FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

~~the~~ Securities Exchange Act of 1934

For the month of ~~March~~ August 2014

SANTANDER UK PLC (Translation of registrant’s name into English)		ABBEY NATIONAL TREASURY SERVICES PLC
		(Translation of registrant’s name into English)
2 Triton Square, Regent’s Place, London NW1 3AN, England (Address of principal executive offices)		2 Triton Square, Regent’s Place, London NW1 3AN, England (Address of principal executive offices)

ABBEY NATIONAL TREASURY SERVICES PLC

(Translation of registrant’s name into English)

2 Triton Square, Regent’s

Place, London NW1 3AN, England

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F ¨ o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o ¨ No x

~~THIS~~The ~~REPORT~~Registrant ONhereby ~~FORM 6-K~~incorporates ~~SHALL~~all BEparts ~~DEEMED~~of TOthis BEReport ~~INCORPORATED~~on BYForm 6-K ~~REFERENCE~~by INreference ~~THE~~in ~~PROSPECTUS~~Registration Statement ~~INCLUDED IN THE REGISTRATION STATEMENT ON FORM F-3 (FILE NOS~~no. 333-190509 ~~AND 333~~-~~190509-~~01) OFfiled ~~SANTANDER~~by UKthe ~~PLC~~Registrant ~~AND~~with ~~ABBEY~~the ~~NATIONAL~~Securities ~~TREASURY~~and ~~SERVICES~~Exchange ~~PLC~~Commission ~~AND~~on ~~TO BE A PART~~Form ~~THEREOF~~F-3ASR ~~FROM~~under ~~THE~~the ~~DATE~~Securities ONAct ~~WHICH~~of ~~THIS REPORT IS FURNISHED, TO THE EXTENT NOT SUPERSEDED BY DOCUMENTS OR REPORTS SUBSEQUENTLY FILED OR FURNISHED~~1933.

~~Santander~~2014 UKHalf ~~plc~~Yearly ~~and~~Financial ~~Abbey~~Report National Treasury Services plc hereby incorporate by reference the following exhibits to this report on Form 6-K into their Registration Statement on Form F-3 (File Nos. 333-190509 and 333-190509-01).

Exhibit No.		Description of Document
4.4		First Supplemental Indenture, dated as of March 13, 2014, among Abbey National Treasury Services plc, Santander UK plc and The Bank of New York Mellon, as trustee.
5.1		Opinion of Cleary Gottlieb Steen & Hamilton LLP, special U.S. counsel to Santander UK plc and Abbey National Treasury Services plc.
5.2		Opinion of Slaughter and May, English solicitors to Santander UK plc and Abbey National Treasury Services plc.

Abbey National Treasury Services plc

2PART OF THE SANTANDER GROUP

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Abbey National Treasury Services plc

2014 Half Yearly Financial Report

Index


About us
Our Business and our Corporate Purpose			2
Our Strategy			3

Detailed Business Review
Group and Divisional Results			4
Balance Sheet Review			9
Risk Management Report			14

Governance
Directors			39

Financial Statements
Primary Financial Statements			42
Notes to the Financial Statements			45

Shareholder Information
Risk Factors			66
Contact Information			66

Forward-looking Statements			67

Other Information for US Investors			68


Abbey National Treasury Services plc 2014 Half Yearly Financial Report		1

About us

Our Business and our Corporate Purpose

Our heritage

Abbey National Treasury Services plc (the ‘Company’) and its subsidiaries (collectively, ‘ANTS’ or the ‘ANTS group’) was established in 1989 for the purpose of managing the liquidity, risk management and wholesale banking needs of Abbey National plc (subsequently renamed Santander UK plc) and its subsidiaries (collectively, ‘Santander UK’ or the ‘Santander UK group’).

In 1997, Abbey National plc acquired the business and assets of Cater Allen Holdings plc (“CAH”) for £195m. The synergies between the ANTS group and the CAH business provided ANTS with opportunities for growth in strategically important markets comprising money markets, sharedealing, and onshore and offshore retail banking.

In 2010, all of the business and assets of Cater Allen International Limited, a subsidiary of CAH, and a significant participant in the repo and wholesale money markets, were transferred to the Company. The principal purpose of the transfer was to increase the efficiency of the ANTS group and the Santander UK group. No gain or loss was recognised on the transfer.

On 12 November 2004, Banco Santander, S.A., a company incorporated in Spain, completed the acquisition of the entire issued ordinary share capital of the parent company of ANTS, Santander UK plc, at which point the Company became an indirect subsidiary of Banco Santander, S.A..

The structural relationship of ANTS and Santander UK with the Banco Santander group

The Banco Santander group operates a ‘subsidiary model’. This model involves autonomous units, such as the Santander UK group (of which ANTS is a significant part) operating in core markets with each unit being responsible for its own liquidity, funding and capital management on an ongoing basis. The model is designed to minimise the risk to the Banco Santander group and all its units from problems arising elsewhere in the Banco Santander group.

The subsidiary model gives both ANTS and Santander UK considerable financial flexibility, yet enables them to continue to take advantage of the significant synergies and strengths that come from being part of the global Banco Santander group, in brand, products, systems, platforms, development capacity and management capability. In the subsidiary model, the Banco Santander group facilitates the sharing of best practice and provides common technology, operations and support services to all of its subsidiaries via independent operating entities, themselves established by the Banco Santander group so as to be able to continue operating as viable standalone businesses.

On 10 January 2014, Santander UK Group Holdings Limited became the holding company of Santander UK plc following its acquisition of Santander UK plc from Banco Santander S.A.. The acquisition was satisfied by the issue of shares in Santander UK Group Holdings Limited. The new holding company was put in place in light of UK regulatory developments relating to Banking Reform and Resolution and Recovery planning under which having a holding company above the operating banking companies is considered preferable.

For more information, see the Directors’ Report on page 99 of the Annual Report and Accounts for the year ended 31 December 2013 (the ‘2013 Annual Report’).

LOGO

(1)	From 10 January 2014.


2		Abbey National Treasury Services plc 2014 Half Yearly Financial Report

About us

Our Strategy

ANTS today

ANTS is regulated by the UK Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and is part of the Santander UK group which is, in turn, part of the Banco Santander, S.A. group (comprising Banco Santander, S.A. and its subsidiaries, the ‘Banco Santander group’). Banco Santander, S.A. is incorporated in Spain and is the ultimate parent company of ANTS.

Corporate purpose

ANTS provides treasury, corporate and wholesale banking services. ANTS provides these services to the wider Santander UK group, of which ANTS is a significant part, and also to UK clients. ANTS is also the treasury support function for the Santander UK group. In this regard, ANTS’s role is to provide access to financial markets and central bank facilities in order to meet the Santander UK group’s liquidity, funding, capital and balance sheet management requirements. As such, ANTS is one of the main debt issuance vehicles in the Santander UK group.

ANTS contains part of a number of Santander UK’s business segments. Whether transactions are booked in ANTS or another Santander UK group entity reflects historic or operational reasons and does not necessarily reflect any particular business split.

The Company has given a full and unconditional guarantee in respect of the unsubordinated liabilities of Santander UK plc incurred prior to 30 June 2015 under a deed poll guarantee entered into by the Company on 10 May 2012. Santander UK plc has given a reciprocal guarantee in respect of the unsubordinated liabilities of the Company incurred prior to 30 June 2015.

As a result of these guarantees, the results and creditworthiness of ANTS should not be viewed in isolation. Account should also be taken of the position of the Santander UK group into which the assets and liabilities of ANTS are fully consolidated.

ANTS has also entered into agreements to provide capital and/or liquidity to Santander UK plc and other members of the Santander UK group, in accordance with UK regulatory requirements. For further details, see Note 25 to the Condensed Consolidated Interim Financial Statements.

Our businesses

ANTS is headed by Jacques Ripoll, Chief Executive Officer, and operates three business divisions as follows:


Business division		About
Commercial Banking		Commercial Banking offers a wide range of products and financial services to UK companies. Commercial Banking products and services include loans, bank accounts, deposits, and treasury services. The Large Corporates business offers specialist treasury services in fixed income and foreign exchange, lending, transactional banking services, capital markets and money markets to large multinational corporate customers. Lending includes syndicated loans and structured finance. Transactional banking includes trade finance and cash management. Money market activities include securities lending/borrowing and repos.

Markets		Markets offers risk management and other services to financial institutions, as well as to other Santander UK divisions. Its main product areas are fixed income and foreign exchange, equity, capital markets and institutional sales.

Corporate Centre		Corporate Centre consists of Financial Management & Investor Relations (‘FMIR’) and the non-core portfolios of social housing loans and structured credit assets. FMIR is responsible for managing capital and funding, balance sheet composition and structure, and strategic liquidity risk for the Santander UK group. The non-core portfolios are being run-down and/or managed for value.

Our strategy

ANTS’s strategy is to continue to provide treasury support functions for the Santander UK group and to provide treasury, corporate and wholesale banking services to UK clients.


Abbey National Treasury Services plc 2014 Half Yearly Financial Report		3

Detailed Business Review

Group and Divisional Results

GROUP SUMMARY

KEY PERFORMANCE INDICATORS

Key performance indicators are set at the Santander UK group level, rather than separately for the ANTS group.

SUMMARISED CONSOLIDATED INCOME STATEMENT


	Six months ended 30 June 2014 £m			Six months ended 30 June 2013 £m
Net interest expense		(50	)		(8	)
Non-interest income		240			436

Total operating income		190			428

Administrative expenses		(125	)		(108	)
Depreciation, amortisation and impairment		(1	)		(1	)

Total operating expenses excluding impairment losses		(126	)		(109	)

Impairment losses on loans and advances		—			(18	)

Total operating impairment losses		—			(18	)

Profit before tax		64			301
Taxation credit/(charge)		1			(45	)

Profit for the period		65			256

Six months ended 30 June 2014 compared to six months ended 30 June 2013

Profit before tax decreased by £237m to £64m in the first half of 2014 (2013: £301m). By income statement line, the movements were:

•

Net interest expense increased by £42m to £50m in the first half of 2014 (2013: £8m) as the returns on our structural hedge strategy were lower than in the first half of 2013 following the maturity of historic contracts that benefited from higher returns. This was partially offset by increased interest income as a result of continued growth in customer loans at improved spreads.

•

Non-interest income decreased by £196m to £240m in the first half of 2014 (2013: £436m) principally due to reduced mark-to-market gains on certain derivatives, which are only treated as hedging for Santander UK group purposes. In addition, non-interest income decreased due to a significantly reduced credit arising from the debit valuation adjustments on derivatives written by ANTS.

•

Administrative expenses increased by £17m to £125m in the first half of 2014 (2013: £108m). The increase reflected the continued investment in the Commercial Banking and Markets businesses, partially offset by effective cost control.

•

Depreciation, amortisation and impairment costs were unchanged at £1m in the first half of 2014 (2013: £1m).

•

Impairment losses on loans and advances decreased by £18m to £nil in the first half of 2014 (2013: £18m). Credit quality in the loan books continued to be good, supported by the improving economic environment.

•

The taxation charge decreased by £46m to a credit of £1m in the first half of 2014 (2013: £45m) principally due to reduced profits. The tax charge in both periods was also reduced by the effect of other non-equalised items and adjustments in respect of prior year provisions.


4		Abbey National Treasury Services plc 2014 Half Yearly Financial Report

Detailed Business Review

Group and Divisional Results continued

Critical factors affecting results

The preparation of our Condensed Consolidated Interim Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the balance sheet date and the reported amount of income and expenses during the reporting period. Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and other factors believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Estimates and judgements that are considered important to the portrayal of our financial condition including, where applicable, quantification of the effects of reasonably possible ranges of such estimates are set out in “Critical Accounting Policies” in Note 1 on page 127 of the 2013 Annual Report.

The rest of this section contains a summary of the results, and commentary thereon, by Income Statement line item for each segment.

Basis of results presentation

The segmental information in this Half Yearly Financial Report reflects the reporting structure in place at the reporting date in accordance with which the segmental information in Note 2 to the Condensed Consolidated Interim Financial Statements has been presented. The Company’s board of directors (the ‘Board’) is the chief operating decision maker for the ANTS group. The segment information below is presented on the basis used by the Board to evaluate performance and allocate resources. The Board reviews discrete financial information for each segment of the business which follows the ANTS group’s normal accounting policies and principles, including measures of operating results, assets and liabilities.

