractual or other legal rights or if they are capable of being separated or divided from Santander UK

and sold, transferred, licensed, rented or exchanged. The value of such intangible assets, where they are available for use, is amortised on a straight-line basis over

their useful economic life of three to seven years and the assets are reviewed annually for impairment indicators and tested for impairment where indicators are

present. Other intangible assets that are not yet available for use are tested for impairment annually or more frequently when events or changes in circumstances

dictate.

Software development costs are capitalised when they are direct costs associated with identifiable and unique software products that are expected to provide

future economic benefits and the cost of those products can be measured reliably. These costs include payroll, materials, services and directly attributable

overheads. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and

amortised on a straight-line basis over their useful life of three to seven years, unless the software is an integral part of the related computer hardware, in which

case it is treated as property, plant and equipment as described below. Capitalisation of costs ceases when the software is capable of operating as intended. Costs

of maintaining software are expensed as incurred.

Property, plant and equipment

Property, plant and equipment include owner-occupied properties (including leasehold properties), office fixtures and equipment and computer software.

Property, plant and equipment also includes operating leases where the Santander UK group is the lessor and right-of-use assets where the Santander UK group is

the lessee. Internally developed software meeting the criteria set out in ‘Goodwill and other intangible assets’ above and externally purchased software are

classified in property, plant and equipment where the software is an integral part of the related computer hardware (for example operating system of a computer).

Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life, as follows:


Owner-occupied properties	Not exceeding 50 years
Office fixtures and equipment	3 to 15 years
Computer software	3 to 7 years
Right-of-use assets	Shorter of the lease term or the useful life of the underlying asset
Operating lease assets - vehicles	2 to 4 years

Depreciation is not charged on freehold land and assets under construction. Depreciation of operating lease assets where the Santander UK group is the lessor is

described in 'Leases' below.

Financial instruments (for impairment of debt instrument financial assets see' Critical judgements and accounting estimates: Credit impairment losses')

a) Initial recognition and measurement

Financial assets and liabilities are initially recognised when the Santander UK group becomes a party to the contractual terms of the instrument. The Santander UK

group determines the classification of its financial assets and liabilities at initial recognition and measures a financial asset or financial liability at its fair value plus

or minus, in the case of a financial asset or financial liability not at FVTPL, transaction costs that are incremental and directly attributable to the acquisition or issue

of the financial asset or financial liability. Transaction costs of financial assets and financial liabilities carried at FVTPL are expensed in profit or loss. Immediately

after initial recognition, an expected credit loss (ECL) allowance is recognised for financial assets measured at amortised cost and investments in debt instruments

measured at FVOCI.

A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by

regulation or convention in the marketplace concerned. Regular way purchases of financial assets classified as loans and advances, and issues of equity or financial

liabilities measured at amortised cost are recognised on settlement date, being the date when the Santander UK group becomes a party to the contractual terms of

the instrument; all other regular way purchases and issues are recognised on trade date.

b) Financial assets and liabilities

i) Classification and subsequent measurement

The Santander UK group classifies its financial assets in the measurement categories of amortised cost, FVOCI and FVTPL.

Financial assets and financial liabilities are classified as FVTPL where there is a requirement to do so or where they are otherwise designated at FVTPL on initial

recognition. Financial assets and financial liabilities which are required to be held at FVTPL include:

–Financial assets and financial liabilities held for trading.

–Debt instruments that do not have solely payments of principal and interest (SPPI) characteristics. Otherwise, such instruments are measured at amortised cost

or FVOCI, and

–Equity instruments that have not been designated as held at FVOCI.

Financial assets and financial liabilities are classified as held for trading if they are derivatives or if they are acquired or incurred principally for the purpose of selling

or repurchasing in the near-term, or form part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit

taking.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 139

In certain circumstances, other financial assets and financial liabilities are designated at FVTPL where this results in more relevant information. This may arise

because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on

them on a different basis, where the assets and liabilities are managed and their performance evaluated on a fair value basis or, in the case of financial liabilities,

where it contains one or more embedded derivatives which are not closely related to the host contract.

