Allowance for expected credit losses

12 Months Ended

Dec. 31, 2025

Disclosure of allowance for expected credit losses [Abstract]

Note 21: Allowance for expected credit losses

The Group recognises an allowance for expected credit losses (ECLs) for loans and advances to customers and banks, other financial assets

held at amortised cost, financial assets (other than equity investments) measured at fair value through other comprehensive income and

certain loan commitment and financial guarantee contracts. At 31 December 2025, the Group’s expected credit loss allowance was

£3,228 million (2024: £3,481 million), of which £3,031 million (2024: £3,211 million) was in respect of drawn balances.

The Group’s total expected credit loss allowances were as follows:


	At 31 December 2025					At 31 December 2024
Allowance for expected credit losses	Stage 1 £m	Stage 2 £m	Stage 3 £m	POCI £m	Total £m	Stage 1 £m	Stage 2 £m	Stage 3 £m	POCI £m	Total £m
In respect of:
Loans and advances to banks	1	–	–	–	1	1	–	–	–	1
UK mortgages	51	207	309	159	726	53	273	335	187	848
Credit cards	145	248	121	–	514	149	297	133	–	579
Other	368	343	226	–	937	329	326	227	–	882
Retail	564	798	656	159	2,177	531	896	695	187	2,309
Commercial Banking	173	279	382	–	834	205	264	413	–	882
Other	–	–	–	–	–	–	–	–	–	–
Loans and advances to customers	737	1,077	1,038	159	3,011	736	1,160	1,108	187	3,191
Debt securities	4	–	1	–	5	3	–	1	–	4
Financial assets at amortised cost	742	1,077	1,039	159	3,017	740	1,160	1,109	187	3,196
Other assets	6	–	8	–	14	7	–	8	–	15
Provisions in relation to loan commitments and financial guarantees	113	83	1	–	197	142	126	2	–	270
Total	861	1,160	1,048	159	3,228	889	1,286	1,119	187	3,481
Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item)	3	–	–	–	3	4	–	–	–	4

The calculation of the Group’s expected credit loss allowances and provisions against loan commitments and guarantees, which are set out

above, requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below:

Critical accounting judgements and key sources of estimation uncertainty


Critical judgements:	Determining an appropriate definition of default against which a probability of default, exposure at default and loss given default parameter can be evaluated
	Establishing the criteria for a significant increase in credit risk (SICR)
	The individual assessment of material cases and the use of judgemental adjustments made to impairment modelling processes that adjust inputs, parameters and outputs to reflect risks not captured by models
Key source of estimation uncertainty:	Base case and multiple economic scenarios (MES) assumptions, including the rate of unemployment and the rate of change of house prices, required for creation of MES scenarios and forward-looking credit parameters

Definition of default

The probability of default (PD) of an exposure, both over a 12-month period and over its lifetime, is a key input to the measurement of the

ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely

to affect the ability to repay amounts due. The definition of default adopted by the Group is described in note 2(H) Impairment of financial

assets. A Stage 3 asset that is no longer credit-impaired is transferred back to Stage 2 as no general probation period is applied to assets in

Stage 3. UK mortgages is an exception to this rule where a probation period is enforced for non-performing forborne and defaulted

exposures in accordance with prudential regulation.

Significant increase in credit risk

An ECL allowance equivalent to 12 months’ expected losses is established against assets in Stage 1; assets classified as Stage 2 carry an ECL

allowance equivalent to lifetime expected losses. Assets are transferred from Stage 1 to Stage 2 when there has been a significant increase

in credit risk (SICR) since initial recognition. Credit-impaired assets are transferred to Stage 3 with a lifetime expected losses allowance. If

an exposure that is classified as Stage 2 no longer meets the SICR criteria, which in some cases capture customer behaviour in previous

periods, it is moved back to Stage 1.

The Group uses both quantitative and qualitative indicators to determine whether there has been a SICR for an asset. The setting of

precise trigger points combined with risk indicators requires judgement and the use of different trigger points may have a material impact

upon the ECL allowance. The Group monitors the effectiveness of SICR criteria on an ongoing basis.

For UK mortgages a doubling of PD since origination is set as a quantitative SICR trigger. All originations post IFRS 9 adoption incorporate

forward looking information, and for recent Interest Only accounts the likelihood of default occurring at the end of term. This is

supplemented by qualitative triggers including where customers have surpassed their original contractual term through use of term

extensions, where fraud is evident, or where an account is in arrears.

Note 21: Allowance for expected credit losses continued

For credit cards, loans and overdrafts an increase of three PD grades since origination on the retail master scale (RMS) shown below is set

as a quantitative SICR trigger. Assets are also assumed to have suffered a SICR if they have either been in arrears on three occasions, or in

default once, in the past 12 months.


