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Edited Transcript of Santander UK Group Holdings PLC earnings conference call or presentation 23-Jul-19 11:00am GMT

Q2 2019 Santander UK Group Holdings PLC Earnings Call

LONDON Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Santander UK Group Holdings PLC earnings conference call or presentation Tuesday, July 23, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Roman

Santander UK Group Holdings plc - CFO & Executive Director

* Nathan Mark Bostock

Santander UK Group Holdings plc

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Conference Call Participants

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* Alvaro Serrano Saenz de Tejada

Morgan Stanley, Research Division - Lead Analyst

* Christopher Cant

Autonomous Research LLP - Partner, United Kingdom and Irish Banks

* Joe A. Hopkins

Morgan Stanley, Research Division - Strategist

* John Cronin

Goodbody Stockbrokers, Research Division - Financials Analyst

* Lee Street

Citigroup Inc, Research Division - Head of IG CSS

* Rohith Chandra-Rajan

BofA Merrill Lynch, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Santander UK Q2 2019 Results Analyst Conference Call. I will now hand you over to

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Nathan Mark Bostock, Santander UK Group Holdings plc [2]

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Thank you very much. And good afternoon, everyone, and thank you for joining us today as we present Santander UK 2019 half year results. With me as usual is Antonio Roman, Santander UK's Chief Financial Officer; Mónica Cueva, Financial Controller; and Bojana Flint, Head of Investor Relations. We are also joined by Duke Dayal, our incoming Chief Financial Officer, who will take over from Antonio in mid-September. Duke is joining the call as an observer only to facilitate the best handover. As usual, on these calls, I'll briefly run through the results and strategy highlights and then I'll pass over to Antonio to go through the financial results in more detail. This should take around 15 minutes and then we will open up the call as usual for questions and of course, we'll aim to finish by 1:00 p.m.

The results we are reporting today reflect continued income pressure driven by competition in the mortgage market as well as the impact of transformation cost and PPI charges. On previous calls, we talked about the challenges of the uncertain operating environment, including the highly competitive market and intense regulatory change agenda. Given this uncertainty, we continue to manage growth prudently and we remain cautious in our outlook. In a moment, I'll ask Antonio to give you an update on how we have prepared the bank for these challenges and more broadly, how we are positioned for the years ahead.

Against this backdrop, I'd like to mention some key points from today's results. Profit before tax was down 36%, largely due to continued income pressure from the mortgage back book, transformation program spend as well as additional PPI charges in the second quarter. On an adjusted basis, profits were down 17%. We expect income pressure to continue to impact our results, with the significant cost savings from our transformation program largely offsetting this over the medium term. And we are focused on transforming the bank by becoming simpler and more focused, more effective at harnessing technology and faster at turning innovative new ideas into reality. Our RoTE was 7.9% and I'm pleased to report a 60 basis point increase in our CET1 capital ratio, up to 13.8%. We have ambitious plans to continue to improve our service to our customers whether that is through better processes, greater use of technology, getting better at the basics or just by working together in a more collaborative way.

During the first half of 2019, we helped 15,000 first-time buyers purchase a home and 169,000 customers finance their cars. We are strengthening our mortgage franchise through innovative launches such as our online mortgage overpayments tool. In June, we launched the successful advertising campaign which resulted in the highest monthly uplift in ad awareness of any brand in the U.K. And since the launch of our 1I2I3 Business Current Account, we have been opened 31,000 new accounts for our customers and our switcher levels are running above market average. Digital adoption is driving change in the organization. This year, we retained 60% of refinanced mortgage loans online, up 6 percentage points year-on-year. We also opened 46% of current account and 66% of credit cards through digital channels, up 3 and 9 percentage points, respectively.

We're also continuing to develop our international proposition supported by the 13 trade corridors we have now established. That's 3 new trade corridors this year. We also continued to utilize our access to global best practice and market-leading solutions through Banco Santander.