The classification and measurement requirements for financial asset debt and equity instruments and financial liabilities are set out below.

Financial assets: debt instruments

Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective, such as loans and government and corporate

bonds. Classification and subsequent measurement of debt instruments depend on the Santander UK group’s business model for managing the asset, and the cash

flow characteristics of the asset.

Business model

The business model reflects how the Santander UK group manages the assets in order to generate cash flows and, specifically, whether the Santander UK group’s

objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of the

assets. If neither of these is applicable, such as where the financial assets are held for trading purposes, then the financial assets are classified as part of an ‘other’

business model and measured at FVTPL. Factors considered in determining the business model for a group of assets include past experience on how the cash flows

for these assets were collected, how the assets’ performance is evaluated and reported to key management personnel, and how risks are assessed and managed.

SPPI

Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Santander UK group assesses

whether the assets’ cash flows represent SPPI. In making this assessment, the Santander UK group considers whether the contractual cash flows are consistent

with a basic lending arrangement (i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that

is consistent with a basic lending arrangement). Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending

arrangement, the related asset is classified and measured at FVTPL.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.

Based on these factors, the Santander UK group classifies its debt instruments into one of the following measurement categories:

–Amortised cost – Financial assets that are held for collection of contractual cash flows where those cash flows represent SPPI, and that are not designated at

FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any ECL recognised and measured as presented in Note 13. Interest

income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method. When estimates of future cash flows are

revised, the carrying amount of the respective financial assets or financial liabilities is adjusted to reflect the new estimate discounted using the original effective

interest rate. Any changes are recognised in the income statement.

–FVOCI – Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent SPPI, and that are

not designated at FVTPL, are measured at FVOCI. Movements in the carrying amount are recognised in OCI, except for the recognition of impairment gains or

losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial

asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Other operating

income’. Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate method.

–FVTPL – Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument that is

subsequently measured at FVTPL, including any debt instruments designated at fair value, is recognised in profit or loss and presented in the income statement

in ‘Other operating income’ in the period in which it arises.

The Santander UK group reclassifies financial assets when and only when its business model for managing those assets changes. The reclassification takes place

from the start of the first reporting period following the change. Such changes are expected to be very infrequent.

Financial assets: equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer’s perspective, being instruments that do not contain a contractual obligation

to pay cash and that evidence a residual interest in the issuer’s net assets. All equity investments are subsequently measured at FVTPL, except where management

has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. When this election is used, fair value gains and losses are recognised in

OCI and are not subsequently reclassified to profit or loss, including on disposal. ECLs (and reversal of ECLs) are not reported separately from other changes in fair

value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the right to receive payments

is established. Gains and losses on equity investments at FVTPL are included in ‘Other operating income’ in the income statement.

Financial liabilities

Financial liabilities are classified as subsequently measured at amortised cost, except for:

–Financial liabilities at FVTPL: this classification is applied to derivatives and other financial liabilities designated as such at initial recognition. Gains or losses on

financial liabilities designated at FVTPL are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability

that is attributable to changes in the credit risk of that liability) and partially in profit or loss (the remaining amount of change in the fair value of the liability)

–Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the

consideration received for the transfer. In subsequent periods, the Santander UK group recognises any expense incurred on the financial liability, and

–Financial guarantee contracts and loan commitments.

Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits. The principal products

are Capital Guaranteed/Protected Products which give the customers a limited participation in the upside growth of an equity index. In the event the index falls in

price, a cash principal element is guaranteed/protected. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in

combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts

with customers. The cash principal element is accounted for as deposits by customers at amortised cost. The embedded derivatives are separated from the host

instrument and are separately accounted for as derivatives.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 140

Sale and repurchase agreements (including stock borrowing and lending)

Securities sold subject to a commitment to repurchase them at a predetermined price (repos) under which substantially all the risks and rewards of ownership are

retained by the Santander UK group remain on the balance sheet and a liability is recorded in respect of the consideration received. Securities purchased under

commitments to resell (reverse repos) are not recognised on the balance sheet and the consideration paid is recorded as an asset. The difference between the sale

and repurchase price is treated as trading income in the income statement, except where the repo is not treated as part of the trading book, in which case the

difference is recorded in interest income or expense.