PROFIT BEFORE TAX BY SEGMENT


30 June 2014	Commercial Banking £m			Markets £m			Corporate Centre £m			Total £m
Net interest income/(expense)		90			1			(141	)		(50	)
Non-interest income		110			57			73			240

Total operating income		200			58			(68	)		190

Administration expenses		(50	)		(56	)		(19	)		(125	)
Depreciation, amortisation and impairment		—			(1	)		—			(1	)

Total operating expenses excluding impairment losses		(50	)		(57	)		(19	)		(126	)

Impairment losses on loans and advances		—			—			—			—

Total operating impairment losses		—			—			—			—

Profit/(loss) before tax		150			1			(87	)		64


30 June 2013	Commercial Banking £m			Markets £m			Corporate Centre £m			Total £m
Net interest income/(expense)		69			(1	)		(76	)		(8	)
Non-interest income		114			40			282			436

Total operating income		183			39			206			428

Administration expenses		(42	)		(48	)		(18	)		(108	)
Depreciation, amortisation and impairment		—			(1	)		—			(1	)

Total operating expenses excluding impairment losses		(42	)		(49	)		(18	)		(109	)

Impairment losses on loans and advances		(18	)		—			—			(18	)

Total operating impairment losses		(18	)		—			—			(18	)

Profit/(loss) before tax		123			(10	)		188			301


Abbey National Treasury Services plc 2014 Half Yearly Financial Report		5

Detailed Business Review

Group and Divisional Results continued

COMMERCIAL BANKING

Commercial Banking offers a wide range of products and financial services to customers through a network of regional CBCs and through telephony and e-commerce channels. Commercial Banking products and services include loans, bank accounts, deposits and treasury services. The management of our customers is organised according to the annual turnover of their business, enabling us to offer a differentiated service to small and medium enterprises (‘SMEs’), mid and large corporate customers.

The SME and mid corporate business principally serves SMEs with an annual turnover of more than £250,000 up to £50m, and other corporate customers with an annual turnover of up to £500m. This also includes real estate lending.

The Large Corporates business offers specialist treasury services in fixed income and foreign exchange, lending, transactional banking services, capital markets and money markets to large multinational corporate customers with an annual turnover of more than £500m. Lending includes syndicated loans and structured finance. Transactional banking includes trade finance and cash management. Money market activities include securities lending/borrowing and repos.

Summarised income statement


	Six months ended 30 June 2014 £m			Six months ended 30 June 2013 £m
Net interest income		90			69
Non-interest income		110			114

Total operating income		200			183

Administration expenses		(50	)		(42	)
Depreciation, amortisation and impairment		—			—

Total operating expenses excluding impairment losses		(50	)		(42	)

Impairment losses on loans and advances		—			(18	)

Total operating impairment losses		—			(18	)

Profit before tax		150			123

Commercial Banking profit before tax

Six months ended 30 June 2014 compared to six months ended 30 June 2013

Profit before tax increased by £27m to £150m in the first half of 2014 (2013: £123m). By income statement line, the movements were:

•

Net interest income increased by £21m to £90m in the first half of 2014 (2013: £69m), principally as a result of continued growth in customer loans at improved spreads.

•

Non-interest income decreased by £4m to £110m in the first half of 2014 (2013: £114m) reflecting lower income from Large Corporates, primarily as a result of lower demand for interest rate risk management products in a relatively stable, low interest rate environment, partially offset by increased client short-term market activity.

•

Administration expenses increased by £8m to £50m in the first half of 2014 (2013: £42m). The increase reflected the continued investment in the Commercial Banking business.

•

Depreciation, amortisation and impairment were unchanged at £nil in the first half of 2014 (2013: £nil).

•


6		Abbey National Treasury Services plc 2014 Half Yearly Financial Report

Detailed Business Review

Group and Divisional Results continued

MARKETS

Markets offers risk management and other services to financial institutions, as well as to other Santander UK divisions. Its main product areas are fixed income and foreign exchange, equity, capital markets and institutional sales.

Summarised income statement


	Six months ended 30 June 2014 £m			Six months ended 30 June 2013 £m
Net interest income/(expense)		1			(1	)
Non-interest income		57			40

Total operating income		58			39

Administration expenses		(56	)		(48	)
Depreciation, amortisation and impairment		(1	)		(1	)

Total operating expenses excluding impairment losses		(57	)		(49	)

Impairment losses on loans and advances		—			—

Total operating impairment losses		—			—

Profit/(loss) before tax		1			(10	)

Markets profit/(loss) before tax

Six months ended 30 June 2014 compared to six months ended 30 June 2013

Profit/(loss) before tax increased by £11m to £1m in the first half of 2014 (2013: loss of £10m). By income statement line, the movements were:

•

Net interest income/(expense) increased by £2m to £1m in the first half of 2014 (2013: expense of £1m), primarily due to a decrease in funding costs.

•

Non-interest income increased by £17m to £57m in the first half of 2014 (2013: £40m). Following a refocusing of the Equity Derivatives and Securities Financing businesses in 2013, non-interest income recovered to more normalised levels.

•

Administration expenses increased by £8m to £56m in the first half of 2014 (2013: £48m), reflecting investment in developing interest rate and fixed income product capabilities offset by tight cost control.

•

Depreciation, amortisation and impairment remained unchanged at £1m in the first half of 2014 (2013: £1m).


Abbey National Treasury Services plc 2014 Half Yearly Financial Report		7

Detailed Business Review

Group and Divisional Results continued

CORPORATE CENTRE

Corporate Centre consists of FMIR and the non-core portfolios of social housing loans and structured credit assets. FMIR is responsible for managing capital and funding, balance sheet composition and structure, and strategic liquidity risk for the Santander UK group. The non-core portfolios are being run-down and/or managed for value.

Summarised income statement


	Six months ended 30 June 2014 £m			Six months ended 30 June 2013 £m
Net interest expense		(141	)		(76	)
Non-interest income		73			282

Total operating (expense)/income		(68	)		206

Administration expenses		(19	)		(18	)
Depreciation, amortisation and impairment		—			—

Total operating expenses excluding impairment losses		(19	)		(18	)

Impairment losses on loans and advances		—			—

Total operating impairment losses		—			—

(Loss)/profit before tax		(87	)		188

Corporate Centre (loss)/profit before tax

Six months ended 30 June 2014 compared to six months ended 30 June 2013

(Loss)/profit before tax decreased by £275m to £(87)m in the first half of 2014 (2013: £188m). By income statement line, the movements were:

•

Net interest expense increased by £65m to £141m in the first half of 2014 (2013: £76m) as the returns on our structural hedge strategy were lower than in the first half of 2013 following the maturity of historic contracts that benefited from higher returns.

•

Non-interest income decreased by £209m to income of £73m in the first half of 2014 (2013: £282m) principally due to reduced mark-to-market gains on certain derivatives, which are only treated as hedging for Santander UK group purposes. In addition, non-interest income decreased due to a significantly reduced credit arising from the debit valuation adjustments on derivatives written by ANTS.

•

Administration expenses increased by £1m to £19m in the first half of 2014 (2013: £18m) reflecting effective cost control.


8		Abbey National Treasury Services plc 2014 Half Yearly Financial Report

Detailed Business Review

Balance Sheet Review

This Balance Sheet Review describes the ANTS group’s significant assets and liabilities and its strategy and reasons for entering into such transactions. Throughout this section, references to UK and non-UK, in the geographic analysis, refer to the location of the office where the transaction is recorded.


Index
Summarised condensed consolidated balance sheet		9
Short-term borrowings		11
Liquidity and Funding		12
Average balance sheet		13

This Balance Sheet Review focuses on those areas that have changed significantly during the first half of 2014, and represents an update to the Balance Sheet Review in the 2013 Annual Report, with which it should be read in conjunction. The Balance Sheet Review in the 2013 Annual Report contains additional disclosures which have not changed significantly during the first half of 2014.

SUMMARISED CONDENSED CONSOLIDATED BALANCE SHEET


	30 June 2014 £m		31 December 2013 £m
Assets
Cash and balances at central banks		7,452		4,911
Trading assets		18,307		21,897
Derivative financial instruments		21,379		21,550
Financial assets designated at fair value		2,543		2,534
Loans and advances to banks		110,454		113,649
Loans and advances to customers		38,032		41,108
Loans and receivables securities		96		128
Available for sale securities		2,550		2,962
Macro hedge of interest rate risk		399		379
Property, plant and equipment		7		6
Tax, intangibles and other assets		201		203

Total assets		201,420		209,327

Liabilities
Deposits by banks		118,326		120,698
Deposits by customers		4,824		7,780
Trading liabilities		17,848		21,275
Derivative financial instruments		21,607		21,496
Financial liabilities designated at fair value		3,252		3,407
Debt securities in issue		31,717		30,889
Tax, other liabilities and provisions		549		614

Total liabilities		198,123		206,159

Equity
Total shareholders’ equity		3,297		3,168

Total equity		3,297		3,168

Total liabilities and equity		201,420		209,327

A more detailed consolidated balance sheet is contained in the Condensed Consolidated Interim Financial Statements.

30 June 2014 compared to 31 December 2013

Assets

Cash and balances at central banks

Cash and balances held at central banks increased to £7,452m at 30 June 2014 (2013: £4,911m). The increase was due to additional cash placed with the Federal Reserve Bank of New York as part of normal liquid asset portfolio management activity.

Trading assets

Trading assets decreased by 16% to £18,307m at 30 June 2014 (2013: £21,897m) reflecting lower levels of activity relating to securities purchased under resale agreements to both banks and customers partially offset by increased holdings of equity instruments as part of short-term markets trading activity.

Derivative financial instruments - assets

Derivative assets remained broadly unchanged at £21,379m at 30 June 2014 (2013: £21,550m).

Financial assets designated at fair value through profit and loss

Financial assets designated at fair value through profit and loss remained broadly unchanged at £2,543m at 30 June 2014 (2013: £2,534m).


Abbey National Treasury Services plc 2014 Half Yearly Financial Report		9

Business Review

Balance Sheet Review continued

Loans and advances to banks

Loans and advances to banks decreased by 3% at £110,454m at 30 June 2014 (2013: £113,649m). These balances largely consisted of loans to Santander UK to support its retail and commercial banking activities.

Loans and advances to customers

Loans and advances to customers decreased by 7% to £38,032m at 30 June 2014 (2013: £41,108m) due to reduced on-lending of covered bond issuances.

Available for sale securities

Available for sale securities decreased to £2,550m at 30 June 2014 (2013: £2,962m) as part of normal liquid asset portfolio management activity.

Loans and receivables securities

Loans and receivables securities decreased by 25% to £96m at 30 June 2014 (2013: £128m). The decrease principally reflected the continuing run-down of the Treasury asset portfolio.

Tax, intangibles and other assets

Tax, intangibles and other assets remained broadly unchanged at £201m at 30 June 2014 (2013: £203m).

Liabilities

Deposits by banks

Deposits by banks were relatively stable at £118,326m at 30 June 2014 (2013: £120,698m). This largely consisted of deposits by Santander UK representing on-lending to ANTS of retail and commercial deposits.

Deposits by customers

Deposits by customers decreased by 38% to £4,824m at 30 June 2014 (2013: £7,780m). The decrease was attributable to lower levels of deposits as part of a plan for the management of our less relationship driven deposit base.

Trading liabilities

Trading liabilities decreased by 16% to £17,848m at 30 June 2014 (2013: £21,275m). A decrease in securities sold under repurchase activities and the cash collateral received as part of normal trading activity were offset by an increase in short-term deposits and short positions in securities.

Derivative financial instruments - liabilities

Derivative liabilities were broadly unchanged at £21,607m at 30 June 2014 (2013: £21,496m).

Financial liabilities designated at fair value

Financial liabilities designated at fair value decreased by 5% to £3,252m at 30 June 2014 (2013: £3,407m). The decrease principally reflected a slight reduction in issuances of structured notes.