Customer loyalty underpins our strategic focus, while we transform the bank for improved returns. We have

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we plan to invest GBP 400 million before the end of 2021 and expect to see payback over a 2- to 3-year period.

Our medium-term focus is on profitable growth in Retail Banking and improved returns for the Corporate business as well as enhanced efficiency and capital discipline. To date, we have spent GBP 113 million on transformation. This was largely related to the significant restructure we announced earlier in the year to make our branch network smaller and more optimized for the future. We have also announced plans to reshape our corporate business and I expect the impact of these changes to quickly translate into improved operational efficiency.

As we progress through our transformation program, we have an additional GBP 100 million earmarked for further strategic opportunities over the medium term. We are prioritizing growth in portfolios with attractive returns, such as retail mortgages and auto finance, as we aim to become a more focused and efficient bank. We will also continue to leverage our relationship with our parent and to collaborate with the wider Banco Santander group on a number of market-leading initiatives, including One Pay FX, Openbank and Asto. And we're confident that this strategy, with the decisive actions we are taking to transform the bank, positions us well to deliver on our medium-term loyalty goal as well as improved returns.

So thank you for listening and I'll now hand over to Antonio.

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [3]

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Thank you, Nathan. On previous calls I have outlined our cautious approach to growth in certain business lines and how we have prioritized credit quality to position the bank for a period of economic uncertainty. Our half year results reflect the impact of this approach as well as actions we have taken to transform the bank. Before we turn to the results, I thought I would touch on Brexit and the continued uncertainty faced by the bank and our customers. Since we last spoke, market perception for the likelihood of a no-deal outcome in October has increased. We will have soon a new Prime Minister, so we all have to wait to see how far the Brexit negotiations develop. Our current approach leads us well positioned and we have dedicated significant focus to ensure we can continue to serve our customers whatever the Brexit outcome is. Of course, positioning the bank prudently, in combination with fierce competition, comes with an associated impact on profitability both in the short and medium term.

Turning to our performance in the first half of the year. The mortgage market remains very competitive and along with income pressure from the mortgage back book, our transformation program expense and PPI charges, profit before tax was GBP 575 million, which was down 36% year-on-year. Adjusted profit was GBP 743 million, down 17%. This excludes Banking Reform costs, perimeter changes, transformation and PPI charges.

Transformation program spend today was GBP 113 million. This was largely related to restructuring of the branch network, with GBP 100 million of this amount accounted for as provisions and the remaining GBP 13 million as expenses. As Nathan said, these restructuring costs will translate into improved efficiency pretty quickly.

The trend across the income statement have remained largely the same as I previously reported, so I'll focus on the highlights. Net interest income of GBP 1.7 billion was 8% lower year-on-year, driven by pressure from back book mortgages margin and SVR attrition. SVR was GBP 2.1 billion lower than year-end compared to GBP 2.4 billion in the same period last year. The SVR book now stands at just over GBP 16 billion. We have seen lower attrition in the second quarter, with SVR falling by GBP 0.5 billion compared to GBP 1.6 billion in the first quarter, so a significant reduction. The Banking NIM of 1.69% was 11 basis points lower than last year, largely due to the income pressures I just outlined. Net interest income was down 11%, largely due to ring-fencing perimeter changes only partially offset by the GBP 15 million of additional consideration from the Vocalink sale to Mastercard back in 2017. Noninterest income was down 2% when adjusted for ring-fencing perimeter changes and additional Vocalink consideration.

Operating expenses before credit impairment losses, provisions and charges were down 1%. This was largely due to GBP 41 million of ring-fencing perimeter changes and GBP 28 million of Banking Reform cost in the first half of 2018, which were not repeated this year. Expenses were up 3% when adjusted for these 2 items, along with the GBP 13 million of transformation cost. We also incur higher depreciation costs related to prior year investment projects and the change in accounting treatment of operating leases in auto finance. These increases were partially offset by lower employee costs.