Securities lending and borrowing transactions are generally secured, with collateral in the form of securities or cash advanced or received. Securities lent or

borrowed are not reflected on the balance sheet. Collateral in the form of cash received or advanced is recorded as a deposit or a loan. Collateral in the form of

securities is not recognised.

Day One profit adjustments

The fair value of a financial instrument on initial recognition is generally its transaction price (that is, the fair value of the consideration given or received). However,

sometimes the fair value will be based on other observable current market transactions in the same instrument, without modification or repackaging, or on a

valuation technique whose variables include only data from observable markets, such as interest rate yield curves, option volatilities and currency rates. When

such evidence exists, the Santander UK group recognises a trading gain or loss at inception (Day One gain or loss), being the difference between the transaction

price and the fair value. When significant unobservable parameters are used, the entire Day One gain or loss is deferred and is recognised in the income statement

over the life of the transaction until the transaction matures, is closed out, the valuation inputs become observable, or an offsetting transaction is entered into.

ii) Impairment of debt instrument financial assets

The Santander UK group assesses on a forward-looking basis the ECL associated with its debt instrument assets carried at amortised cost and FVOCI and with the

exposure arising from financial guarantee contracts and loan commitments. The Santander UK group recognises a loss allowance for such losses at each reporting

date. The measurement of ECL reflects:

–An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes.

–The time value of money, and

–Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts

of future economic conditions.

Grouping of instruments for losses measured on a collective basis

We typically group instruments and assess them for impairment collectively where they share risk characteristics (as described in the Credit risk section of the Risk

review) using one or more statistical models. Where we have used internal capital or similar models as the basis for our ECL models, this typically results in a

large number of relatively small homogenous groups which are determined by the permutations of the underlying characteristics in the statistical models. We

calculate separate collective provisions for instruments in Stages 1, 2 and 3 where the instrument is not individually assessed, as described below.

Individually assessed impairments (IAIs)

We assess significant Stage 3 cases individually. We do this for Corporate & Commercial Banking cases, but not for Business Banking cases in Retail Banking which

we assess collectively. To calculate the estimated loss, we estimate the future cash flows under several scenarios each of which uses case-specific factors and

circumstances. We then probability-weight the net present value of the cash flows under each scenario to arrive at a weighted average provision requirement. We

update our assessment process every quarter and more frequently if there are changes in circumstances that might affect the scenarios, cash flows or probabilities

we apply.

For more on how ECL is calculated, see the Credit risk section of the Risk review.

–Write-off

For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold and/or a claim made on any

mortgage indemnity guarantee or other insurance. In the corporate loan portfolio, there may be occasions where a write-off occurs for other reasons, such as

following a consensual restructure or refinancing of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than its

face value.

There is no threshold based on past due status beyond which all secured loans are written off as there can be significant variations in the time needed to enforce

possession and sale of the security, especially due to the different legal frameworks that apply in different regions of the UK. For unsecured loans, a write-off is

only made when all internal avenues of collecting the debt have been exhausted. Where appropriate the debt is passed over to external collection agencies. A

past due threshold is applied to unsecured debt where accounts that are 180 days past due are written off unless there is a dispute awaiting resolution. Contact

is made with customers with the aim to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried

out only when the steps described above have been undertaken without success.