Debt securities in issue

Debt securities in issue increased by 3% to £31,717m at 30 June 2014 (2013: £30,889m) with increases in issuance of certificates of deposit, partially offset by maturities under the covered bond programme.

Equity

Total shareholders equity increased by 4% to £3,297m at 30 June 2014 (2013: £3,168m). The increase was principally attributable to retained profit for the period and an increase in the cash flow hedging reserve.


10		Abbey National Treasury Services plc 2014 Half Yearly Financial Report

Business Review

Balance Sheet Review continued

SHORT-TERM BORROWINGS

The ANTS group includes short-term borrowings within deposits by banks, trading liabilities, financial liabilities designated at fair value and debt securities in issue and does not show short-term borrowings separately on the balance sheet. Short-term borrowings are defined by the US Securities and Exchange Commission (the ‘SEC’) as amounts payable for short-term obligations that are US Federal funds purchased and securities sold under repurchase agreements, commercial paper, borrowings from banks, borrowings from factors or other financial institutions and any other short-term borrowings reflected on the ANTS group’s balance sheet. The ANTS group’s only significant short-term borrowings are securities sold under repurchase agreements, commercial paper, borrowings from banks, negotiable certificates of deposit, and certain other debt securities in issue. Additional information on short-term borrowings is provided in the table below for each of the six months ended 30 June 2014 and 30 June 2013.


	Six months ended 30 June 2014 £m			Six months ended 30 June 2013 £m
Securities sold under repurchase agreements
- Period end balance		13,217			23,664
- Period-end interest rate		0.63	%		0.35	%
- Average balance⁽¹⁾		22,872			19,607
- Average interest rate⁽¹⁾		0.44	%		0.39	%
- Maximum balance⁽¹⁾		25,927			23,664
Commercial paper
- Period-end balance		3,862			4,687
- Period-end interest rate		0.61	%		0.47	%
- Average balance⁽¹⁾		4,043			4,223
- Average interest rate⁽¹⁾		0.39	%		0.53	%
- Maximum balance⁽¹⁾		4,610			4,687
Borrowings from banks (Deposits by banks)
- Period-end balance		602			223
- Period-end interest rate		0.50	%		0.45	%
- Average balance⁽¹⁾		467			563
- Average interest rate⁽¹⁾		1.27	%		0.27	%
- Maximum balance⁽¹⁾		602			1,149
Negotiable certificates of deposit
- Period-end balance		4,119			2,336
- Period-end interest rate		2.00	%		1.96	%
- Average balance⁽¹⁾		3,588			2,299
- Average interest rate⁽¹⁾		2.51	%		1.77	%
- Maximum balance⁽¹⁾		4,119			2,724
Other debt securities in issue
- Period-end balance		4,793			4,661
- Period-end interest rate		2.87	%		2.92	%
- Average balance⁽¹⁾		4,922			6,211
- Average interest rate⁽¹⁾		3.11	%		2.95	%
- Maximum balance⁽¹⁾		5,938			7,888

(1)	Calculated using monthly data.

The ANTS group issues commercial paper generally in denominations of not less than US$50,000, with maturities of up to 365 days. Commercial paper is issued by the Company and its subsidiary Abbey National North America LLC.


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LIQUIDITY AND FUNDING

Sources and uses of liquidity and funding

ANTS is the treasury support function for the Santander UK group. In this regard, ANTS’s role is to provide access to financial markets and central bank facilities in order to meet the Santander UK group’s liquidity, funding, capital and balance sheet management requirements.

Liquidity and funding risk is managed on a Santander UK group basis and it is not therefore appropriate to consider these risks separately at an ANTS group level. In addition, under the PRA’s regulatory liquidity regime, Santander UK and ANTS together with Cater Allen Limited, a fellow subsidiary of Santander UK plc, form the Santander UK Defined Liquidity Group (‘DLG’). Under these arrangements, each member of the DLG is liable to support each other in terms of transferring or receiving surplus liquidity in times of stress. In considering the liquidity resources available to the ANTS group, both its own liquid assets and also those of the rest of the Santander UK group are separately presented.

In addition, the Company, Santander UK plc, and Cater Allen Limited, which are the three PRA-regulated entities within the Santander UK group, are party to a capital support deed dated 14 December 2012 (the “Capital Support Deed”) with certain other non-regulated subsidiaries of Santander UK plc. The parties to the Capital Support Deed constitute a core UK group for the purposes of the large exposures provisions of CRD IV. Under article 4001(f) of the Capital Requirements Regulations, exposures of each of the three regulated entities to other members of the core UK group are exempt from large exposure limits that would otherwise apply. The purpose of the Capital Support Deed is 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 event that one of the regulated parties has breached or is at risk of breaching its capital resources requirements or risk concentrations requirements.

Santander UK primarily generates funding and liquidity through UK retail and corporate deposits, as well as in the financial markets through its own debt programmes and facilities to support its business activities and liquidity requirements. It does this in reliance on the strength of its balance sheet and profitability and its own network of investors.

Liquidity and funding risks are identified and encompassed within Santander UK’s Risk Framework and subject to Santander UK’s three-tier risk governance framework.

The debt issuance programmes managed by ANTS are set out in Notes 30 and 31 to the Consolidated Financial Statements in the 2013 Annual Report.

Further information is set out in “Liquidity and funding risk” in the Risk Management Report.

Cash flows


	Six months ended 30 June 2014 £m		Six months ended 30 June 2013 £m
Net cash inflow/(outflow) from operating activities		11,450		(1,771	)
Net cash inflow from investing activities		381		843
Net cash inflow/(outflow) from financing activities		405		(3,596	)

Increase/(decrease) in cash and cash equivalents		12,236		(4,524	)

The major activities and transactions that affected the ANTS group’s cash flows during the first six months of 2014 were as follows:

In the six months ended 30 June 2014, the net cash inflow from operating activities of £11,450m resulted from decreased loans and advances to banks and customers.

In the six months ended 30 June 2014, the net cash inflow from investing activities of £381m resulted primarily from the net proceeds of acquisitions and disposals of UK Treasury bills and other government securities.

In the six months ended 30 June 2014, the net cash inflow from financing activities of £405m reflected new issues of debt securities of £9,977m, partially offset by repayments of debt securities maturing in the period of £9,572m.

In the six months ended 30 June 2014, cash and cash equivalents increased by £11,657m resulted principally from an increase in short-term loans and advances to banks, and an increase in cash and balances at central banks.


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AVERAGE BALANCE SHEET

As period-end statements may not be representative of the ANTS group’s activity throughout the period, average balance sheets for the ANTS group are presented below. The average balance sheets summarise the significant categories of assets and liabilities, together with average interest rates.


	Six months ended 30 June 2014								Six months ended 30 June 2013
	Average Balance⁽¹⁾ £m			Interest^(4) (5) £m			Average rate %		Average balance⁽¹⁾ £m			Interest^(4) (5) £m			Average rate %
Assets
Loans and advances to banks:
- UK		102,469			628			1.23		110,903			1,021			1.84
- Non-UK		13,380			15			0.22		5,634			9			0.32
Loans and advances to customers:⁽³⁾
- UK		40,195			523			2.60		41,078			542			2.64
Other interest-earning financial assets
- UK		2,717			18			1.32		4,464			20			0.90
- Non-UK		—			—			—		289			1			0.69

Total average interest-earning assets, interest income⁽²⁾		158,761			1,184			1.49		162,368			1,593			1.96

Impairment loss allowances		(56	)		—			—		(114	)		—			—
Trading business		18,930			—			—		26,320			—			—
Assets designated at FVTPL		2,605			—			—		3,236			—			—
Other non-interest-earning assets		28,840			—			—		37,147			—			—

Total average assets		209,080			—			—		228,957			—			—

Non-UK assets as a % of total		6.40	%		—			—		2.59	%		—			—

Liabilities
Deposits by banks:
- UK		(113,290	)		(666	)		1.18		(117,862	)		(998	)		1.69
- Non-UK		(9	)		—			—		(2	)		—			—
Deposits by customers – wholesale:
- UK		(6,341	)		(72	)		2.27		(5,665	)		(67	)		2.37
- Non-UK		—			—			—		—			—			—
Bonds and medium-term notes:
- UK		(28,451	)		(491	)		3.45		(27,099	)		(525	)		3.87
- Non-UK		(4,287	)		(5	)		0.23		(4,357	)		(11	)		0.50
Dated and undated loan capital and other subordinated liabilities:
- UK		—			—			—		—			—			—

Total average interest-bearing liabilities, interest expense⁽²⁾		(152,378	)		(1,234	)		1.62		(154,985	)		(1,601	)		2.07

Trading business		(25,891	)		—			—		(31,233	)		—			—
Liabilities designated at FVTPL		(4,085	)		—			—		(4,902	)		—			—
Non-interest-bearing liabilities:
- Other		(23,486	)		—			—		(33,935	)		—			—
- Shareholders’ funds		(3,240	)		—			—		(3,902	)		—			—

Total average liabilities and shareholders’ funds		(209,080	)		—			—		(228,957	)		—			—

Non-UK liabilities as a % of total		2.05	%		—			—		1.90	%		—			—

(1)	Average balances are based upon monthly data.

(2)	The ratio of average interest-earning assets to interest-bearing liabilities for the six months ended 30 June 2014 was 104.19% (Six months ended 30 June 2013: 104.76%).

(3)	Loans and advances to customers include non-performing loans. See the “Credit Risk” section of the Risk Management Report.

(4)	The net interest margin for the six months ended 30 June 2014 was (0.06)% (Six months ended 30 June 2013: (0.01)%). Net interest margin is calculated as net interest income divided by average interest-earning assets.

(5)	The interest spread for the six months ended 30 June 2014 was (0.13)% (Six months ended 30 June 2013: (0.1)%). Interest spread is the difference between the rate of interest earned on average interest-earning assets and the rate of interest paid on average interest-bearing liabilities.


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Detailed Business Review

Risk Management Report


Index
Risk Management		15
Introduction		16
Risk Framework		16
Credit Risk		17
• Credit Risk Review		17
• ANTS group exposure		17
• Commercial Banking		19
• Markets		26
• Corporate Centre		27
Market Risk		29
• Traded Market risk		29
Balance Sheet Management Risk		31
• Banking Market risk		31
• Liquidity and Funding risk		32
• Capital risk		34
Operational Risk		34
Conduct Risk		34
Regulatory Risk		34
Legal Risk		34
Areas of focus and other items		35
• Country Risk exposure		35

This Risk Management Report contains information that forms an integral part of the Condensed Consolidated Interim Financial Statements.

This Risk Management Report focuses on those areas that have changed significantly during the first half of 2014, and represents an update to the Risk Management Report in the 2013 Annual Report, with which it should be read in conjunction. The Risk Management Report in the 2013 Annual Report contains additional disclosures which have not changed significantly during the first half of 2014.


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RISK MANAGEMENT REPORT

This Risk Management Report contains information that forms an integral part of the Condensed Consolidated Interim Financial Statements

The ANTS group provides treasury, corporate and wholesale banking services to UK clients and also to the wider Santander UK group, of which ANTS is a significant part. ANTS is also the treasury support function for the Santander UK group. In this regard, ANTS’s role is to provide access to financial markets and central bank facilities in order to meet the Santander UK group’s liquidity, funding, capital and balance sheet management requirements. As such, ANTS is one of the main debt issuance vehicles in the Santander UK group.

ANTS contains part of a number of Santander UK’s business segments. Specifically, ANTS consists of part of the Santander UK group’s Commercial Banking and Corporate Centre business segments and its entire Markets business segment. Whether transactions are booked in ANTS or another Santander UK group entity reflects historical or operational reasons and does not necessarily reflect any particular business split.

Santander UK plc has given a full and unconditional guarantee in respect of the liabilities of ANTS incurred up to 30 June 2015. The Company has given a reciprocal guarantee in respect of the unsubordinated liabilities of Santander UK plc incurred up to 30 June 2015. As a consequence of the reciprocal guarantee given by the Company in respect of the unsubordinated liabilities of Santander UK plc, the Company is exposed to the same risks as the Santander UK group, of which ANTS is a significant part.