RMS grade	1	2	3	4	5	6	7	8	9	10	11	12	13	14
PD boundary1 (%)	0.10	0.40	0.80	1.20	2.50	4.50	7.50	10.00	14.00	20.00	30.00	45.00	99.99	100.00

1Probability-weighted annualised lifetime probability of default.

For Commercial Banking a doubling of PD with a minimum increase in PD of 1% since origination is treated as a SICR. This is complemented

with the use of internal credit risk classifications and ratings as qualitative indicators to identify a SICR.

The Group does not use the low credit risk exemption in its staging assessments, though more simplistic SICR criteria are applied for

portfolios not listed above. All financial assets are assumed to have suffered a SICR if they are more than 30 days past due.

Individual assessments and application of judgement in adjustments to modelled ECL

The table below analyses total ECL allowances by portfolio, separately identifying the amounts that have been modelled, those that have

been individually assessed and those arising through the application of judgemental adjustments.


	At 31 December 2025					At 31 December 2024
	Modelled ECL £m	Individually assessed £m		Judgemental adjustments £m	Total £m	Modelled ECL £m	Individually assessed £m	Judgemental adjustments £m	Total £m
UK mortgages	623		–	108	731	720	–	132	852
Credit cards	540		–	63	603	681	–	(7)	674
Other Retail	916		–	75	991	860	–	90	950
Commercial Banking	555		355	(22)	888	894	354	(259)	989
Other	15		–	–	15	16	–	–	16
Total	2,649		355	224	3,228	3,171	354	(44)	3,481

Individually assessed ECL

Stage 3 ECL in Commercial Banking is largely assessed on an individual basis by the Business Support Unit using bespoke assessment of loss

for each specific client based on potential recovery strategies. While these assessments are based on the Group’s latest economic view, the

use of Group-wide multiple economic scenarios and weightings is not considered appropriate for these cases due to their individual

characteristics. In place of this, a range of case-specific outcomes are considered with any alternative better or worse outcomes that carry

a 25% likelihood taken into account in establishing a probability-weighted ECL. At 31 December 2025, individually assessed provisions for

Commercial Banking were £355 million (2024: £354 million) which reflected a range of £276 million to £440 million (2024: £309 million to

£437 million), based on the range of alternative outcomes considered.

Application of judgement in adjustments to modelled ECL

Impairment models fall within the Group’s model risk framework with model monitoring, periodic validation and back testing performed on

model components, such as probability of default. Limitations in the models or data inputs may be identified through these assessments

and review of model outputs, which may require appropriate judgemental adjustments to the ECL. These adjustments are determined by

considering the particular attributes of exposures which have not been adequately captured by the impairment models and range from

changes to model inputs and parameters, at account level (in-model adjustments), through to more qualitative post-model adjustments.

UK mortgages: £108 million (2024: £132 million)

These adjustments principally comprise:

Repossession risk: £85 million (2024: £110 million)

Additional ECL continues to be held judgementally to capture the potential repossession and recovery risk from specific subsets of largely

long-term defaulted cases. This is alongside an adjustment to capture a longer duration between default and repossession than model

assumptions use on existing and future defaults. The reduction in the period reflects methodology refinement and latest data points on the

population judged at risk.

Adjustment for specific segments: £13 million (2024: £13 million)

The Group monitors risks across specific segments of its portfolios which may not be fully captured through collective models. The

judgement for fire safety and cladding uncertainty remains in place as the only Mortgages segment sufficiently material to address, given

evidence of cases with defective cladding, or other fire safety issues.

Credit cards: £63 million (2024: £(7) million) and Other Retail: £75 million (2024: £90 million)

These adjustments principally comprise:

Lifetime extension: Credit cards: £49 million (2024: £55 million) and Other Retail: £9 million (2024: £10 million)

An adjustment is required to extend the lifetime used for Stage 2 exposures on Retail revolving products from a three-year modelled

lifetime, which reflected the outcome data available when the ECL models were developed, to a more representative lifetime. Incremental

defaults beyond year three are calculated through the extrapolation of the default trajectory observed throughout the three years and

beyond.

Adjustments to loss rates: Credit cards: £nil (2024: £(57) million) and Other Retail: £25 million (2024: £47 million)

A number of adjustments were previously made to the loss given default (LGD) assumptions used within unsecured and motor credit

models. For unsecured portfolios, the previous adjustments reflected the impact of changes in collection debt sale strategy on the Group’s

LGD models, incorporating up to date customer performance and forward flow debt sale pricing. These impacts have now been integrated

into the model solution following model refinements. The remaining adjustment for UK Motor Finance, within Other Retail, captures the

observed loss rates and the latest outlook on used car prices.