All write-offs are assessed / made on a case-by-case basis, taking account of the exposure at the date of write-off, after accounting for the value from any

collateral or insurance held against the loan. The exception to this is in cases where fraud has occurred, where the exposure is written off once investigations

have been completed and the probability of recovery is minimal. The time span between discovery and write-off will be short and may not result in an

impairment loss allowance being raised. The write-off policy is regularly reviewed. Write-offs are charged against previously established loss allowances.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 141

–Recoveries

Recoveries of credit impairment charges are not included in the impairment loss allowance but are taken to income and offset against credit impairment

charges. Recoveries of credit impairment charges are classified in the income statement as ‘Credit impairment charges’.

iii) Modifications of financial assets

The treatment of a renegotiation or modification of the contractual cash flows of a financial asset normally depends upon whether the renegotiation or

modification is due to financial difficulties of the borrower or for other commercial reasons.

–Contractual modifications due to financial difficulties of the borrower: where the Santander UK group modifies the contractual conditions to enable the

borrower to fulfil their payment obligations, the asset is not derecognised. The gross carrying amount of the financial asset is recalculated as the present value

of the renegotiated/modified contractual cash flows that are discounted at the financial asset’s original EIR and any gain or loss arising from the modification is

recognised in the income statement.

–Contractual modifications for other commercial reasons: an assessment is performed to determine whether the terms of the new agreement are substantially

different from the terms of the existing agreement, after considering changes in the cash flows arising from the modified terms and the overall instrument risk

profile. Where terms are substantially different, such modifications are treated as a new transaction resulting in derecognition of the original financial asset, and

the recognition of a ‘new’ financial asset with any difference between the carrying amount of the derecognised asset and the fair value of the new asset is

recognised in the income statement as a gain or loss on derecognition. Where terms are not substantially different, the carrying value of the financial asset is

adjusted to reflect the present value of modified cash flows discounted at the original EIR with any gain or loss arising from modification recognised

immediately in the income statement.

Any other contractual modifications, such as where a regulatory authority imposes a change in certain contractual terms or due to legal reasons, are assessed on a

case-by-case basis to establish whether or not the financial asset should be derecognised. For IBOR reform see Note 41.

iv) Derecognition other than on a modification

Financial assets are derecognised when the rights to receive cash flows have expired or the Santander UK group has transferred its contractual right to receive the

cash flows from the assets and either: (1) substantially all the risks and rewards of ownership have been transferred; or (2) the Santander UK group has neither

retained nor transferred substantially all of the risks and rewards but has transferred control.

Financial liabilities are derecognised when extinguished, cancelled or expired.

c) Financial guarantee contracts and loan commitments

Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified

debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions

and others on behalf of customers to secure loans, overdrafts and other banking facilities.

Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of the amount of the loss allowance, and the premium

received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments are measured as the amount of the loss

allowance (determined in accordance with IFRS 9 as described in Credit risk section of the Risk review). The Santander UK group has not provided any commitment

to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.

For financial guarantee contracts and loan commitments, the loss allowance is recognised as a provision and charged to credit impairment charges in the income

statement. The loss allowance in respect of revolving facilities is classified in loans and advances to customers to the extent of any drawn balances. The loss

allowance in respect of undrawn amounts is classified in provisions. When amounts are drawn, any related loss allowance is transferred from provisions to loans

and advances to customers.

Derivative financial instruments (derivatives)

Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which

require no or little initial net investment and are settled at a future date. Transactions are undertaken in interest rate, cross currency, equity, residential property

and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded

interest rate futures, and equity index options.

Derivatives are held for risk management purposes. Derivatives are classified as held for trading unless they are designated as being in a hedge accounting

relationship. The Santander UK group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria, as further described in

‘Hedge accounting’ below.

Derivatives are recognised initially (on the date on which a derivative contract is entered into), and are subsequently remeasured, at their fair value. Fair values of

exchange-traded derivatives are obtained from quoted market prices. Fair values of over-the-counter derivatives are estimated using valuation techniques,

including discounted cash flow and option pricing models.

Certain derivatives may be embedded in hybrid contracts. If the hybrid contract contains a host that is a financial asset, then the Santander UK group assesses the

entire contract as described in the financial asset section above for classification and measurement purposes. Otherwise, embedded derivatives are treated as

separate derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative

would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated

at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing

embedded derivatives are not subsequently reassessed for separation unless either there has been a change in the terms of the contract which significantly

modifies the cash flows (in which case the contract is reassessed at the time of modification) or the contract has been reclassified (in which case the contract is

reassessed at the time of reclassification).