Credit impairment losses decreased 24%, with a release from a significant risk transfer securitization in June. There were also single name charges last year that were not repeated in this period. The cost of risk was 7 basis points, well below normalized levels. The Stage 3 ratio was also very low at 1.28%. Both portfolios continue to perform well, supported by our prudent approach to risk and the resilience of the U.K. economy.

Provision for other liabilities and charges were up GBP 173 million to GBP 206 million. It was mainly due to GBP 100 million of transformation program charges which we mentioned before. We also made an additional GBP 70 million provision for PPI. This reflected an increase in claims volumes, additional industry activities and having considered guidance provided by the FCA in advance of the PPI claims deadline on 29th August 2019.

Turning to capital and funding. Common equity Tier 1 capital was stable at GBP 10.4 billion, with ongoing capital accretion through retained profits, offset by market-driven pension movement. RWAs reduced largely as a result of the significant risk transfer securitization and lower lending in our corporate business as we continue to focus on risk-weighted returns. This decrease was partially offset by increased risk-weighted assets in Retail Banking with lending growth in both mortgages and Consumer Finance. The CET1 capital ratio increased 60 basis points to 13.8%, achieving our end-state capital position, notwithstanding any future changes to the countercyclical buffer. As leverage becomes the binding constraint, the common equity Tier 1 capital ratio could continue to increase alongside lending growth.

We have fully met our 2019 MREL requirements with GBP 9.3 billion of senior unsecured holdco issuance to date. This is in excess of our transitional recapitalization requirements currently GBP 6.4 billion for 2019 and also exceeds the GBP 7.8 billion requirement for 2020. Taking account of maturities, senior unsecured holdco issuance of GBP 2 billion per annum will comfortably allow us to achieve our current 2022 end-state requirement.

Before I close, I'll just recap our 2019 outlook, which remains broadly unchanged from when we last spoke and is predicated on the U.K.'s orderly exit from the European Union. As I mentioned earlier, in recent months, market perception of the likelihood of a no-deal outcome in October has increased. We continue to prepare for all potential outcomes. We expect our results will continue to be impacted by income pressure from mortgages going forward, with the significant cost savings from our transformation program largely offsetting this over the medium term. With the strong foundations already in place, proven stability and resilience of our balance sheet as well as an ambitious transformation program, we are well positioned to deliver sustainable results and achieve our medium-term goals.

Before I hand back to Nathan, I would like to take this opportunity to thank all of you. It has been a pleasure to grow with you over the last years. This will be my last results call for Santander UK, but Duke and I will be working closely together over the coming weeks to ensure a smooth transition.

Thank you for listening, and I will now hand back to Nathan for his closing remarks.

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Nathan Mark Bostock, Santander UK Group Holdings plc [4]

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So thank you, Antonio. And to conclude, we have continued to make progress across key areas of the bank fulfilling our purpose to help people and businesses prosper. Despite ongoing uncertainty and competitive pressures, we've continued to generate consistent earnings and capital growth and credit quality remains very good. Through our strategic transformation program, which will simplify and optimize our organization for the future, we believe we can improve our operational efficiency and drive higher returns. Our focus remains on improving customer loyalty, enhance the efficiency and capital discipline, delivering digital excellence and steady and sustainable growth. We are confident that as a U.K. scale challenger, we have strong and sustainable foundations in place and the right approach to succeed.

I think though, on a personal note, I would really like to thank Antonio for his outstanding service to Santander UK during his 6 years with us. His experience and knowledge has been highly valued by both the Board and the executive team, and we all wish him the very best in his new role in Banco Santander, where I am sure he will be equally successful.

Thank you very much for listening, and I will now hand over to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Rohith Chandra-Rajan calling from Bank of America Merrill Lynch.