As a subsidiary of Santander UK plc, ANTS has adopted the Santander UK Risk Framework. As a consequence, the ANTS group’s risks are managed at a Santander UK group level in accordance with the Santander UK group’s Risk Framework. The Risk Management Report describes the Santander UK group’s Risk Framework and includes more detail on the key risks (on a segmental basis or aggregated where relevant) to which the ANTS group is directly exposed. In addition, as a consequence of the guarantee given by the ANTS group in respect of the liabilities of Santander UK plc, the ANTS group is indirectly exposed to risks that arise in parts of the Santander UK group that are wholly outside the ANTS group. Those risks consist of retail credit risk and pension obligations risk.

Throughout the Risk Management Report, except where stated otherwise, references to Santander UK should be taken to include the ANTS group (reflecting both the risks that ANTS is directly exposed to through its own activities and the risks arising elsewhere in the Santander UK group that ANTS is indirectly exposed to due to the existence of the cross guarantees described above).


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RISK MANAGEMENT

INTRODUCTION

As a significant financial services provider, risk is at the core of Santander UK’s day-to-day activities. The understanding and control of risk is critical for the effective management of the business. Santander UK aims to employ a prudent approach and advanced risk management techniques to facilitate the delivery of robust financial performance, and ultimately build sustainable value for all our stakeholders, including our people, customers, shareholders and the communities in which we operate. Santander UK aims to maintain a predictable medium-low risk profile.

RISK FRAMEWORK

The Risk Framework in place at 30 June 2014 was based upon the following key components:

•

Risk definition and structure;

•

Risk Culture, overriding principles and minimum standards;

•

Governance, roles and responsibilities; and

•

System of internal control for risk.

In December 2013, the Board of Santander UK plc (the “Santander UK Board”) approved an updated Risk Framework, which operated throughout the first half of 2014. As a subsidiary group of Santander UK, ANTS has adopted this Risk Framework. The key risk types were simplified and the lines of defence model streamlined. There was no change to the overriding principles. The main changes were:

•

With respect to risk definition and structure, the key risk types were reorganised as: Credit, Traded Market, Balance Sheet Management (previously known as Structural) including Banking Market (previously known as Non-traded Market), Operational, Conduct, Regulatory and Legal, as set out diagrammatically below; and

•

The additional classification of financial / non-financial risks was removed;

•

With respect to governance, roles and responsibilities, a Conduct & Regulatory Risk Committee was created which reports to the Executive Risk Committee; and

•

A Risk Culture statement was included.

Risk definition and structure

LOGO


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CREDIT RISK REVIEW

ANTS GROUP EXPOSURE

Maximum exposure to credit risk

The tables below set out the ANTS group’s maximum exposure to credit risk. For balance sheet assets, the maximum exposure to credit risk represents the carrying value after allowance for impairment losses. Off-balance sheet exposures comprise guarantees, formal standby facilities, credit lines and other commitments. For off-balance sheet guarantees, the maximum exposure is the maximum amount that ANTS would have to pay if the guarantees were to be called upon. For formal standby facilities, credit lines and other commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.

The table presented below include only those financial assets subject to credit risk, and therefore excludes equity securities.


	30 June 2014				31 December 2013
	Maximum exposure				Maximum exposure
	Balance sheet asset £bn		Off-balance sheet⁽¹⁾ £bn		Balance sheet asset £bn		Off-balance sheet⁽¹⁾ £bn
Cash and balances at central banks		7.5		—		4.9		—
Trading assets		15.5		—		21.6		—
Financial assets designated at fair value		2.5		0.2		2.5		0.2
Available-for-sale debt securities		2.6		—		3.0		—
Derivative financial instruments		21.4		—		21.6		—
Loans and advances to banks		110.5		155.3		113.6		149.9
Loans and advances to customers		38.0		11.9		41.1		10.7
Loans and receivables securities		0.1		—		0.1		—

Total		198.1		167.4		208.4		160.8

(1)	Off balance sheet exposure includes the cross guarantee of the liabilities of Santander UK plc, as set out in Note 20 to the Condensed Consolidated Interim Financial Statements.

Credit quality

ANTS uses a single rating scale to provide a consistent approach for reporting default risk across all the credit risk portfolios. The scale is comprised of eight grades for non-defaulted exposures numbered from 9 (lowest risk) to 2 (highest risk). Each grade is defined by an upper and lower probability of default (‘PD’) value and is scaled so that the default risk increases by a factor of 10 for every 2 step reduction in the grade number. For example, risk grade 9 equates to an average PD of 0.01%, and risk grade 7 equates to an average PD of 0.1%. Defaulted exposures are assigned to grade 1 and a PD value of 100%. An approximation to the equivalent credit rating grade used by Standard and Poor’s Rating Services (‘S&P’) is shown in the final column of the table.


	PD range
ANTS risk grade	Mid %		Lower %		Upper %		S&P equivalent
9		0.010		0.000		0.021		AAA to AA-
8		0.032		0.021		0.066		A+ to A
7		0.100		0.066		0.208		A- to BBB+
6		0.316		0.208		0.658		BBB to BBB-
5		1.000		0.658		2.081		BB+ to BB-
4		3.162		2.081		6.581		B+ to B
3		10.000		6.581		20.811		B- to CCC
2		31.623		20.811		99.999		CC TO C
1 Default		100.000		100.000		100.000		D


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Non-performing loans and advances ⁽¹⁾⁽²⁾

An analysis of ANTS’s NPLs is presented below. The information is presented for Commercial Banking only as there are no NPLs in other business divisions.


	30 June 2014 £m		31 December 2013 £m
Loans and advances to customers of which:⁽²⁾		6,838		6,317
Commercial Banking Arrears including NPLs⁽³⁾		130		94
Commercial Banking NPLs - impaired^{(3) (4) (5)}		130		94
Commercial Banking NPLs - not impaired^{(3) (4)}		—		—

Commercial Banking NPLs		130		94

Impairment loan loss allowances		50		63

		%		%

Arrears ratio⁽⁶⁾		1.90		1.49
NPLs ratio⁽⁷⁾		1.90		1.49
Coverage ratio⁽⁸⁾		38		67

(1)	Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed probable that this will occur in the near future.

(2)	All Commercial Banking NPL balances are UK and continue accruing interest. For the data presented, the balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.

(3)	Commercial Banking loans and advances to customers include finance leases.

(4)	All the Non-Performing Loans are impaired for purposes of provisioning.

(5)	NPLs against which an impairment loss allowance has been established.

(6)	Commercial Banking loans and advances to customers in arrears as a percentage of Commercial Banking loans and advances to customers.

(7)	Commercial Banking NPLs as a percentage of Commercial Banking loans and advances to customers.

(8)	Impairment loan loss allowances as a percentage of NPLs.

Concentrations of credit risk exposures

The management of risk concentration is a key part of risk management. ANTS tracks the degree of concentration of its credit risk portfolios using various criteria, including geographic areas and countries, economic sectors, products and groups of customers. Although ANTS’s operations are based mainly in the UK, it has built up exposures to various entities around the world and is therefore exposed to concentrations of risk related to geographic area.

Geographic concentrations

As part of its approach to credit risk management and risk appetite, ANTS sets exposure limits to countries and certain geographic areas. These limits are set with reference to the country limits set by Banco Santander, S.A. These are determined according to the classification of the country (whether it is a developed OECD country or not), the rating of the country, its gross domestic product and the type of business activities and products the Banco Santander group wishes to engage in within that country. For additional geographic information, see “Country Risk Exposure” on pages 35 to 38.

Credit risk exposures by industry

As part of its approach to credit risk management and risk appetite, ANTS sets exposure limits to certain key industry sectors. For additional industry information, see “Country Risk Exposure” on pages 35 to 38.

Forbearance

Commercial Banking is the only business division that undertakes forbearance activities. Discussion and analysis of forbearance activities in Commercial Banking are set out on page 22.


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CREDIT RISK – COMMERCIAL BANKING

In Commercial Banking, credit risk arises on asset balances and on committed off-balance sheet transactions such as credit facilities or guarantees. Consequently, committed exposures are typically higher than asset balances. However, in the following committed exposures tables, Sovereigns are presented net of short positions and include Sovereign exposures established for liquidity management purposes managed by Short Term Markets on behalf of Corporate Centre. Large Corporate reverse repos are presented net of repo liabilities and include OTC derivatives. As a result, the committed exposures are smaller than the asset balances recognised on the balance sheet.

COMMERCIAL BANKING - COMMITTED EXPOSURES

Rating distribution

The rating distribution tables show the credit risk exposure by ANTS’s internal rating scale (see page 17) for each portfolio within Commercial Banking. Within this scale, the higher the rating, the better the quality of the counterparty.


30 June 2014	Sovereign and Supranational⁽²⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
9		1,483		3		90		—		339		1,915
8		3,614		1,664		377		259		385		6,299
7		680		2,738		1,655		793		219		6,085
6		—		4,022		2,984		2,580		90		9,676
5		—		1,271		1,400		1,202		—		3,873
4		—		100		125		159		—		384
1 to 3		—		85		115		99		—		299
Other ⁽¹⁾		—		—		3		4		—		7

Total		5,777		9,883		6,749		5,096		1,033		28,538


31 December 2013	Sovereign and Supranational⁽²⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
9		1,295		14		139		126		263		1,837
8		3,894		1,242		280		278		359		6,053
7		860		3,122		1,571		1,419		231		7,203
6		—		3,454		2,830		1,797		115		8,196
5		—		1,336		899		1,061		—		3,296
4		—		—		84		200		—		284
1 to 3		—		—		10		112		—		122
Other ⁽¹⁾		—		—		12		1		—		13

Total		6,049		9,168		5,825		4,994		968		27,004

(1)	Represents smaller exposures predominantly within the commercial mortgages portfolio which are subject to scorecards rather than a rating model.

(2)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the to the geographical focus of the organisation.

Geographical distribution

The geographic location is classified by country of risk, being the country where each counterparty’s main business activity or assets are located. For clients whose operations are more geographically dispersed, the country of incorporation is applied.


30 June 2014	Sovereign and Supranational⁽¹⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
UK		—		7,710		6,477		5,096		1,033		20,316
Peripheral eurozone		680		323		8		—		—		1,011
Rest of Europe		1,191		1,393		237		—		—		2,821
US		—		358		4		—		—		362
Rest of world		3,906		99		23		—		—		4,028

Total		5,777		9,883		6,749		5,096		1,033		28,538


31 December 2013	Sovereign and Supranational⁽¹⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
UK		—		7,520		5,601		4,994		968		19,083
Peripheral eurozone		860		317		18		—		—		1,195
Rest of Europe		1,029		861		87		—		—		1,977
US		—		284		—		—		—		284
Rest of world		4,160		186		119		—		—		4,465

Total		6,049		9,168		5,825		4,994		968		27,004

(1)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the to the geographical focus of the organisation.

30 June 2014 compared to 31 December 2013

During the first half of 2014, total committed exposures increased by £1.5bn or 6% to £28.5bn principally within the Large Corporate, and Mid Corporate and SME portfolios. Large Corporate exposures increased by 8% as a result of the development of the franchise focused in high-rated multinational companies. Growth was focused on the UK and other European countries with counterparties with good credit quality and primarily reflects the provision of financial products to support the working capital and liquidity needs of our clients. The Mid Corporate and SME portfolio grew by 16%, reflecting the continued development of the franchise especially in the SME segment. This was reflected in the rise in the mid-range rating bands as this is where counterparties in this segment typically rate.


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COMMERCIAL BANKING - CREDIT RISK MITIGATION

At 30 June 2014, collateral held against impaired loans amounted to 54% (2013: 61%) of the carrying amount of impaired loan balances.

COMMERCIAL BANKING – CREDIT PERFORMANCE

Exposures exhibiting potentially higher risk characteristics are subject to risk monitoring under the Watchlist process (described in “The Credit Cycle” section under “Risk monitoring” on page 39 in the 2013 Annual Report). The table below sets out the portfolio showing exposures subject to risk monitoring under the Watchlist process and those classified as non-performing by portfolio at 30 June 2014 and 31 December 2013.