All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative, except where netting is permitted. The

method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments and, if the latter,

the nature of the risks being hedged. Gains and losses from changes in the fair value of derivatives held for trading are recognised in the income statement and

included in Other operating income.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 142

Offsetting financial assets and liabilities

Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off

the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Santander UK group is party

to a number of arrangements, including master netting arrangements under industry standard agreements which facilitate netting of transactions in jurisdictions

where netting agreements are recognised and have legal force. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities

for accounting purposes, as transactions are usually settled on a gross basis.

Hedge accounting

The Santander UK group applies hedge accounting to represent, to the maximum possible extent permitted under accounting standards, the economic effects of

its risk management strategies. Derivatives are used to hedge exposures to interest rates and exchange rates.

At the time a financial instrument is designated as a hedge (i.e. at the inception of the hedge), the Santander UK group formally documents the relationship

between the hedging instrument(s) and hedged item(s), its risk management objective and strategy for undertaking the hedge. The documentation includes the

identification of each hedging instrument and respective hedged item, the nature of the risk being hedged (including the benchmark interest rate being hedged in a

hedge of interest rate risk) and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the

hedged risk is to be assessed. Accordingly, the Santander UK group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the

hedging derivatives have been and will be highly effective in offsetting changes in the fair value attributable to the hedged risk during the period that the hedge is

designated. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Santander UK group can expect, and actual results indicate,

that changes in the fair value or cash flow of the hedged items are effectively offset by changes in the fair value or cash flow of the hedging instrument. If at any

point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued.

Where derivatives are held for risk management purposes, and when transactions meet the required criteria for documentation and hedge effectiveness, the

derivatives may be designated as either: (i) hedges of the change in fair value of recognised assets or liabilities or firm commitments (fair value hedges); (ii) hedges

of the variability in highly probable future cash flows attributable to a recognised asset or liability, or a forecast transaction (cash flow hedges); or (iii) a hedge of a

net investment in a foreign operation (net investment hedges). The Santander UK group applies fair value and cash flow hedge accounting, but not hedging of a net

investment in a foreign operation.

a) Fair value hedge accounting

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the

fair value of the hedged asset or liability that are attributable to the hedged risk. Where the hedged item is measured at amortised cost, the fair value changes due

to the hedged risk adjust the carrying amount of the hedged asset or liability. Changes in the fair value of portfolio hedged items are presented separately in the

consolidated balance sheet in macro hedge of interest rate risk and recognised in the income statement within other operating income. If the hedge no longer

meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income

statement. For fair value hedges of interest rate risk, the cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the

income statement using the effective interest method over the period to maturity. For portfolio hedged items, the cumulative adjustment is amortised to the

income statement using the straight-line method over the period to maturity.

b) Cash flow hedge accounting

The effective portion of changes in the fair value of qualifying cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The

gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income

statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the

criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the

forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that

was reported in equity is immediately transferred to the income statement. The Santander UK group is exposed to cash flow interest rate risk on its floating rate

assets, foreign currency risk on its fixed rate debt issuances denominated in foreign currency and equity price risk arises from the Santander UK group operating the

Employee Sharesave scheme. Cash flow hedging is used to hedge the variability in cash flows arising from these risks.

Securitisation transactions

The Santander UK group has entered into arrangements where undertakings have issued mortgage-backed and other asset-backed securities or have entered into

funding arrangements with lenders in order to finance specific loans and advances to customers. The Santander UK group has also entered into synthetic

securitisation arrangements, as part of significant risk transfer (SRT) transactions to reduce its risk-weighted assets, where undertakings have issued credit-linked

notes and deposited the funds raised as collateral for credit protection in respect of specific loans and advances to customers. As the Santander UK group has

retained substantially all the risks and rewards of the underlying assets, such financial instruments continue to be recognised on the balance sheet, and a liability

recognised for the proceeds of the funding transaction, or in the case of SRT transactions, collateral deposited.