Note 21: Allowance for expected credit losses continued

Commercial Banking: £(22) million (2024: £(259) million)

These adjustments principally comprise:

Corporate insolvency rates: £(122) million (2024: £(253) million)

The volume of UK corporate insolvencies continues to exhibit an elevated trend beyond December 2019 levels, revealing a marked

misalignment between observed UK corporate insolvencies and the Group’s equivalent credit performance. This dislocation gives rise to

uncertainty over the drivers of the observed trends in the metric and the appropriateness of the Group’s Commercial Banking model

response which uses observed UK corporate insolvencies data to anchor future loss estimates to. Given the Group’s stable credit

performance, a negative adjustment is applied by reverting judgementally to the long-term average of the insolvency rate. The scale of the

negative adjustment reduced in the period reflecting both the reduction in observed actual UK corporate insolvencies rates, narrowing the

gap of the misalignment, as well from changes due to the interaction with the implementation of loss rate model enhancements in the

period.

Adjustments to loss given defaults (LGDs): £50 million (2024: £(80) million)

In preceding years, adjustments have been required to mitigate limitations identified in the modelling approach which were causing loss

given defaults to be inflated. These included the lack of benefit from amortisation of exposures relative to collateral values at default, and

the need to reflect an exposure-weighted calculation. These two adjustments have been released following respective enhancements to

models. One remaining adjustment remains for a specific segment of the SME portfolio which judgementally applies a more appropriate

blended LGD rate from credit risk profile segments more aligned to experience.

Corporate income gearing (CIG) adjustment: £nil (2024: £37 million)

An adjustment was raised at 31 December 2024, based upon the assessment of Corporate Income Gearing, a model parameter for

affordability used in Commercial Banking. This adjustment reversed the modelled ECL release seen from updating CIG drivers (interest

rates), given interest rates had merely reached a plateau which translated into a slower year-on-year increase. This slowdown gave a

modelled ECL release not judged representative of the continued pressure on borrowers and business margins. However, the maintenance

of those improvements in drivers over the first half of 2025 (including sustained lower base rates) gives support for the modelled release to

now be recognised, removing the judgemental adjustment.

Commercial Real Estate (CRE) price reduction: £nil (2024: £35 million)

This adjustment recognised the potential impact on loss rates from valuations on specific CRE sectors where evidence suggested valuations

may lag achievable levels, notably in cases of stressed sale. Recent performance reflects stabilisation in valuations and improved confidence

in the CRE sector, removing the judgemental adjustment.

Global tariff and geo-political disruption risks: £50 million (2024: £nil)

This new adjustment is to recognise the potential risks to specific drivers across various corporate sectors not reflected in broad

macroeconomic model drivers. These are potential nuanced risks to businesses inherent in the base case which could also worsen in the

downside scenarios. This assessment is judgemental and apportioned across all sectors given the uncertainty of how these risks would

emerge.

Generation of multiple economic scenarios

The estimate of expected credit losses is required to be based on an unbiased expectation of future economic scenarios. The approach

used to generate the range of future economic scenarios depends on the methodology and judgements adopted. The Group’s approach is

to start from a defined base case scenario, used for planning purposes, and to generate alternative economic scenarios around this base

case. The base case scenario is a conditional forecast underpinned by a number of conditioning assumptions that reflect the Group’s best

view of key future developments. If circumstances appear likely to materially deviate from the conditioning assumptions, then the base

case scenario is updated.

The base case scenario is central to a range of future economic scenarios generated by simulation of an economic model, for which the

same conditioning assumptions apply as in the base case scenario. These scenarios are ranked by using estimated relationships with

industry-wide historical loss data. With the base case already pre-defined, three other scenarios are identified as averages of constituent

scenarios located around the 15th, 75th and 95th percentiles of the distribution. The full distribution is therefore summarised by a practical

number of scenarios to run through ECL models representing an upside, the base case, and a downside scenario weighted at 30% each,

together with a severe downside scenario weighted at 10%. The scenario weights represent the distribution of economic scenarios and not

subjective views on likelihood. The inclusion of a severe downside scenario with a smaller weighting ensures that the non-linearity of losses

in the tail of the distribution is adequately captured. Macroeconomic projections may employ reversionary techniques to adjust the paths

of economic drivers towards long-run equilibria after a reasonable forecast horizon. The Group does not use such techniques to force the

MES scenarios to revert to the base case planning view. Utilising such techniques would be expected to be immaterial for expected credit

losses since loss sensitivity is minimal after the initial five years of the projections.