30 June 2014	Sovereign and Supranational⁽⁷⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
Total Committed Exposure of which:⁽¹⁾		5,777		9,883		6,749		5,096		1,033		28,538
-Watchlist: Enhanced Monitoring		—		99		225		147		30		501
-Watchlist: Proactive Management		—		—		201		104		—		305
-Remaining Performing Exposure		5,777		9,784		6,323		4,713		1,003		27,600
Subtotal Performing Exposure		5,777		9,883		6,749		4,964		1,033		28,406
Non-Performing Exposure⁽²⁾		—		—		—		132		—		132

Total Impaired Exposure of which:⁽³⁾		—		—		242		383		30		655
-Performing – Watchlist		—		—		242		251		30		523
-Non-Performing Exposure⁽²⁾		—		—		—		132		—		132

Total Observed impairment loss allowances of which:⁽⁴⁾		—		—		1		44		—		45
-Performing – Watchlist		—		—		1		15		—		16
-Non-Performing Exposure⁽²⁾		—		—		—		29		—		29

IBNO⁽⁵⁾⁽⁶⁾												5
Total Impairment loss allowance												50


31 December 2013	Sovereign and Supranational⁽⁷⁾ £m		Large Corporate £m		Mid Corporate and SME £m		Commercial Real Estate £m		Social Housing £m		Total £m
Total Committed Exposure of which:⁽¹⁾		6,049		9,168		5,825		4,994		968		27,004
-Watchlist: Enhanced Monitoring		—		111		143		130		35		419
-Watchlist: Proactive Management		—		—		77		193		—		270
-Remaining Performing Exposure		6,049		9,057		5,600		4,582		933		26,221
Subtotal Performing Exposure		6,049		9,168		5,820		4,905		968		26,910
Non-Performing Exposure⁽²⁾		—		—		5		89		—		94

Total Impaired Exposure of which:⁽³⁾		—		—		225		412		35		672
-Performing – Watchlist		—		—		220		323		35		578
-Non-Performing Exposure⁽²⁾		—		—		5		89		—		94

Total Observed impairment loss allowances of which:⁽⁴⁾		—		—		6		55		—		61
-Performing – Watchlist		—		—		1		16		—		17
-Non-Performing Exposure⁽²⁾		—		—		5		39		—		44

IBNO⁽⁵⁾⁽⁶⁾												2
Total Impairment loss allowance												63

(1)	Includes committed facilities and derivatives. The terms ‘Enhanced Monitoring’ and ‘Proactive Management’ are defined on page 41 of the 2013 Annual Report.

(2)	Non-Performing Exposure in the table above include committed facilities and derivative exposures and therefore are larger than the NPLs in the tables on page 21 which only include drawn balances. All the Non-Performing Exposures are impaired for the purposes of provisioning.

(3)	Corporate loans are assessed individually or collectively assessed for impairment. Assets reported as impaired represent, for collective assessment, that portion of the loan portfolio where it is estimated that a loss has been incurred, plus those assets individually impaired.

(4)	Excludes IBNO provision.

(5)	Allowance for incurred inherent losses (i.e. incurred but not observed (‘IBNO’)) as described in Note 1 to the Consolidated Financial Statements in the 2013 Annual Report.

(6)	There is no impairment allowance attributable to Sovereign and Supranational, Large Corporate or Social Housing.

(7)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the to the geographical focus of the organisation.


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Non-performing loans and advances^{(1) (2)}

An analysis of Commercial Banking NPLs is presented below.


	30 June 2014 £m		31 December 2013 £m
Loans and advances to customers of which:⁽²⁾		6,838		6,317
Commercial Banking Arrears including NPLs⁽³⁾		130		94
Commercial Banking NPLs - impaired^(3)(4)(5)		130		94
Commercial Banking NPLs - not impaired⁽³⁾⁽⁴⁾		—		—

Commercial Banking NPLs		130		94

Impairment loss allowances		50		63

		%		%

Arrears ratio⁽⁶⁾		1.90		1.49
NPLs ratio⁽⁷⁾		1.90		1.49
Coverage ratio⁽⁸⁾		38		67

(1)	Loans and advances are classified as non-performing typically when the counterparty fails to make payments when contractually due for three months or where it is deemed probable that this will occur in the near future.

(2)	Commercial Banking loans and advances to customers include finance leases.

(3)	All Commercial Banking balances are UK and continue accruing interest. For the data presented, the balances include interest charged to the customer’s account, but exclude interest accrued but not yet charged to the account.

(4)	All the Non-Performing Loans are impaired for purposes of provisioning.

(5)	NPLs against which an impairment loss allowance has been established.

(6)	Commercial Banking loans and advances to customers in arrears as a percentage of Commercial Banking loans and advances to customers.

(7)	Commercial Banking NPLs as a percentage of Commercial Banking loans and advances to customers.

(8)	Impairment loss allowances as a percentage of NPLs.

Movements in NPLs during the first six months are set out in the table below. ‘Transfers in’ represent loans which have become classified as NPLs during the period. ‘Exits (including repayments)’ represent that element of loans to customers that have been repaid (in full or in part) plus those returned to performing status. ‘Write-offs’ represent the unrecovered element of a loan where recovery options, including realisation of any collateral, have been exhausted. Forbearance activity does not result in a change in the NPL status.


	£m
At 1 January 2014		94
Transfers in to NPL:
- Entries		85
Transfers out of NPL:
- Exits (including repayments)		(35	)
- Write-Offs		(14	)

At 30 June 2014		130

30 June 2014 compared to 31 December 2013

During the first six months of 2014, Watchlist exposures subject to proactive management increased to £305m (2013: £270m), largely driven by an increase in the Mid Corporate and SME portfolio, partially offset by a reduction in Commercial Real Estate. Watchlist exposures subject to enhanced monitoring increased slightly. In the Sovereign and Supranational, Large Corporate, and Social Housing portfolios, there were no exposures subject to proactive management with only 1% (2013: 1%) of these portfolio exposures subject to enhanced monitoring.

Loans and advances to customers in arrears increased to £130m (2013: £94m) largely due to a single long-standing loan of £65m which moved to non-performance. A successful restructure of this loan is still anticipated and a conservative provision is held against it. Consequently, loans and advances to customers in arrears as a percentage of loans and advances to customers increased to 1.90% (2013: 1.49%).

During the first six months of 2014, the NPLs ratio also increased slightly to 1.90% (2013: 1.49%) due to the same single long-standing loan noted above.

In the first half of 2014, interest income recognised on impaired loans amounted to £1m (six months ended 30 June 2013: £1m).


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COMMERCIAL BANKING LOANS - FORBEARANCE

Forbearance commenced during the period/year⁽¹⁾

No arrangements have been entered into with respect to Sovereign and Supranational, Large Corporate or Social Housing counterparties. The exposures that entered forbearance during the six months period ended 30 June 2014 and the year ended 31 December 2013 were:


	Mid Corporate and SME		Commercial Real Estate		Total
30 June 2014	£m		£m		£m
Forbearance of NPL		—		—		—
Forbearance of Non-NPL		7		58		65

		7		58		65


	Mid Corporate and SME		Commercial Real Estate		Total
31 December 2013	£m		£m		£m
Forbearance of NPL		—		31		31
Forbearance of Non-NPL		—		72		72

		—		103		103

(1)	The figures by period/year reflect the amount of forbearance activity undertaken during the period/year irrespective of whether any forbearance activity has previously been undertaken on the forborne accounts.

Forbearance cumulative position

At 30 June 2014, 97% (2013: 98%) of the forbearance related to the Commercial Real Estate portfolio.

a) Performance status when entering forbearance

The status of forborne exposures at 30 June 2014 and 31 December 2013 when they originally entered forbearance, analysed by their payment status, was:


30 June 2014	Forbearance of NPL £m		Forbearance of Non-NPL £m		Total £m		Impairment allowance £m
Performing		—		224		224		18
In arrears (inc. NPLs)		16		—		16		2

Total		16		224		240		20


31 December 2013	Forbearance of NPL £m		Forbearance of Non-NPL £m		Total £m		Impairment allowance £m
Performing		—		201		201		13
In arrears (inc. NPLs)		51		—		51		19

Total		51		201		252		32

b) Performance status at the period/year-end

The current status of forborne exposures analysed by their payment status, at 30 June 2014 and 31 December 2013 was:


30 June 2014	Forbearance of NPL £m		Forbearance of Non-NPL £m		Total £m		Impairment allowance £m
Performing		—		139		139		8
In arrears (inc. NPLs)		16		85		101		12

Total		16		224		240		20


31 December 2013	Forbearance of NPL £m		Forbearance of Non-NPL £m		Total £m		Impairment allowance £m
Performing		—		201		201		13
In arrears (inc. NPLs)		51		—		51		19

Total		51		201		252		32


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30 June 2014 compared to 31 December 2013

The incidence of forbearance that commenced in the period remained stable compared to 2013, and related to a small number of Commercial Real Estate exposure originated in the pre-2009 vintage where a further forbearance was required. The volume of forborne exposures decreased as the number of pre-2009 cases continued to work their way through the process.

Accounts that are in forbearance continue to be closely monitored, to ensure that the forbearance arrangements are sustainable. Not all forbearance will prove effective, and in certain circumstances, market conditions may lead either to a case remaining in NPL even post-forbearance or to the need for a second forbearance action as, for example, in the case of Commercial Real Estate where it remains difficult to sell or refinance certain properties. At 30 June 2014, 58% (2013: 80%) of forborne exposure was performing in accordance with the revised terms agreed under the forbearance arrangements. This decrease is largely due to the aforementioned single long-standing loan of £65m which moved to non-performance. A successful restructure of this loan is still anticipated.

The level of compliance with revised terms agreed under forbearance arrangements is influenced by market conditions and, as a consequence of the economic conditions, it is taking longer for cases to return to performing status after forbearance. Those cases where forbearance occurs prior to default, which at 30 June 2014 represented 94% (2013: 80%) of exposure, are generally more effective as highlighted in the tables above. Forborne exposures are assessed for observed impairment loss allowances. The greater probability of a loss when compared to the performing book is reflected in the calculation of impairment loss allowances. A customer’s ability to adhere to any revised terms agreed is an indicator of the sustainability of ANTS’s forbearance arrangements, although the forbearance is unlikely to be successful in all cases.

Debt-for-equity swaps

Debt-for-equity swaps amounted to £24m at 30 June 2014 (2013: £34m) and in view of their small size are not included in these analyses.

Financial assets that would otherwise be past due or impaired

At 30 June 2014, the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been forborne was £nil (2013: £nil).


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HIGHER RISK LOANS AND OTHER SEGMENTS OF PARTICULAR INTEREST

The Commercial Real Estate market has experienced a particularly challenging environment over recent years following the financial crisis. Within this sector, Commercial Real Estate loans originated prior to 2009 represent a segment of relatively higher risk.

Credit performance

Commercial Real Estate non-performing exposures and weighted average LTVs at 30 June 2014 and 31 December 2013 may be further analysed between loans originated pre-2009 and thereafter as follows:


	Original vintage
30 June 2014	Pre-2009			2009 onwards			Total
Total committed exposure	£	594m		£	4,502m		£	5,096m
Non-performing exposure ratio		22.2	%		—			2.6	%
Weighted average LTV		71	%		54	%		56	%

	Original vintage
31 December 2013	Pre-2009			2009 onwards			Total
Total committed exposure	£	684m		£	4,310m		£	4,994m
Non-performing exposure ratio		13.0	%		—			1.8	%
Weighted average LTV		69	%		54	%		56	%

30 June 2014 compared to 31 December 2013

At 30 June 2014, all of the non-performing exposures related to deals originated pre-2009. The pre-2009 vintage loans were written on terms prevailing in the market at that time which, compared to more recent times, included higher original LTVs, lower interest coverage and exposure to development or letting risk. Following the significant downturn in the commercial real estate market in 2008 and 2009, some of these customers suffered financial stresses resulting in their inability to meet the contractual payment terms, comply with covenants, or achieve refinancing/repayment at maturity. As a result, the pre-2009 sub-portfolio has experienced higher NPL rates in recent years.