Impairment of non-financial assets (for goodwill see 'Critical judgements and accounting estimates')

At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets)

and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review.

The impairment review comprises a comparison of the carrying value of the asset or cash generating unit with its recoverable amount: the higher of the asset’s or

cash-generating unit’s fair value less costs to sell and its value in use. The cash-generating unit represents the lowest level at which non-financial assets, including

goodwill, are monitored for internal management purposes and is not larger than an operating segment.

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the

measurement date. Value in use is calculated by discounting management’s expected future cash flows obtainable as a result of the asset’s continued use (after

making allowance for increases in regulatory capital requirements), including those resulting from its ultimate disposal, at a market-based discount rate on a pre-

tax basis. The recoverable amounts of goodwill have been based on value in use calculations.

For conducting goodwill impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.

Strategic Report

Sustainability and

Responsible Banking

Financial review

Governance

Risk review

Financial

statements

Shareholder

information


Annual Report 2022			Santander UK plc 143

Leases (as lessor)

Operating lease assets are recorded at cost and the difference between cost and residual value (RV) is depreciated over the life of the asset. Operating lease rental

income and depreciation is recognised on a straight-line basis over the life of the asset. After initial recognition, residual values are reviewed regularly, and any

changes are recognised prospectively through remaining depreciation charges.

Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Santander UK group’s net investment

in the leases. Finance lease income is allocated to accounting periods to reflect a constant periodic rate of return on the Santander UK group’s net investment

outstanding in respect of the leases and hire purchase contracts. A provision is recognised to reflect a reduction in any anticipated unguaranteed RV. A provision is

also recognised for voluntary termination of the contract by the customer, where appropriate.

Income taxes, including deferred taxes

The tax expense represents the sum of the income tax currently payable and deferred income tax.

A current tax liability for the current or prior period is measured at the amount expected to be paid to the tax authorities. Where the amount of the final tax liability

is uncertain or where a position is challenged by a taxation authority, the liability recognised is the most likely outcome. Where a most likely outcome cannot be

determined, a weighted average basis is applied.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised based on rates enacted or

substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items recognised in other

comprehensive income or directly in equity, in which case the deferred tax is also recognised in other comprehensive income or directly in equity.

Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the

intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Cash and cash equivalents

Following a decision by the IFRS Interpretations Committee in April 2022, Santander UK updated its accounting policy to exclude from cash and cash equivalents

Reserves Collateralisation Accounts (RCAs) balances held at the Bank of England relating to Santander UK’s participation in certain payments schemes. Instead,

RCAs balances are classified as restricted balances and included within 'change in operating assets' in the cash flow statement. Prior periods have been restated

see Note34.

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition,

including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks, reverse repurchase agreements

and short-term investments in securities. Balances with central banks represent amounts held at the Bank of England as part of the Santander UK group’s liquidity

management activities. It includes certain minimum cash ratio deposits held for regulatory purposes and reserves collateralised accounts in respect of Santander

UK’s participation in certain payments schemes which are required to be maintained with the Bank of England and are restricted balances.

Provisions and contingent liabilities (see 'Critical judgements and accounting estimates')

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be

necessary to settle the obligation, and it can be reliably estimated.

Customer remediation provisions are made for the estimated cost of making redress payments with respect to the past sales of products, using conclusions such

as the number of claims the number of those that will be upheld, the estimated average settlement per case and other related costs. Provision is made for the

anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Santander UK group has a detailed formal

plan for restructuring a business, has raised valid expectations in those affected by the restructuring, and has started to implement the plan or announce its main

features.

When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are

expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.

Loan commitments are measured as the amount of the loss allowance, determined in line with IFRS 9 as set out in the Credit risk section of the Risk review.

Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of

economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.

Critical judgements and accounting estimates