A forum under the chairmanship of the Chief Economist meets at least quarterly to review and, if appropriate, recommend changes to the

method by which economic scenarios are generated, for approval by the Chief Financial Officer and Chief Risk Officer. Since 30 September

2025, the non-modelled adjustments previously applied to UK Bank Rate and CPI inflation in the severe downside scenario have been

removed. This is because the incremental ECL impact is no longer considered sufficiently material to justify their application. Accordingly,

its removal has had no material impact on ECL.

Note 21: Allowance for expected credit losses continued

Base case and MES economic assumptions

The Group’s base case economic scenario has been updated to reflect global developments and changes in domestic economic policy. The

Group’s updated base case scenario has the following conditioning assumptions. First, developments in global conflicts, technology or

financial sector issues do not cause a significant degree of financial market volatility. Second, the US effective tariff rate is maintained at

levels prevailing at the balance sheet date pending a switch to a sector-based tariff framework. Third, the UK’s macroeconomic framework

for monetary and fiscal policy remains in place, alongside broader continuity on other areas of government policy.

Based on these assumptions and incorporating the economic data published for the third quarter of 2025, the Group’s base case scenario is

for a slow expansion in gross domestic product (GDP) and a further rise in the unemployment rate alongside small gains in residential and

commercial property prices. With underlying inflationary pressures expected to recede, modest further reductions in UK Bank Rate are

expected to continue in 2026. Risks around this base case economic view lie in both directions and are largely captured by the generation

of alternative economic scenarios.

The Group has taken into account the latest available information at the reporting date in defining its base case scenario and generating

alternative economic scenarios. The scenarios include forecasts for key variables as at the fourth quarter of 2025. Actual data for this

period, or restatements of past data, may have since emerged prior to publication and have not been included.

Scenarios by year

The key UK economic assumptions made by the Group are shown in the following tables across a number of measures explained below.

Annual assumptions

Gross domestic product (GDP) growth and Consumer Price Index (CPI) inflation are presented as an annual change, house price growth

and commercial real estate price growth are presented as the growth in the respective indices over each year. Unemployment rate and

UK Bank Rate are averages over the year.

Five year average

The five-year average reflects the average annual growth rate, or level, over the five-year period. It includes movements within the current

reporting year, such that the position as at 31 December 2025 covers the five years 2025 to 2029. The inclusion of the reporting year

within the five-year period reflects the need to predict variables which remain unpublished at the reporting date and recognises that

credit models utilise both level and annual changes. The use of calendar years maintains a comparability between the annual

assumptions presented.

Five year start to peak and trough

The peak or trough for any metric may occur intra year and therefore not be identifiable from the annual assumptions, so they are also

disclosed. For GDP, house price growth and commercial real estate price growth, the peak, or trough, reflects the highest, or lowest

cumulative quarterly position reached relative to the start of the five-year period, which as at 31 December 2025 is 1 January 2025. Given

these metrics may exhibit increases followed by greater falls, the start to trough movements quoted may be smaller than the equivalent

‘peak to trough’ movement (and vice versa for start to peak). Unemployment, UK Bank Rate and CPI inflation reflect the highest, or lowest,

quarterly level reached in the five-year period.