In light of the market deterioration, ANTS’s lending criteria were significantly tightened from 2009 onwards, with lower LTVs and the avoidance of transactions with material letting or development risks. In addition, while the market remains challenging, prices have not declined significantly further since ANTS’s lending criteria were tightened. As a result, the sub-portfolio representing loans originating from 2009 onwards continues to perform significantly better than the pre-2009 sub-portfolio which continues to decline both in absolute terms and as a proportion of the total Commercial Real Estate portfolio. At 30 June 2014, the pre-2009 sub-portfolio represented 12% (2013: 14%) of the total Commercial Real Estate portfolio.

Further detail on the entire Commercial Real Estate portfolio is contained in the following section.


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Commercial Real Estate loans

The Commercial Real Estate portfolio remained well diversified by sector at 30 June 2014 and 31 December 2013, as set out below.


Sector	30 June 2014 %		31 December 2013 %
Office		27		27
Retail		29		28
Industrial		16		13
Residential		4		4
Mixed Use		10		9
Student Accommodation		4		7
Hotels & Leisure		5		6
Other		5		6

		100		100

Loan-to-value analysis

In Commercial Real Estate lending, the main form of credit mitigation is collateral. The table below analyses the loan to value ratios of loans within the Commercial Real Estate portfolio at 30 June 2014 and 31 December 2013.


30 June 2014	Stock %		New Business %
Up to 50%		33		16
50% to 60%		33		36
60% to 70%		23		48
70% to 80%		6		—
80% to 90%		1		—
90% to 100%		2		—
> 100% i.e. negative equity		2		—

Total		100		100


31 December 2013	Stock %		New Business %
Up to 50%		36		23
50% to 60%		34		54
60% to 70%		15		12
70% to 80%		7		11
80% to 90%		4		—
90% to 100%		—		—
> 100% i.e. negative equity		4		—

Total		100		100

30 June 2014 compared to 31 December 2013

At 30 June 2014, the profile of the portfolio remained conservative in terms of LTV with 66% (2013: 70%) of the portfolio at or below 60% LTV. This reflected the more recent vintage of the portfolio with 90% (2013: 86%) originated in 2009 or subsequent years. The majority of higher LTV deals represent older deals which remain in the portfolio.

New business is rarely written above 65% LTV. During the first half of 2014, all new business was originated at 65% LTV or lower. The majority of the cases with negative equity form part of the forborne element of the portfolio and are managed by the Restructuring & Recoveries team.

At 30 June 2014 the average LTV, weighted by exposure, remained stable at 56% (2013: 56%). The weighted average LTV of new deals written in the first half of 2014 was 57% (2013: 57%).

Refinancing risk

As part of the annual review process, for commercial real estate loans that are approaching maturity, consideration is given to the prospects of refinancing the loan at prevailing market terms and applicable credit policy. The review will consider this and other aspects (e.g. covenant compliance) which could result in the case being placed on the Watchlist. Additionally, where an acceptable refinancing proposal has not been received within six months prior to maturity, the case will be placed on the Watchlist.

At 30 June 2014, there was £887m (2013: £620m) of commercial real estate loans due to mature within 12 months. Of these, £135m i.e. 15% (2013: £153m i.e. 25%) have an LTV ratio above that which would be considered acceptable under current credit policy, all of which has been placed on the Watchlist or recorded as NPL and has an impairment loss allowance of £25m (2013: £27m) associated with it.


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CREDIT RISK – MARKETS

Derivative risk exposures in the tables below are lower than the balance sheet position because the overall risk exposure is monitored and therefore consideration is taken of margin posted, Credit Support Annexes within ISDA Master Agreements, and master netting agreements and other financial instruments which reduce the Santander UK group’s exposures. Derivative asset balances recognised on the balance sheet reflect only the more restrictive netting permitted by IAS 32.

MARKETS – COMMITTED EXPOSURES

Rating and geographical distribution

The tables below reflect the total credit risk exposures of Markets by ANTS’s internal rating scale (see page 17) and by geographical areas. The exposures include committed facilities as well as the uncommitted drawn facilities. The geographic location is defined as the counterparty’s country of domicile except where a full risk transfer guarantee is in place, in which case the country of domicile of the guarantor is used.


30 June 2014	UK £m		Peripheral eurozone £m		Rest of Europe £m		US £m		Rest of world £m		Total £m
9		295		—		19		128		9		451
8		2,109		28		678		530		105		3,450
7		597		650		103		640		—		1,990
6		97		1		1		4		—		103
5		1		4		11		—		—		16
4		58		—		—		—		—		58
1 to 3		—		—		—		—		—		—

Total		3,157		683		812		1,302		114		6,068


31 December 2013	UK £m		Peripheral eurozone £m		Rest of Europe £m		US £m		Rest of world £m		Total £m
9		—		—		2		—		56		58
8		1,410		10		897		746		87		3,150
7		1,064		582		169		227		—		2,042
6		76		3		—		23		—		102
5		1		5		11		—		1		18
4		—		—		—		—		—		—
1 to 3		28		—		—		—		—		28

Total		2,579		600		1,079		996		144		5,398

30 June 2014 compared to 31 December 2013

As a continued effort to mitigate counterparty credit risk in derivative transactions, ANTS increased the use of Central Counterparties (‘CCPs’) during the first half of 2014. This was reflected by the increased exposure in rating categories 8 and 9 in the UK resulting in an overall improved credit rating profile.

MARKETS – CREDIT RISK MITIGATION

Market focuses on derivative products and mitigates its credit risk to counterparties through netting arrangements, collateralisation and the use of CCPs. For details of the approach to credit risk mitigation, see “Credit Risk Management – Markets” on page 46 of the 2013 Annual Report.

The top 20 clients with which ANTS had the biggest derivative exposures were Banks and CCPs. These top 20 clients’ derivative exposure accounted for 79% of the total derivative exposure in Markets at 30 June 2014 (2013: 74%). Cash collateral related to the Top 20 at 30 June 2014 was £0.9bn (2013: £1.8bn) and the risk exposure weighted average credit rating was 7.4 (2013: 7.6).

The total notional amount of OTC derivatives at 30 June 2014 was £1,023.3bn (2013: £1,006.2bn) and 38% (2013: 34%) was cleared through CCPs. By mark-to-market terms (i.e. the credit risk exposure including mark-to-market value plus a volatility add-on that reflects the future volatility of the derivatives), CCPs were used in connection with 22% (2013: 19%) of OTC derivatives. CCP transaction values as a percentage of the total portfolio are higher in notional amount than in mark-to-market terms due to their higher collateralisation and lower volatility.

MARKETS – CREDIT PERFORMANCE

At 30 June 2014, there were no impaired or non-performing loans or exposures (2013: none) and the assets in the Watchlist proactive management category amounted to only £69m (2013: £36m).

MARKETS – FORBEARANCE

At 30 June 2014 and 31 December 2013, there was no forbearance activity in Markets.


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CREDIT RISK - CORPORATE CENTRE

Credit risk arises on assets in the balance sheet and in off-balance sheet transactions. Consequently, the committed exposure (which takes into account credit mitigation procedures) is shown in the table below. It also excludes Sovereign and Supranational exposures managed by Short Term Markets within Commercial Banking.

CORPORATE CENTRE – COMMITTED EXPOSURES

Rating distribution

The rating distribution tables below show the credit risk exposure by ANTS’s internal rating scale (see page 17) for each portfolio. Within this scale the higher the rating the better the quality of the counterparty.


30 June 2014	Sovereign and Supranational⁽²⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
9		11,037		108		—		2,622		13,767
8		—		98		436		4,354		4,888
7		—		12		290		1,753		2,055
6		—		2		—		223		225
5		—		—		—		—		—
4		—		—		—		—		—
1 to 3		—		9		—		—		9
Other⁽¹⁾		—		—		—		—		—

Total		11,037		229		726		8,952		20,944


31 December 2013	Sovereign and Supranational⁽²⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
9		8,305		84		—		2,654		11,043
8		—		104		901		4,382		5,387
7		—		14		—		1,713		1,727
6		—		4		14		238		256
5		—		5		1		—		6
4		—		46		—		—		46
1 to 3		—		3		—		—		3
Other⁽¹⁾		—		1		2		—		3

Total		8,305		261		918		8,987		18,471

(1)	Represents smaller exposure predominantly within the commercial mortgages portfolio which are subject to scorecards rather than a rating model.

(2)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

Geographical distribution

The geographic location is classified by country of risk being the country where each counterparty’s main business activity or assets are located. For clients whose operations are more geographically dispersed the country of incorporation is applied.


30 June 2014	Sovereign and Supranational⁽¹⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
UK		3,441		99		—		8,952		12,492
Peripheral eurozone		—		68		—		—		68
Rest of Europe		—		62		276		—		338
US		7,498		—		450		—		7,948
Rest of world		98		—		—		—		98

Total		11,037		229		726		8,952		20,944


31 December 2013	Sovereign and Supranational⁽¹⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
UK		2,777		107		15		8,987		11,886
Peripheral eurozone		—		69		—		—		69
Rest of Europe		—		85		601		—		686
US		5,230		—		300		—		5,530
Rest of world		298		—		2		—		300

Total		8,305		261		918		8,987		18,471

(1)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

30 June 2014 compared to 31 December 2013

During the first half of 2014, total committed exposures increased by £2.4bn or 13% to £20.9bn principally within the Sovereign and Supranational portfolio, partially offset by decreases in the Derivatives portfolio. Committed exposures to Sovereigns and Supranationals principally reflect cash at central banks and holdings of highly rated liquid assets as part of normal liquid asset portfolio management, and remained concentrated in the UK and US. Derivative exposures decreased due to a managed reduction of the portfolio.


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CORPORATE CENTRE – CREDIT RISK MITIGATION

Structured Products are unsecured but benefit from senior positions in the creditor cascade. Credit risk in derivatives is mitigated by netting agreements, collateralisation and the use of CCPs. For details of the approach to credit risk mitigation, see “Credit Risk Management – Markets” on page 46 of the 2013 Annual Report.

CORPORATE CENTRE – CREDIT PERFORMANCE


30 June 2014	Sovereign and Supranational⁽⁵⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
Total Committed Exposure of which:⁽¹⁾		11,037		229		726		8,952		20,944
-Watchlist: Enhanced Monitoring		—		—		—		35		35
-Watchlist: Proactive Management		—		—		—		—		—
-Remaining Performing Exposure		11,037		229		726		8,917		20,909
Subtotal Performing Exposure		11,037		229		726		8,952		20,944
Non-Performing Exposure		—		—		—		—		—

Total Impaired Exposure of which:⁽²⁾		—		—		—		35		35
-Performing – Watchlist		—		—		—		35		35
-Non-Performing Exposure		—		—		—		—		—

Total Observed impairment loss allowances of which:⁽³⁾		—		—		—		—		—
-Performing – Watchlist		—		—		—		—		—
-Non-Performing Exposure		—		—		—		—		—

IBNO⁽⁴⁾										—
Total Impairment loss allowance										—


31 December 2013	Sovereign and Supranational⁽⁵⁾ £m		Structured Products £m		Derivatives £m		Social Housing £m		Total £m
Total Committed Exposure of which:⁽¹⁾		8,305		261		918		8,987		18,471
-Watchlist: Enhanced Monitoring		—		—		—		118		118
-Watchlist: Proactive Management		—		—		—		—		—
-Remaining Performing Exposure		8,305		261		918		8,869		18,353
Subtotal Performing Exposure		8,305		261		918		8,987		18,471
Non-Performing Exposure		—		—		—		—		—

Total Impaired Exposure of which:⁽²⁾		—		—		—		118		118
-Performing – Watchlist		—		—		—		118		118
-Non-Performing Exposure		—		—		—		—		—

Total Observed impairment loss allowances of which:⁽³⁾		—		—		—		—		—
-Performing – Watchlist		—		—		—		—		—
-Non-Performing Exposure		—		—		—		—		—

IBNO⁽⁴⁾										—
Total Impairment loss allowance										—

(1)	Includes committed facilities and derivatives. The terms ‘Enhanced Monitoring’ and ‘Proactive Management’ are defined on page 41 of the 2013 Annual Report.

(2)	Corporate loans are assessed individually or collectively assessed for impairment. Assets reported as impaired represent, for collective assessment, that portion of the loan portfolio where it is estimated that a loss has been incurred, plus those assets individually impaired.