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Rohith Chandra-Rajan, BofA Merrill Lynch, Research Division - Director & Senior Analyst [2]

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Just a brief one, really. I guess one of the big thing that's changed in terms of the outlook in the first half of the year is really the interest rate environment. So not that long ago, the consensus view was that we would continue to get gradual rate rises and now the market is looking for rate cuts, and yield curves are pretty flat. I guess we're seeing that some benefit now in terms of new mortgage spreads, which have widened a bit as swap rates have fallen. But I imagine, it's quite negative on the liability side of the balance sheet. So I was keen to get your views in terms of how we should think about the evolution of net interest income if rates expectations as they are today do actually come through?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [3]

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Thanks, Rohith. I think it's a very good question. If you look at the market in play, I believe the rate cut is fully priced by June 2020 as we speak. I guess obviously, it depends pretty much on the Brexit outcome, which comes kind of binary, yes? And if you were to look 3 months ago what the market implies, totally different. Nevertheless, if the scenario that you were mentioning were to pan out that way, obviously it would be making a little more difficult, the NII in the future. Now obviously, that's in a standstill management action type of view. So obviously, you would expect that everyone will react to that new scenario, which is not the case at this point. I think as you said, it's also important how's the structure. So if there's a rate cut, I would imagine that the swap curve will change in terms of the slope. So still, there will be opportunities. I guess probably what's the scenario is, it's very flattish in terms of, for example, the [net structure] position. But if you have shown a slope, no matter what, you could take some opportunities. I guess you mentioned one point which is probably the most positive aspect that we have seen in several quarters, which is that the spreads on the mortgage share market are getting slightly better. I will not declare victory yet on that but it's true that if we look at the last 3, 4 quarters now almost, spreads have been flat or even increasing, and that's also our case. So not only in the market but also for Santander UK. If that were to continue that way, that will be a very upsetting force against the scenario that you have portrayed.

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Rohith Chandra-Rajan, BofA Merrill Lynch, Research Division - Director & Senior Analyst [4]

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And in a rate-cutting scenario, how would you see deposit spreads evolving?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [5]

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I guess one would assume that if, let's say, base rate were to be 60 bps, running on 75, you will have less pressure on the deposits side and, therefore, you will look at repricing and parting, partially or fully, depending on market dynamics that rate cut.

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Operator [6]

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Our next question today comes from Chris Cant calling from Autonomous.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [7]

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Could I just ask about the cost of deposits from the first instance? What are the particular driver behind the increase in the cost deposits for the U.K. business during the quarter versus 1Q? I think in the group release this morning, it suggests that the cost of deposits was up by about 2 basis points quarter-over-quarter. Is there a mixed effect that is driving that or is it just a broad-based upwards rise in the cost of funding on the deposit side of the balance sheet?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [8]

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Thanks, Chris. Actually, it's a very -- well, first, well spotted. And secondly, it's driven by the ISA campaign. So we were very competitive this time around in the ISA campaign and that was the impact on the deposit cost. I would say that as we progressed within the year, and obviously there's not going to be another ISA campaign because its stocks-driven, you will see probably deposits to reflect that new situation, which is basically BAU.

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Operator [9]

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Our next question comes from John Cronin of Goodbody.

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John Cronin, Goodbody Stockbrokers, Research Division - Financials Analyst [10]

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I have a couple of questions, and apologies if it's hard to hear me as I have a bit of a cold. But the first one is on capital. So going back to your comments as year-end around your assessment at that point, if I recall correctly, you said you wouldn't anticipate any inflation were the end-state Basel III reforms be introduced today. Based on any subsequent analysis you've done and taking into account your comments today around expected deflation in RWAs, would your end-state implementation assumption still be what you communicated 6 months ago? Well, acknowledging look, we don't have final clarity from the PRA. And secondly, on PPI claims volumes, can you elaborate a little further in terms of what you're seeing there, for example, what kind of percentage uptick, if I can draw you on that or indeed what you're seeing in terms of the eligibility of the complaints that are coming through there?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [11]

