Santander UK Performance

We manage liquidity risk on a consolidated basis in our CFO division, which is our centralised function for managing funding, liquidity and capital.

In line with our liquidity management principles, we avoid an over-reliance on funding from a single product, customer or counterparty.

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.

Through our Liquidity Risk Appetite (LRA) framework, we manage our funding or structural contingent and market liquidity risks wherever they arise.

Other risks our framework covers include funding concentrations, intra-day cash flows, intra-group commitments and support, franchise retention and cross currency risk.

We hold sufficient liquid resources and have adequate governance and controls in place to manage the liquidity risks arising from our business and strategy.

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.

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.

The Risk Appetite statements consist of qualitative statements of appetite supported by risk limits and triggers which operate as a defence against excessive risk taking.

We set a clear tolerance in line with business activities, and we also set lower level triggers, parameters and quantitative thresholds across our business areas.

We monitor our risk profile and performance against the risk appetite, and we have processes to identify, assess, manage, and report risks and events.

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.

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.

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.

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 BRC each month.

On this scale, the higher the rating, the better the quality of the counterparty.

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 2023 and 31 December 2022.

Board members also visited the Financial Crime and Financial Support Centres of Excellence in Bradford to gain deeper insight into financial crime risk mitigation and initiatives to provide support to our customers experiencing hardship.

The Board also approved the Anti Money Laundering and Counter Terrorist Policy as part of its annual review.

The Board subsequently approved changes to three financial crime risk indicators, fraud risk appetite metrics, and material outsourcing risk appetite.

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.

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.

Also, 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 take into account the volatility of ECL in our capital planning strategy.

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 or high inflation, we formally review our retail risk management policy and strategy.

We also use the Retail Risk Playbook tolerance framework and management judgements to ensure that portfolio quality remains within our Risk Appetite by measuring against trigger values for key risk profile and performance metrics.

The table below shows how our net interest income would be affected by a 100bps parallel shift (both up and down) applied instantaneously to the yield curve at 31 December 2023 and 31 December 2022.

The 1 year NII sensitivity to a -100bps stress increased slightly to £(220)m (2022: £(197)m).

EVE sensitivity is adversely exposed to rising interest rate scenarios.

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.

Our structural hedge position decreased, with £106.0bn at 31 December 2023 (2022: £108.0bn), and a duration of 2.4 years (2022: 2.5 years).

The balance on the structural hedge fell in 2023 reflecting lower non-rate sensitive liabilities.

The overall contribution to income has, however, increased as maturities were replaced with higher yielding assets offsetting the lower balance.

Going forward, we expect the overall contribution of the structural hedge to continue to increase.

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.

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.

We have several strategies to manage arrears that we can use as early as the day after a missed payment.

We also reach out to up-to-date customers who may be at risk of going into arrears for support purposes.

We assess the financial difficulties a customer is having, so we can offer them the right support to manage their agreement whilst in arrears.

The strategy we use depends on the risk and the customer’s circumstances.

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.

We have a strong wholesale funding investor base, diversified across product types and geographies.

We access the wholesale funding markets through the issuance of capital, senior unsecured debt, covered bonds, structured notes and short-term funding.