(3)	Excludes IBNO provision.

(4)	Allowance for incurred inherent losses (i.e. incurred but not observed (‘IBNO’)) as described in Note 1 to the Consolidated Financial Statements in the 2013 Annual Report.

(5)	An international organisation, whereby member states transcend national boundaries or interests to share in the decision-making and vote on issues pertaining to the geographical focus of the organisation.

30 June 2014 compared to 31 December 2013

During the first half of 2014, Social Housing exposure subject to enhanced monitoring decreased as a result of a number of cases returning to performing status following resolution of governance issues as anticipated. There was no Watchlist exposure subject to enhanced monitoring in Sovereign and Supranational, Structured Products and Derivatives. At 30 June 2014 and 31 December 2013, there were no loans and advances to customers in arrears in Corporate Centre.

Non-performing loans and advances

At 30 June 2014 and 31 December 2013, there were no non-performing loans in Corporate Centre.

CORPORATE CENTRE- FORBEARANCE

At 30 June 2014 and 31 December 2013, there was no forbearance activity in Corporate Centre.


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MARKET RISK

TRADED MARKET RISK

TRADED MARKET RISK – COMMERCIAL BANKING

The amounts below represent the potential change in market values of trading instruments. Since trading instruments are recorded at market value, these amounts also represent the potential effect on income.


	Actual exposure at
Trading instruments	30 June 2014 £m			31 December 2013 £m
Interest rate risks⁽¹⁾		1.4			1.7
Equity risks⁽²⁾		0.5			0.5
Spread risks⁽³⁾		—			—

Correlation offsets⁽⁴⁾		(0.5	)		(0.5	)

Total correlated one-day VaR		1.4			1.7


	Actual exposure for the period ended
	Average exposure						Highest exposure				Lowest exposure
Trading instruments	30 June 2014 £m			31 December 2013 £m			30 June 2014 £m		31 December 2013 £m		30 June 2014 £m		31 December 2013 £m
Interest rate risks⁽¹⁾		2.5			3.1			3.9		4.6		1.3		1.6
Equity risks⁽²⁾		0.5			0.8			0.6		1.2		0.4		0.5
Spread risks⁽³⁾		—			—			—		1.1		—		—

Correlation offsets⁽⁴⁾		(0.4	)		(0.8	)		—		—		—		—

Total correlated one-day VaR		2.6			3.1			3.9		5.0		1.4		1.7

(1)

Interest rate risk measures the impact of interest rate and volatility changes on cash instruments, securities and derivatives. This includes swap spread risk (the difference between swap rates and the government bond rates), basis risk (changes in interest rate floating benchmark levels) and inflation risk (changes in inflation rates).

(2)	Equity risk measures the impact on equity stocks and derivatives from changes in equity prices, volatilities and dividends.

(3)	Spread risk measures the impact of changes in the credit spread of corporate bonds or credit derivatives.

(4)	The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day VaR. A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above table.

Commercial Banking daily total correlated one day VaR 2014 (short-term markets business))

LOGO

The principal component of VaR in Commercial Banking is interest rate risk. The increase in risk seen in the first quarter of 2014 was due to changes in interest rate positioning which also accounted for the decrease in the second quarter.


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TRADED MARKET RISK – MARKETS


	Actual exposure at
Trading instruments	30 June 2014 £m			31 December 2013 £m
Interest rate risks⁽¹⁾		2.0			2.3
Equity risks⁽²⁾		0.9			1.4
Property risks⁽³⁾		0.1			0.1
Spread risks⁽⁴⁾		0.3			0.3
Other risks⁽⁵⁾		—			—

Correlation offsets⁽⁶⁾		(1.1	)		(1.6	)

Total correlated one-day VaR		2.2			2.5


	Actual exposure for the period ended
	Average exposure						Highest exposure				Lowest exposure
Trading instruments	30 June 2014 £m			31 December 2013 £m			30 June 2014 £m		31 December 2013 £m		30 June 2014 £m		31 December 2013 £m
Interest rate risks⁽¹⁾		3.3			2.6			6.1		4.4		1.8		1.7
Equity risks⁽²⁾		1.2			1.9			1.9		4.6		0.7		0.7
Property risks⁽³⁾		0.1			0.1			0.1		0.2		0.1		—
Spread risks⁽⁴⁾		0.4			0.4			0.6		1.0		0.2		0.2
Other risks⁽⁵⁾		—			0.1			0.1		0.5		—		—

Correlation offsets⁽⁶⁾		(1.6	)		(1.9	)		—		—		—		—

Total correlated one-day VaR		3.4			3.2			5.9		6.5		1.7		1.9

(1)

(2)	Equity risk measures the impact on equity stocks and derivatives from changes in equity prices, volatilities and dividends.

(3)	Property risk measures the impact of changes in the property indices.

(4)	Spread risk measures the impact of changes in the credit spread of corporate bonds or credit derivatives.

(5)	Other risks include foreign exchange risk. Foreign exchange risk measures the impact of changes in foreign exchange rates and volatilities.

(6)	The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day VaR. A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above table.

Markets daily total correlated one day VaR 2014

LOGO

The principal component of VaR in Markets is interest rate risk. The VaR volatility in the first half of 2014 was predominately due to short-term changes in interest rate positioning during the period.


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BALANCE SHEET MANAGEMENT RISK

INTRODUCTION

Balance sheet management risk includes exposures arising as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short-time horizon. The risk exposure is generated by features inherent in either a product or portfolio and normally presented over the life of the product or portfolio. Such exposures are a result of the decision to undertake specific business activities, can take a number of different forms, and are generally managed over a longer-time horizon. Through the internal transfer pricing mechanism, material balance sheet management risks arising from divisions are transferred from the originating business to FMIR in Corporate Centre where they are monitored, controlled and managed holistically in conjunction with exposures arising from the funding, liquidity or capital management activities of FMIR.

There are three key areas of balance sheet management risk within ANTS, which are discussed in the sections that follow. These are:

•

Banking Market risk;

•

Liquidity and funding risk; and

•

Capital risk.

BANKING MARKET RISK

Types of Banking Market risk

Yield Curve Risk

The table below reflects how base case income and valuation across the Santander UK group would be affected by a 100 basis point parallel shift (both upwards and downwards) applied instantaneously to the yield curve. Sensitivity to parallel shifts represents the quantum of risk in a manner that is considered to be both simple and scaleable. 100 basis points is the stress which is typically focussed on for Banking Market risk controls across the Santander UK group (although sensitivities to other parallel shifts are also regularly monitored). For comparison purposes these measures are shown at 30 June 2014 and 31 December 2013:

30 June 2014

31 December 2013

+100bps
£m

-100bps
£m

+100bps
£m

-100bps
£m

NIM sensitivity

236

(20

)

181

EVE sensitivity

176

(231

)

(16

)

The change in the sensitivities between 31 December 2013 and 30 June 2014 was largely attributable to changes in product mix, the forecast timing of Base Rate movements and their impact on customer rates.

Basis Risk

The Santander UK Basis Risk VaR (99% confidence level, 1 day) at 30 June 2014 was £6m (2013: £8m) and was broadly unchanged from the year-end position.

Inflation and Spread Risks

The available-for-sale volatility from the Santander UK ALCO Portfolio and Liquid Asset Portfolio positions VaR (95% confidence level, 1 day) at 30 June 2014 was £4.9m (2013: £4.7m) and was broadly unchanged from the year-end position. This included the inflation and spread risk exposures of these positions. VaR for the individual risk types is not reported separately.

As in previous periods, the portfolio of securities held for liquidity and investment purposes is regularly stress tested against a variety of historical and hypothetical scenarios. There are limits established against the potential losses estimated by the stress tests that complement the VaR-based limits discussed above. At 30 June 2014, the worst 3 month stressed loss for the Santander UK available-for-sale accounted portfolios was estimated to be £190m using historic deterministic stress tests (2013: £139m). The increase in VaR over the period was due to changes in the composition of the bond portfolio as part of normal liquidity management activities.


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LIQUIDITY AND FUNDING RISK

Liquidity and funding risk is managed on a Santander UK group basis and it is not therefore appropriate to consider these risks separately at an ANTS group level. In addition, under the PRA’s regulatory liquidity regime, Santander UK and ANTS together with Cater Allen Limited, a fellow subsidiary of Santander UK plc, form the Santander UK Defined Liquidity Group (‘DLG’). Under these arrangements, each member of the DLG is liable to support each other in terms of transferring or receiving surplus liquidity in times of stress. In considering the liquidity resources available to the ANTS group, both its own liquid assets and also those of rest of the Santander UK group have been separately presented below.

These stress tests are supplemented with sensitivity analysis for instantaneous liquidity shocks by each major liquidity risk driver to understand the impact on internal Liquidity Risk Appetite and regulatory liquidity metrics.

LIQUID ASSETS

Santander UK holds, at all times, a portfolio of unencumbered liquid assets to mitigate liquidity risk. The size and composition of this portfolio is determined by Santander UK’s Liquidity Risk Appetite and regulatory requirements.

The table below shows liquid assets held by the ANTS group and additional liquid assets held by the rest of the Santander UK group (to which the ANTS group has access through the cross guarantee and DLG arrangements described above) by the geographic location of the issuer or counterparty at 30 June 2014 and 31 December 2013:


	Held by the ANTS group				Held elsewhere in Santander UK
	30 June 2014 £bn		31 December 2013 £bn		30 June 2014 £bn		31 December 2013 £bn
Eligible liquid assets:
Cash at central banks:
- UK		—		—		18		20
- US		7		5		—		—

		7		5		18		20

Government bonds:
- UK		2		2		1		—
- US		3		2		—		—
- Supranational		—		—		1		—

		5		4		2		—

Total Eligible liquid assets		12		9		20		20

High quality⁽¹⁾corporate bonds and asset-backed securities:
- UK		1		1		—		—
- US		—		—		—		1
- Other countries, each less than £1bn⁽²⁾		—		—		3		1

		1		1		3		2

Other liquid assets:
- UK – Whole loans and own debt securities		4		4		30		35
- UK – Other debt securities, bonds, and equities included in major indices		1		1		—		—
- Other countries, each less than £1bn⁽³⁾		—		—		1		1

		5		5		31		36

Total liquid assets		18		15		54		58

(1)	A- rated or above.

(2)	Consists of Austria, Belgium, Canada, Switzerland, Germany, France, Norway, Sweden, Ireland, Luxembourg, Denmark and Netherlands.

(3)	Consists of Canada, Spain, Italy, France, Denmark, Portugal and Australia.

Liquidity developments in the first half of 2014

The first half of 2014 was characterised by steadily improving sentiment regarding the UK, US and, to a lesser extent, eurozone economies. In addition, overall investor sentiment continued to strengthen. A developing trend towards the search for enhanced yield and increased risk appetite was observed.

During the first half of 2014, Santander UK benefited from low wholesale, unsecured medium-term and secured medium-term funding rates and increased confidence both in the UK banking sector and wider economic environment. Throughout the first half of 2014, Santander UK continued to maintain a strong liquidity position and a conservative balance sheet structure (i.e. maintaining high levels of high quality liquid assets) as well as robust risk management controls to monitor and manage the levels of the liquid asset portfolio and encumbrance. Eligible liquid assets continued to significantly exceed wholesale funding of less than one year, with a coverage ratio of 127% at 30 June 2014 (2013: 139%). The change in the ratio, which is expected to be volatile due to the management of normal short term business commitments, was driven by an increase in eligible liquid assets by £2.7bn to £32.2bn at 30 June 2014 (2013: £29.5bn) offset by an increase in wholesale funding with a residual maturity of less than one year of £4.1bn to £25.3bn at 30 June 2014 (2013: £21.2bn), due to the phasing of secured funding maturities.

In addition, Santander UK’s LCR improved to 107% at 30 June 2014 (2013: 103%). The rules relating to the LCR, which is expected to be effective from the start of 2015, remain to be finalised. We continue to monitor the ratio based on our interpretation of the rules but it will be subject to revision as the regulatory process develops further. The ratio will also not necessarily be comparable with those of our peers.


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FUNDING RISK

Santander UK’s primary sources of funding, approach to funding risk management and funding strategy and structure are described on pages 76 to 77 of the 2013 Annual Report.