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Thanks, John. On Basel III, on a recession, which is obviously not a straightforward estimate, what I would say is that potentially, the main impact for Santander UK would be on risk-weighted assets for mortgage book depending on the floor. Now we would expect -- and when we say that we don't think it's going to be significant for us it's because actually, our current risk-weighted assets density for mortgages is higher than 16%, which is well, well above anybody in the market, which is using IRB models. So probably, there will be 2 impact. One is we'll have a significant benefit on risk-weighted assets from the interaction of the hybrid mortgage model in January 1, 2021, and probably some of that benefit for Santander UK will disappear as we implement Basel. That's the major impact for Santander UK, which again is kind of a benefit in the short term and probably part of that benefit will be lost here while we implement in the next several years. On PPI, what we have seen in the last couple of months is basically claims that are higher than we have seen in previous months but actually, at a level that we saw 1 year ago. So again, they're higher but not abnormally higher when you look at our past 12, 18 months. Now one would think that in the ramp-up to the deadline, there will be more inquiries and therefore, those inquiries could be translated into claims. So that's how we are looking at this and how we are estimating with the current information. And as you know, by accounting rules, we need to provide based on the current net information that we got, that's the result that we have decided to provide GBP 70 million. Obviously, the $1 million question which is, is it going to be enough or not? Difficult to say. We believe that this is the best estimate that we can do with the information that we got.

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John Cronin, Goodbody Stockbrokers, Research Division - Financials Analyst [12]

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Okay. And can I just -- one further on PPI, if I can. Is there, within the complaints that you received in the last 3 months, for example, is there a higher proportion that turned out to be illegitimate claims effectively than you've seen in previous years?

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Nathan Mark Bostock, Santander UK Group Holdings plc [13]

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No. John, I think it wouldn't be fair to say we've seen any sort of material shifts in that type of nature. The reality is, though, we also don't know whether or not some of the, let's call it, the claims have been effectively brought forward by people trying to make sure that they get them in by the deadline. So this is definitely a mixture of art and science at the moment, but we're not seeing any differential trends in terms of, let's call it, false claims.

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Operator [14]

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We now have a question from Lee Street calling from Citigroup.

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Lee Street, Citigroup Inc, Research Division - Head of IG CSS [15]

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I have 3 quick ones, I think. On Slide 15 of your slides, you detail out your capital requirements. Just do you expect any changes in these or do you think these are relatively set now? Secondly, just to link back to the prior question, you mentioned a reasonably significant reduction in the RWAs for mortgages in '21 given the PRA changes. Are you able to quantify that at all? And finally, just on the fixed income side, any comments on what your intentions are from here in terms of issuance for the rest of the year throughout the capital structure? That will be my 3 questions.

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [16]

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Thank you very much, Lee. So the capital requirements, there are only 2 bits on the capital requirement that could fluctuate. One, obviously, the countercyclical buffer, which is the decision of the SEC. So that obviously give us some uncertainty on what will be the level in a 1-year time horizon because it depends on the SEC. The other bit that could fluctuate is the Pillar 2A. On the Pillar 2A, we got the 3.1%. One of the main components is pensions. We are confident that in the future, the situation on pension will be better. But that's all we can say. So therefore, when we look at our current capital requirements, yes, I think it's the endpoint; again, predicated that Basel III finalization lands where we believe it lands.

So the second on risk-weighted assets, which is a very pertinent question on the benefit and why we do not quantify the benefits. As you know, the benefit will depend on the approval of the hybrid mortgage model. If the approval was in our hands completely, I will tell you what is our impact, which we believe is significant however it's for the regulator to approve the model and it might suffer some adjustments in the process. So therefore, it is difficult for me to tell you what is the benefit that is expected. Now that's why qualifying the benefit are significant. If you look at the banks in the U.K., you have, arguably, density on the mortgage books that go from 5% to 13% and then we got Santander UK at 16.5%. Definitely, we will think that we will be more towards the middle than the current situation.