Note 21: Allowance for expected credit losses continued


At 31 December 2025	2025 %	2026 %	2027 %	2028 %	2029 %	2025 to 2029 average %	Start to peak %	Start to trough %
Upside
Gross domestic product growth	1.4	2.0	2.3	1.6	1.6	1.8	9.4	0.7
Unemployment rate	4.8	4.2	3.2	3.1	3.2	3.7	5.1	3.0
House price growth	0.8	3.5	7.1	6.9	6.0	4.8	26.4	(0.1)
Commercial real estate price growth	1.2	7.9	4.9	1.7	0.8	3.2	17.3	0.6
UK Bank Rate	4.13	3.94	4.59	5.07	5.33	4.61	5.39	3.75
CPI inflation	3.4	2.6	2.4	2.8	3.1	2.9	3.8	2.1
Base case
Gross domestic product growth	1.4	1.2	1.4	1.5	1.6	1.4	7.6	0.7
Unemployment rate	4.8	5.2	4.8	4.6	4.5	4.8	5.3	4.5
House price growth	0.8	1.6	1.9	2.2	3.1	1.9	9.8	(0.1)
Commercial real estate price growth	1.2	0.6	1.7	0.5	0.2	0.9	4.4	0.6
UK Bank Rate	4.13	3.44	3.25	3.44	3.50	3.55	4.50	3.25
CPI inflation	3.4	2.6	2.2	2.2	2.3	2.6	3.8	2.1
Downside
Gross domestic product growth	1.4	(0.3)	(0.5)	1.1	1.6	0.7	3.6	0.1
Unemployment rate	4.8	6.6	7.5	7.4	7.0	6.7	7.6	4.5
House price growth	0.8	(0.2)	(4.7)	(5.7)	(2.8)	(2.6)	0.9	(12.2)
Commercial real estate price growth	1.2	(7.1)	(4.2)	(2.7)	(2.3)	(3.1)	1.3	(14.4)
UK Bank Rate	4.13	2.74	1.09	0.75	0.52	1.85	4.50	0.45
CPI inflation	3.4	2.6	2.0	1.4	1.0	2.1	3.8	0.8
Severe downside
Gross domestic product growth	1.4	(1.9)	(1.8)	0.7	1.4	0.0	1.3	(2.8)
Unemployment rate	4.8	8.3	10.2	9.9	9.4	8.5	10.3	4.5
House price growth	0.8	(1.2)	(11.1)	(12.2)	(7.8)	(6.5)	0.8	(28.4)
Commercial real estate price growth	1.2	(17.4)	(9.8)	(7.4)	(5.4)	(8.0)	1.3	(34.0)
UK Bank Rate	4.13	1.91	0.10	0.03	0.01	1.24	4.50	0.01
CPI inflation	3.4	2.6	1.7	0.5	(0.4)	1.6	3.8	(0.7)
Probability-weighted
Gross domestic product growth	1.4	0.7	0.8	1.3	1.6	1.2	6.1	0.7
Unemployment rate	4.8	5.6	5.7	5.5	5.4	5.4	5.8	4.5
House price growth	0.8	1.3	0.2	(0.2)	1.1	0.6	2.8	(0.1)
Commercial real estate price growth	1.2	(1.3)	(0.3)	(0.9)	(0.9)	(0.4)	1.3	(2.6)
UK Bank Rate	4.13	3.23	2.69	2.78	2.81	3.13	4.50	2.64
CPI inflation	3.4	2.6	2.2	2.0	1.9	2.4	3.8	1.8


Base case scenario by quarter1 At 31 December 2025	First quarter 2025 %	Second quarter 2025 %	Third quarter 2025 %	Fourth quarter 2025 %	First quarter 2026 %	Second quarter 2026 %	Third quarter 2026 %	Fourth quarter 2026 %
Gross domestic product growth	0.7	0.3	0.1	0.3	0.3	0.3	0.4	0.4
Unemployment rate	4.5	4.7	5.0	5.1	5.3	5.3	5.2	5.1
House price growth	2.9	2.7	1.3	0.8	1.3	1.6	1.6	1.6
Commercial real estate price growth	2.5	2.6	2.6	1.2	0.5	0.2	0.1	0.6
UK Bank Rate	4.50	4.25	4.00	3.75	3.75	3.50	3.25	3.25
CPI inflation	2.8	3.5	3.8	3.7	3.3	2.6	2.2	2.2

1Gross domestic product growth is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from the

equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.