DEPOSIT FUNDING

Santander UK’s Retail Banking and Commercial Banking activities are largely funded by customer deposits with the remaining funded with long-term debt and equity (including funding secured against customer loans and advances).

WHOLESALE FUNDING

Reconciliation of wholesale funding to the balance sheet

The tables below show ANTS’s primary wholesale funding sources, excluding short-term repurchase agreements, together with a reconciliation of wholesale funding to the balance sheet at 30 June 2014.


30 June 2014				Balance sheet line item
	Funding analysis £bn			Deposits by banks £bn			Deposits by customers⁽²⁾ £bn		Debt securities in issue £bn			Financial liabilities at fair value £bn		Trading liabilities £bn
Deposits by banks (non-customer deposits)		1.9			—			—		—			—		1.9
CDs and Commercial Paper		8.2			—			—		7.3			0.9		—
Senior unsecured - public benchmark		7.4			—			—		7.4			—		—
- privately placed		3.2			—			—		0.8			2.4		—
Covered bonds		16.5			—			—		16.5			—		—
Securitisation & structured funding		4.3			3.9			0.4		—			—		—

Total wholesale funding		41.5			3.9			0.4		32.0			3.3		1.9
Repos		8.9			—			—		—			—		8.9
Foreign exchange and hedge accounting		(0.3	)		—			—		(0.3	)		—		—
Other		121.5			114.4	⁽¹⁾		—		—			—		7.1	⁽³⁾

Balance sheet total		171.6			118.3			0.4		31.7			3.3		17.9


31 December 2013				Balance sheet line item
	Funding analysis £bn			Deposits by banks £bn			Deposits by customers⁽²⁾ £bn		Debt securities in issue £bn			Financial liabilities at fair value £bn		Trading liabilities £bn
Deposits by banks (non-customer deposits)		1.3			—			—		—			—		1.3
CDs and Commercial Paper		6.6			—			—		5.8			0.8		—
Senior unsecured - public benchmark		7.5			—			—		7.5			—		—
- privately placed		2.9			—			—		0.3			2.6		—
Covered bonds		17.0			—			—		17.0			—		—
Securitisation & structured funding		4.6			4.2			0.4		—			—		—

Total wholesale funding		39.9			4.2			0.4		30.6			3.4		1.3
Repos		12.9			—			—		—			—		12.9
Foreign exchange and hedge accounting		0.3			—			—		0.3			—		—
Other		123.6			116.5	⁽¹⁾		—		—			—		7.1	⁽³⁾

Balance sheet total		176.7			120.7			0.4		30.9			3.4		21.3

(1)	Principally consists of amounts due to Santander UK subsidiaries, see Note 14 to the Condensed Consolidated Interim Financial Statements. Also includes items in the course of transmission and other deposits.

(2)	Included in the balance sheet total of £4,824m (2013: £7,780m).

(3)	Consists of short positions in securities and unsettled trades, cash collateral and short-term deposits. See Note 15 to the Condensed Consolidated Interim Financial Statements.

Funding developments in the first half of 2014

Santander UK’s overall funding strategy remains to develop and maintain a diversified funding base, which allows us access to a variety of funding sources. As part of this strategy, Santander UK raises funding in a number of currencies, including US dollars and euro, and converts these back into sterling to fund its commercial assets which are largely sterling denominated.

In keeping with the pattern of new issuance in 2013, the focus of new issuance in the first half of 2014 was in the unsecured markets. In total, we issued three public US Dollar unsecured securities and one public Euro unsecured security. In addition to the unsecured issuance, we issued residential mortgage-backed securities and a benchmark Sterling covered bond, two forms of financing that permit us to benefit from our prime UK mortgage assets. The improvement in market sentiment over the medium term continued in the first half of 2014. The wholesale funding markets that we operate in continued to be stable, offering us economically viable sources of funding. This stable market backdrop allowed us to continue to have a more balanced mix of wholesale unsecured and secured new issuance than in recent years. Overall, the cost of wholesale funding continued to fall due to the replacement of expensive medium-term funding maturities with lower cost new issuance in the now more stable capital markets environment.

In the first half of 2014, Santander UK’s medium-term funding issuance was £6.7bn (2013: £6.6bn). This included £500m Perpetual Capital Securities issued to Santander UK plc’s immediate parent company in June 2014, which issued a similar security to Banco Santander, S.A.. During the first half of 2014, a further £500m of Treasury Bills were drawn under the Bank of England and HM Treasury Funding for Lending Scheme. Maturities in the first half of 2014 were approximately £7.6bn (2013: £16.3bn). At 30 June 2014, 62% (2013: 68%) of wholesale funding had a maturity of greater than one year, with an overall residual duration for wholesale funding of 1,046 days (2013: 1,090 days).

During the first half of 2014, Santander UK’s continuing strategy of building closer customer relationships through the 1|2|3 World retail offering created additional current account liabilities that further strengthened this stable funding source. At the same time, the level of less stable retail and corporate instant access accounts reduced as a constituent of the funding mix.


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CAPITAL RISK

ANTS manages its capital based on an assessment of both regulatory requirements and the economic capital impacts of our businesses. The regulatory capital position at 30 June 2014 is based on the CRD IV rules, which implement Basel III in the EU and came into force on 1 January 2014. Regulatory capital demand is quantified for credit, traded market, banking market, operational, pension obligation and securitisation risk in accordance with PRA requirements. Santander UK produces and shares with the PRA its Internal Capital Adequacy Assessment Process document, which informs the supervisory review and evaluation process by the PRA which can result in additional capital requirements.

The Basel III and CRD IV rules include proposals for the use of a leverage ratio as a backstop measure to risk-based capital ratios. This is managed at a Santander UK group level. The methodology for calculation of the Leverage Ratio and the required minimum level for banks have not been finalised by the EU and are subject to further modification and calibration. A required minimum level significantly above the Basel III proposed level of 3% could require Santander UK to undertake leverage ratio-enhancing actions. Santander UK and other major UK banks and building societies are currently subjected to a PRA-specified leverage ratio minimum level of 3%; however the FPC are consulting upon measures that could increase this minimum level significantly.

During 2014, the Bank of England is conducting concurrent stress tests on major UK banks and building societies, in which Santander UK is participating. The results of this exercise could have a material impact upon minimum capital levels and are expected to be announced towards the end of 2014.

OPERATIONAL RISK

A revised Operational Risk Framework was approved at the start of 2014. A comprehensive supporting programme has been developed to ensure that Santander UK manages its operational risk in line with best practice. This programme has enhanced the key toolset elements of Risk Control Self Assessments, Scenario Analysis and Incident & Loss Management. The programme is being rolled out and will also ensure all the associated initiatives are embedded to a Basel II Advanced Measurement Approach equivalent standard by the end of 2016.

CONDUCT RISK

Conduct risk is the risk that Santander UK’s decisions and behaviours lead to a detriment or poor outcome for our customers. Santander UK considers conduct risk to be a primary risk type and takes a forward-looking approach to managing the risk in alignment with the Conduct Risk Framework. This framework has been developed through Santander UK’s overall Risk Framework and Operational Risk Framework, which include the core principles of risk management and control activities.

The Conduct Risk Framework defines the overriding principles and responsibilities for the identification, management, reporting and oversight of conduct risk. It is the operation of, and outputs from, these risk management activities that enables Santander UK to manage conduct risk exposures. All business units are required to manage their activities in accordance with the principles and guidelines set out in the Conduct Risk Framework, together with those detailed in the Santander UK Risk and Operational Risk Frameworks.

Key business decisions, including product approval, business strategy developments and conduct related remediation programmes are monitored and reported through formal governance committees. A programme of work is planned to continue throughout 2014 to further embed the effective management of conduct risk throughout the business, including a comprehensive cultural change project.

REGULATORY RISK

Regulatory risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with applicable codes and regulatory rules. The risk was broadly unchanged from the year-end position

LEGAL RISK

ANTS considers legal risk to be a key risk type and manages it in full alignment with the Santander UK Legal Risk Framework. This Framework has been developed under the Santander UK Risk Framework and explains how Santander UK manages and controls legal risk. Effective management of legal risk continued and was expanded throughout the first half of 2014.


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AREAS OF FOCUS AND OTHER ITEMS

1. COUNTRY RISK EXPOSURE

The ANTS group manages its country risk exposure under its global limits framework. Within this framework, the ANTS group sets its individual risk appetite for each country, taking into account any factors that may influence the risk profile of each country, including political events, the macro-economic situation and the nature of the risk incurred. Exposures are actively managed if it is considered appropriate. Accordingly, and over recent years, ANTS has intensified its monitoring of exposures to sovereigns and counterparties in eurozone countries, and has proceeded to selectively divest assets directly or indirectly affected by events in those countries. Santander UK group and Banco Santander group-related risk is considered separately.

The country risk tables below show the ANTS group’s exposures to central and local governments, government guaranteed counterparties, banks, other financial institutions and corporate customers at 30 June 2014 and 31 December 2013. Total exposures consist of the total of balance sheet values and off-balance sheet values. Balance sheet values are calculated in accordance with IFRS (i.e. after the effect of netting agreements recognised in accordance with the requirements of IFRS), except for credit provisions which have been added back. Off balance sheet values consist of undrawn facilities and letters of credit.

The country of exposure has been assigned based on the counterparty’s country of incorporation except where the ANTS group is aware that a guarantee is in place, in which case the country of incorporation of the guarantor has been used. The exposures are presented by type of counterparty other than where the specific exposures have been guaranteed by a sovereign counterparty in which case they are presented within the ‘Government guaranteed’ category.

Given the ongoing interest in eurozone economies, disclosures relating to those economies are presented first and highlighted separately.

The tables exclude credit risk exposures to other Santander UK group companies and other Banco Santander group companies, which are presented separately on pages 37 to 38.

30 June 2014

Central and local
governments
£bn

Government
guaranteed
£bn

Banks ⁽²⁾
£bn

Other financial
institutions
£bn

Corporate
£bn

Total⁽¹⁾
£bn

Eurozone:

Peripheral eurozone countries:

Ireland

—

0.3

Italy

0.7

—

0.1

—

0.1

0.9

Spain (excluding Banco Santander)

—

0.1

—

0.1

Other eurozone countries:

Germany

—

1.3

—

0.3

1.6

France

—

0.5

1.1

0.1

—

1.7

All other eurozone⁽³⁾

—

0.3

—

1.5

2.1

0.7

0.8

2.9

0.1

2.2

6.7

All other countries:

3.6

0.4

10.0

3.0

26.6

43.6

7.6

—

7.9

0.3

0.1

15.9

Switzerland

0.7

—

0.3

0.1

1.2

Denmark

—

0.2

Japan

3.5

—

0.1

—

3.7

All others⁽⁴⁾

—

0.4

0.2

2.1

2.7

15.4

0.4

18.7

3.7

29.1

67.3

Total

16.1

1.2

21.6

3.8

31.3

74.0

(1)	Credit exposures exclude cash at hand, the macro hedge of interest rate risk, intangible assets, property, plant and equipment, current and deferred tax assets, and other assets. Loans and advances to customers are included gross of loan loss allowances.

(2)	Excludes balances with central banks.

(3)	Includes Luxembourg, Netherlands, Belgium and Finland as well as Greece of £nil and Cyprus of £nil.

(4)	Includes Russia of £nil and Ukraine of £nil.


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31 December 2013	Central and local governments £bn		Government guaranteed £bn			Banks ⁽²⁾ £bn		Other financial institutions £bn		Corporate £bn		Total⁽¹⁾ £bn
Eurozone:
Peripheral eurozone countries:
Portugal		—		—			—		—		0.1		0.1
Ireland		—		—			—		—		0.1		0.1
Italy		0.8		—			0.1		—		0.1		1.0
Spain (excluding Banco Santander)		—		—			0.1		—		—		0.1
Other eurozone countries:
Germany		—		—			1.5		—		0.1		1.6
France		—		0.4			1.6		—		—		2.0
All other eurozone⁽³⁾		0.1		0.2			1.0		—		1.2		2.5

		0.9		0.6			4.3		—		1.6		7.4
					<

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