Finally, you asked about issuances. Our -- in terms of capital, the only thing that we got is an AT1 call coming up in November, which is the GBP 300 million AT1 call that was issued to the group. So the only holder is Banco Santander SA. We are looking at that. If we have to make the decision today, obviously, we will call that because the reset is expensive versus what we are seeing in the market today. But we'll see in the future.

In terms of MREL, we believe that GBP 2 billion is kind of the normal issuance that we need every year to comply with end-state just because of the maturities of what we issue in the past. Now in theory, we don't need to issue this year. But depending on market condition, we might tap the market at least once before the year-end.

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Operator [17]

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(Operator Instructions) Our next question comes from Joe Hopkins of Morgan Stanley.

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Joe A. Hopkins, Morgan Stanley, Research Division - Strategist [18]

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You mentioned on Slide 17 there are 4 securities subject to CRR2 grandfathering rules. Does this relate to holding company senior bonds issued with (inaudible) rights? And if so, do you just expect the grandfather until maturity?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [19]

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We have to go back to you, Joe. I think that's the case, but I need to double check. I don't want to mislead you on the answer.

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Unidentified Company Representative, [20]

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Joe, we'll come back to you after this call.

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Operator [21]

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We now have a question from Alvaro Serrano of Morgan Stanley.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [22]

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Three hopefully quick questions. First of all on the NII outlook, and apologies if I've missed some of your answers already. You mentioned the front book pricing on the fixed-rate portfolio is improving. How many quarters until -- or what -- how does that compare to the back book -- fixed rate back book? How many quarters between -- do we need to wait for the pricing to stabilize in the back book? And also, related to that, the SVR is now 10% of the total book. How low -- I heard you saying that the attrition is now coming down, but what do you think is the minimal level, just technical level is -- what's the technical minimum level of that? Second question is related to GBP 400 million sort of planned investment at 2- to 3-year payback. Should we think of that GBP 400 million as a medium-term cost-cutting program in line with the group targets?

And the third question is on the hybrid model approval. I think it was expected for later this year. Can you update us on potential timing?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [23]

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I'll take probably the first one and third, probably, and I don't know if (inaudible). So on the front book, what we are saying is that basically for several quarter, we have been seeing spreads flat. Obviously, spreads are lower than the back book, yes, and I will say that it's north probably of 40 bps, the differential between the front book and the back book that is maturing. Now the main impact in the NII is the SVR attrition, and I'll touch in a minute on that one.

You asked about the [quarters]. Obviously, it will depend on the volume. So we have grown last year GBP 3.4 billion on net lending, on mortgages. We expect this year to grow around the same than last year, so from around GBP 3.42 billion. Obviously, it's a combination of price and volume. And definitely, we will be more than keen that, that will happen sooner than later, the breakeven that you are asking for, but it's difficult to say when exactly it's going to happen. The other consideration for you, to help you in response, the average mortgage book now, the back book you -- are under 3 years. So it's happening this year, then you consider 2019 and 2020. We'll see what happens in 2022 -- 2021, 2022. But again, it's a combination of factors. And one of the factors is actually SVR attrition. We got GBP 16 billion. The attrition this year so far is GBP 2.1 billion. Now we'll see where it lands. We believe that it still is going to be lower as we mentioned in our outlook done last year. Last year, it was GBP 4.9 billion. I guess you asked also the question of how far it's going to go. What I can tell you is that currently in those GBP 16 billion, 2/3 of the customers have been there for more than 5 years. Is this a definite answer that only 1/3 of the book will be subject to transfer to other mortgages? Not. It's just a proxy. Yes. But I wouldn't be surprised that, again, the attrition -- again, depending on the market conditions on the alternative for those customers, could go more than 1/3. It's difficult to say. I'm just trying to give you information, but again (inaudible)...

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Nathan Mark Bostock, Santander UK Group Holdings plc [24]

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It also -- yes, I mean that term period is important, obviously, because it also has to do for any customer on the rate differential between that and the market but also the size of the outstanding mortgage. So again, that's why it's not -- there's not a perfect correlation, but it's probably a reasonable way of trying to form an estimation.