Note 21: Allowance for expected credit losses continued


At 31 December 2024	2024 %	2025 %	2026 %	2027 %	2028 %	2024 to 2028 average %	Start to peak %	Start to trough %
Upside
Gross domestic product growth	0.8	1.9	2.2	1.5	1.4	1.6	8.9	0.7
Unemployment rate	4.3	3.5	2.8	2.7	2.8	3.2	4.4	2.7
House price growth	3.4	3.7	6.5	6.6	5.4	5.1	28.2	0.4
Commercial real estate price growth	0.7	7.8	6.7	3.2	0.5	3.7	20.0	(0.8)
UK Bank Rate	5.06	4.71	5.02	5.19	5.42	5.08	5.50	4.50
CPI inflation	2.6	2.8	2.6	2.9	3.0	2.8	3.5	2.0
Base case
Gross domestic product growth	0.8	1.0	1.4	1.5	1.5	1.2	7.0	0.7
Unemployment rate	4.3	4.7	4.7	4.5	4.5	4.5	4.8	4.2
House price growth	3.4	2.1	1.0	1.4	2.4	2.0	10.5	0.4
Commercial real estate price growth	0.7	0.3	2.5	1.9	0.0	1.1	5.4	(0.8)
UK Bank Rate	5.06	4.19	3.63	3.50	3.50	3.98	5.25	3.50
CPI inflation	2.6	2.8	2.4	2.4	2.2	2.5	3.5	2.0
Downside
Gross domestic product growth	0.8	(0.5)	(0.4)	1.0	1.5	0.5	3.2	0.0
Unemployment rate	4.3	6.0	7.4	7.4	7.1	6.4	7.5	4.2
House price growth	3.4	0.6	(5.5)	(6.6)	(3.4)	(2.4)	4.0	(11.4)
Commercial real estate price growth	0.7	(7.8)	(3.1)	(0.9)	(2.3)	(2.7)	0.7	(12.9)
UK Bank Rate	5.06	3.53	1.56	0.96	0.68	2.36	5.25	0.59
CPI inflation	2.6	2.8	2.3	1.8	1.2	2.1	3.5	0.9
Severe downside
Gross domestic product growth	0.8	(1.9)	(1.5)	0.7	1.3	(0.1)	1.2	(2.4)
Unemployment rate	4.3	7.7	10.0	10.0	9.7	8.4	10.2	4.2
House price growth	3.4	(0.8)	(12.4)	(13.6)	(8.8)	(6.7)	3.4	(29.2)
Commercial real estate price growth	0.7	(17.4)	(8.5)	(5.5)	(5.7)	(7.5)	0.7	(32.3)
UK Bank Rate – modelled	5.06	2.68	0.28	0.08	0.02	1.62	5.25	0.02
UK Bank Rate – adjusted1	5.06	4.03	2.70	2.23	1.95	3.19	5.25	1.88
CPI inflation – modelled	2.6	2.8	1.9	1.0	0.1	1.7	3.5	(0.2)
CPI inflation – adjusted1	2.6	3.6	2.1	1.4	0.8	2.1	3.9	0.7
Probability-weighted
Gross domestic product growth	0.8	0.5	0.8	1.2	1.4	1.0	5.7	0.7
Unemployment rate	4.3	5.0	5.5	5.4	5.3	5.1	5.5	4.2
House price growth	3.4	1.8	(0.7)	(1.0)	0.4	0.8	5.3	0.4
Commercial real estate price growth	0.7	(1.7)	1.0	0.7	(1.1)	(0.1)	0.7	(1.3)
UK Bank Rate – modelled	5.06	4.00	3.09	2.90	2.88	3.59	5.25	2.88
UK Bank Rate – adjusted1	5.06	4.13	3.33	3.12	3.08	3.74	5.25	3.06
CPI inflation – modelled	2.6	2.8	2.4	2.2	1.9	2.4	3.5	1.8
CPI inflation – adjusted1	2.6	2.9	2.4	2.3	2.0	2.4	3.5	1.9

1The adjustment to UK Bank Rate and CPI inflation in the severe downside was considered to better reflect the risks around the Group’s base case view in an economic environment

where the risks of supply and demand shocks are more balanced.


Base case scenario by quarter1 At 31 December 2024	First quarter 2024 %	Second quarter 2024 %	Third quarter 2024 %	Fourth quarter 2024 %	First quarter 2025 %	Second quarter 2025 %	Third quarter 2025 %	Fourth quarter 2025 %
Gross domestic product growth	0.7	0.4	0.0	0.1	0.2	0.3	0.3	0.3
Unemployment rate	4.3	4.2	4.3	4.4	4.5	4.6	4.7	4.8
House price growth	0.4	1.8	4.6	3.4	3.6	4.0	3.0	2.1
Commercial real estate price growth	(5.3)	(4.7)	(2.8)	0.7	1.8	1.4	0.9	0.3
UK Bank Rate	5.25	5.25	5.00	4.75	4.50	4.25	4.00	4.00
CPI inflation	3.5	2.1	2.0	2.5	2.4	3.0	2.9	2.7

1Gross domestic product growth is presented quarter-on-quarter. House price growth, commercial real estate growth and CPI inflation are presented year-on-year, i.e. from the

equivalent quarter in the previous year. Unemployment rate and UK Bank Rate are presented as at the end of each quarter.

Note 21: Allowance for expected credit losses continued

ECL sensitivity to economic assumptions

The following table shows the Group’s ECL for the probability-weighted, upside, base case, downside and severe downside scenarios. The

stage allocation for an asset is based on the overall probability-weighted probability of default and hence the staging of assets is constant

across all the scenarios. In each economic scenario the ECL for individual assessments is held constant reflecting the basis on which they are

evaluated. Judgemental adjustments applied through changes to model inputs or parameters, or more qualitative post model adjustments,

are apportioned across the scenarios in proportion to modelled ECL where this better reflects the sensitivity of these adjustments to each

scenario. The probability-weighted view shows the extent to which a higher ECL allowance has been recognised to take account of

multiple economic scenarios relative to the base case; the uplift on a statutory basis being £366 million compared to £445 million at

31 December 2024.


	At 31 December 2025					At 31 December 2024
	Probability- weighted £m	Upside £m	Base case £m	Downside £m	Severe downside £m	Probability- weighted £m	Upside £m	Base case £m	Downside £m	Severe downside £m
UK mortgages	731	341	510	937	1,943	852	345	567	1,064	2,596
Credit cards	603	498	579	674	777	674	518	641	773	945
Other Retail	991	922	969	1,036	1,126	950	843	923	1,010	1,172
Commercial Banking	888	690	789	1,010	1,414	989	745	889	1,125	1,608
Other	15	15	15	15	15	16	16	16	16	17
ECL allowance	3,228	2,466	2,862	3,672	5,275	3,481	2,467	3,036	3,988	6,338

The impact of isolated changes in the UK unemployment rate and House Price Index (HPI) has been assessed on a univariate basis.

Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives

insight into the sensitivity of the Group’s ECL to gradual changes in these two critical economic factors.

The impacts are assessed as changes to probability-weighted modelled ECL inclusive of the impacts upon staging of assets, excluding post

model adjustments. In previous assessments, impacts were assessed as changes to base case modelled ECL only (at 100% weighting) with

staging held flat to the reported view, and similarly excluded post model adjustments. The updated approach addresses the limitations of

the prior methodology and provides a more representative view of the potential impact of these sensitivities.

The ECL impact due to a change in unemployment has reduced in 2025 compared to 2024 as a result of lower loss rates within the

Commercial Banking model. The HPI reduction versus 2024 is due to lower default rates and a reduced proportion of assets in Stage 2 for

UK mortgages, following strong credit performance in the year.

The table below shows the impact on the Group’s ECL resulting from a 1 percentage point increase or decrease in the UK unemployment

rate. The increase or decrease is presented based on the adjustment phased evenly over the first 10 quarters of all four scenarios. A more

immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in both 12-month and lifetime

probability of defaults.


	At 31 December 2025		At 31 December 20241
	1pp increase in unemployment £m	1pp decrease in unemployment £m	1pp increase in unemployment £m	1pp decrease in unemployment £m
UK mortgages	11	(11)	13	(12)
Credit cards	54	(53)	54	(53)
Other Retail	25	(25)	23	(24)
Commercial Banking	58	(48)	113	(82)
ECL impact	148	(137)	203	(171)

1For 2025, impacts are assessed as changes to probability-weighted modelled ECL inclusive of the impacts upon staging of assets, excluding post model adjustments. The comparative

period has been represented on a consistent basis.

The table below shows the impact on the Group’s ECL in respect of UK mortgages of an increase or decrease in loss given default for a

10 percentage point increase or decrease in HPI. The increase or decrease is presented based on the adjustment phased evenly over the first

10 quarters of all four scenarios.


	At 31 December 2025		At 31 December 20241
	10pp increase in HPI £m	10pp decrease in HPI £m	10pp increase in HPI £m	10pp decrease in HPI £m
ECL impact	(172)	261	(207)	312

1For 2025, impacts are assessed as changes to probability-weighted modelled ECL inclusive of the impacts upon staging of assets, excluding post model adjustments. The comparative

period has been represented on a consistent basis.

Assessment of climate risk impacts on ECL

The Group continues to develop capabilities to quantify the potential impact of climate risks on ECL. This includes identifying the climate-

related risk drivers that could influence future credit losses for loan portfolios that have the highest sensitivity to climate risks and

commencing the use of more quantitative analysis on the impact of these risk drivers on ECL. The approach leverages the Group’s climate

scenario analysis, to identify the potential physical and transition risk impacts on credit quality. UK mortgages and Commercial Banking

portfolios are judged to have the highest sensitivity to climate risk, with both physical and transition risk drivers assessed.

UK mortgages physical and transition risks – additional costs arising from regulatory obligations of increased energy efficiency standards to

reduce carbon emissions and increased flood risk and coastal erosion, through property repair or rebuild and/or increased insurance premia.

This can result in affordability pressure, as well as decrease in property valuation, for borrowers owning low EPC rated properties or those in

areas prone to flooding or coastal erosion.

Note 21: Allowance for expected credit losses continued

Commercial Banking physical and transition risks – increased costs or revenue disruption, or both, arising from chronic and acute physical

hazards from rising temperatures. Companies adapting to a sudden transition scenario could potentially lead to increased transition costs

in operations, direct carbon costs, and deteriorating financial performance due to changing consumer perspectives.

Macroeconomic and sector scenario risk assessments

Assessments were performed on the Group’s internally generated economic scenarios used in the measurement of expected credit losses

against external scenarios published by the Network for Greening the Financial System (NGFS).

