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.

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.

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

This can be in retail and corporate deposit outflows, outflows in wholesale secured and unsecured funding 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 stress testing models are subject to a formal review, independent validation and approval process.

We take a multi-layered approach to stress testing to capture risks at various levels.

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.

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.

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.

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.

For balance sheet assets, the maximum exposure to credit risk is the carrying value after impairment loss allowances.

For off-balance sheet guarantees, the maximum exposure is the maximum amount that we would have to pay if the guarantees were called on.

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.

Operational Resilience is the outcome of executing sound Operational Risk practices.

We continued to mature our frameworks and capabilities to support meeting the Operational Resilience requirements by the March 2025 regulatory deadline, with regular updates provided to our Executive and Board Risk committees throughout the year.

We assessed the resilience of our important business services using a broad range of severe but plausible disruption scenarios.

We ran successful cyberattack and loss of third party scenarios, to ensure that our contingency and recovery strategies were effective in minimising harm to our customers, risk to the safety and soundness of Santander UK, and risk to the orderly functioning or stability to the UK market.

We continued to invest in strategic programmes that will further strengthen our resilience position, in particular across our IT estate.

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 2024 and 31 December 2023.

Sensitivity to parallel shifts represents the amount of risk in a way that we think is both simple and scalable.

NII Sensitivity is adversely exposed to down-shock scenarios driven by margin compression of core liabilities, partly offset by the structural position.

EVE sensitivity is adversely exposed to rising interest rate scenarios.

EVE sensitivity reflects the potential impact on economic value due to the structural mismatch of assets and liabilities (excluding equity) over the longer term.

In 2024 NII sensitivity decreased, and EVE sensitivity increased, mainly reflecting the overall increase in the structural hedge position relative to non-rate sensitive liabilities.

outlook for 2025 is likely to see a slow-down in house price growth due to higher swap rates which has pushed up mortgage rates in Q424.

As always, the key to house price growth is the supply of housing which continues to be weak.

We forecast a c.3% year-on-year growth in house prices by the end of 2025 and remaining at this growth rate for the rest of the forecast period.

After falling for seven quarters in a row, CRE prices stabilised in Q224 and rose by 0.3% quarter-on-quarter in Q324 in a sign of the sector turning around after two years of falling prices.

We expect prices to continue to rise throughout the forecast period as Bank Rate is reduced before growth stabilises around the 2% year-on-year mark.

This is reflected in an average annual growth expectation of 1.6%, in line with the OBR’s latest estimate of the UK’s long run average growth rate.

Our LRA is based on the principles of liquidity management we use to manage our balance sheet.

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.

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.

Reputational risk is 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.

We seek to manage our reputation proactively, underpinned by our aim to be a responsible bank, and through our reputational risk framework.

We have a low appetite for reputational risk, which is agreed by the Board at least each year.

We assess our exposure to reputational risk daily.

Our Reputational and ESCC risk policies define how we create long-term value while managing those risks.

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.

Customer deposits finance most of our customer lending.

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.

We also access these markets through securitisations of certain assets of Santander UK plc and our operating subsidiaries.

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 our LRA and regulatory liquidity and capital requirements.

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 risk categories shown below.

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 aim to support 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 Environmental, Social and Climate Change (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 aim, by 2030 we will aim to 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.

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.

We continue to face a demanding regulatory agenda and have multiple ongoing projects to ensure regulatory compliance.

We will continue to work through these requirements in 2025, while keeping good customer outcomes at the heart of everything we do.

Regulatory mandates we delivered include the Payment Systems Regulator's requirement on Confirmation of Payee for all Payment Service Providers and an Authorised Push Payment mandatory reimbursement regulation, both of which became effective from 7 October 2024.