You asked a question as well with regard to the GBP 400 million. So first of all, I think the first thing I would say is think of this as a transformation. So it's really focused around customer experience and also, of course, efficiency. Those things can go hand-in-hand particularly if you're looking at digital re-engineering processes, technology, et cetera. It is our intention to spend, let's call it, that circa GBP 400 million by 2021. We have said that we expect there to be a 2- to 3-year, what I would call, breakeven payback. So against that GBP 400 million, we would expect to achieve that level of efficiencies but over that timescale. Of course, the 2 to 3 years will also depend on the spend profile. So again, that spend profile will vary over the period. So things such as the branch optimization that we've done in the beginning of this year clearly rolls through faster in terms of payback than perhaps re-engineering technology. And I think probably to close off the last point, yes, the numbers are fundamentally in line with the group European target and timescale.

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Alvaro Serrano Saenz de Tejada, Morgan Stanley, Research Division - Lead Analyst [25]

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And on the hybrid kind of the model timing?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [26]

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Sorry. So now we need to include the new definition of default into the hybrid mortgage model, so obviously next year we expect the approval of that model. Obviously, it has to be next year because the implementation date for the whole industry is January 1, 2021.

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Operator [27]

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(Operator Instructions) We now have a follow-up question from Chris Cant from Autonomous.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [28]

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I just wanted to clarify a point of detail from your last answer. You referenced a 40 bps front book, back book differential on mortgages. I just wanted to be precise on specifically what you were defining as back book there. Is that a front book fixed spreads versus back book fixed spreads, or is that your front book fixed spreads versus the average spread on the entire back book, including SVR? I just wanted to be very precise on what you were speaking to there.

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [29]

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Thank you very much, Chris. I understand that you want to be very precise but I guess, giving more information than I have given in the past and I think it's a good proxy for your models. I'm afraid that's all I can say here. Again, what I said is, by the way, north of 40, rather than just setting stone 40 bps.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [30]

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Okay. I mean I guess you referred in your answer to the fact that SVR is more impactful on the NIM because, obviously, the spread that you're earning on SVR is that much higher than on the back book of fixed-rate mortgages. So I was just trying to understand whether...

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [31]

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Okay. Yes, I can give you color on that one. On that one -- sorry, go ahead.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [32]

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It was really just a point of clarification whether you were saying this is the difference between our front and back book on the fixed portion of the book, and then the SVR is sort of a separate issue. The reason I asked the question is one of your peers has commented on this front book, back book differential in the past, and I think has got themselves tied slightly in knots by giving quite a large front book, back book spread differential but was actually referring to a back book spread, including SVR. Your number's somewhat lower and I'm assuming it's front book versus back book fixed, but I just wanted to be clear on that point.

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [33]

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So let me give you detail on SVR and then I'm sure you can figure out. SVR is -- current rate is 4.99%. You think that basically you remortgage that around 2% customer rate, that's 300 bps.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [34]

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Sure. So I suppose within the 40 bps, it's not like there's a handful remortgaging with 300 bps pressure and then the rest of the book is remortgaging with less pressure. It's 40 bps on fixed book churn and then 300 bps on SVR churn, if that makes sense. Is that the right interpretation?

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [35]

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I'm sure that you can come up with an answer to that. Yes. I'm trying to give you as much information as I can.

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Operator [36]

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We have no further question, so I'll hand back to you, Nathan.

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Nathan Mark Bostock, Santander UK Group Holdings plc [37]

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That is very kind. Thank you. So thank you, everyone. Thanks very much for joining us today. Again, my sincere thanks to Antonio for everything he's done for us. And I wish you all a very happy break if you haven't had one yet. So all the best. Thank you.

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Antonio Roman, Santander UK Group Holdings plc - CFO & Executive Director [38]

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Thanks. Thank you.

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Operator [39]

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Ladies and gentlemen, that does conclude today's call. Thank you for joining. You may now disconnect your lines.