The potential incremental impact of climate factors on key economic drivers was isolated from the Phase V NGFS Delayed Transition

scenario, which management judged the most plausible. The incremental risk to ECL was then quantified by overlaying the specific climate

impact of this scenario onto macroeconomic drivers within the Group’s base case and MES scenarios. The results from the most material

Retail portfolios, UK mortgages and Credit cards allowed management to conclude on an immaterial ECL impact for Retail below

£10 million (31 December 2024: below £5 million), and in Commercial Banking a separate climate assessment performed at sector level,

resulted in an ECL impact of below £15 million (31 December 2024: below £15 million).

The Group’s MES downside and severe downside scenarios, together comprising a 40% weighting in ECL calculations, are generally more

severe than the most adverse NGFS scenario (‘Net Zero 2050’). The assessment suggests that no material changes are required to the

Group’s existing suite of economic scenarios used within the ECL calculation.

In Commercial Banking, a top-down analysis using sectoral modelling was repeated to estimate the specific ECL impact of climate risk on

commercial credit conditions. This assessment specifically targets agriculture, automotive, transport, oil and gas, real estate and utilities

sectors where climate impacts were judged to be more significant. Resulting sector-specific, climate-adjusted credit cycle indices (CCI)

were used to calculate probability of default and resulting ECL. These adjusted CCI model inputs combined external NGFS Phase V

scenarios with client level valuation impacts where available, alongside historic impairment data. The Phase V scenarios introduced a

physical risk approach, requiring adjustments to ensure appropriate timing of impacts. Considering methodological limitations, the

additional ECL required was shown to be immaterial.

The Group recognises the ongoing uncertainty and limitations of climate scenario modelling, including external concerns reported in late

2025 for physical risk approaches. While NGFS scenarios continue to provide a consistent benchmark for assessing climate-related risks in

ECL, they are used with prudent adjustments.

Physical and transition risk assessments

The Group has enhanced its assessment of transition risk on the UK mortgage portfolio. Scope has been extended from Probability of

Default (PD) impacts only to also include Loss Given Default (LGD) considerations.

The affordability stress resulting from home retrofitting costs associated with higher EPC regulatory rating requirements, under multiple

scenarios was re-calculated. The provision impact was assessed by transforming the account level assessment of affordability and valuation

impacts to adjust inputs used in existing PD and LGD parameters. As at 31 December 2025, the impact on ECL has been estimated to be

less than £10 million (31 December 2024: less than £10 million) across buy-to-let (BTL), mainstream and legacy portfolios.

The physical risk assessment on the UK mortgage portfolio in 2025 continued to include both flooding and coastal erosion risk. The impacts

were based on an internally defined delayed transition outlook, out to 2050, aligned with the Group’s transition methodology. The

assessment showed that over 80% of the book was not exposed to flood risk damage. Over 99% had no risk to coastal erosion damage.

The impact on ECL to customers exposed to the affordability risk from flood and coastal erosion damage has been estimated to be

immaterial.

Whilst this supports no judgemental adjustment to ECL being required, the narrow scope does not capture the wider impact on loss rates

emanating from being located in a high-risk area. Similarly the current assessment excludes the potential affordability shocks or reduced

insurance coverage that could occur due to possible changes to insurance policy initiatives in this area.


Assessment	Nature of risk assessed	Portfolios assessed	ECL impact At 31 December 2025	ECL impact At 31 December 2024
Macroeconomic impact from climate scenario	Scenario risk – macro level	Retail	< £10 million	< £5 million
Sector level impacts from climate scenario	Scenario risk – sector level	Commercial Banking (excluding Business Banking)	< £15 million	< £15 million
Retrofitting cost to meet EPC regulation	Transition risk	UK mortgages	< £10 million	< £10 million
Flood risk	Physical risk	UK mortgages	< £5 million	< £5 million

The climate risk assessments above remain limited due to the degree of uncertainty underpinning key assumptions used, as well as the

continuing developmental nature of the data, approach and models used in the quantification. These include, but are not limited to, the

analyses being restricted to PD impacts only for Commercial Banking; considering only the most material hazards for UK mortgages (flood

and coastal erosion); client valuation impacts not incorporating climate transition plans; the physical risk modelling for corporates currently

excluding broader components such as supply chain impacts, and more broadly the political landscape; future climate data enhancements

and further model development.

The ECL impacts resulting from these climate risk assessments remain immaterial. This continues to support management’s view that there

is a low residual risk of material error or omission in the Group’s financial statements due to climate-related risks and as a result no

adjustments have been made to ECL measured as at 31 December 2025. The current behavioural lives of the Group’s lending dilute the

potential exposure to the later emergence of potential physical climate impacts, with the incorporation of climate risk, in credit policy, as a

qualitative underwriting assessment within the Commercial Banking credit process and the origination process for mortgages providing

further mitigation on more recent originations.