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Annual Financial Report - Part 2 of 2

27th Apr 2010 15:00

RNS Number : 8694K

Santander UK Plc

27 April 2010

Financial Statements

Independent Auditors' Report to the Members of Santander UK plc

We have audited the financial statements of Santander UK plc for the year ended 31 December 2009 which comprise the Consolidated Income Statement, the Consolidated and Company Statements ofComprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Cash Flow Statements, the Accounting Policies and the related Notes 1 to 51. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditors

As explained more fully in the Directors' Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion:

>	the financial statements give a true and fair view of the state of the group's and the parent company's affairs as at 31 December 2009 and of the group's profit for the year then ended;
>	the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
>	the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
>	the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Separate opinion in relation to IFRSs as issued by the IASB

As explained in the Accounting Policies section of the financial statements, the group in addition to applying IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the group financial statements comply with IFRSs as issued by the IASB.

Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

>	adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
>	the financial statements are not in agreement with the accounting records and returns; or
>	certain disclosures of directors' remuneration specified by law are not made; or
>	we have not received all the information and explanations we require for our audit.

Caroline Britton (Senior Statutory Auditor)

for and on behalf of Deloitte LLP

Chartered Accountants and Statutory Auditors

London, UK

27 April 2010

Consolidated Income Statement

For the years ended 31 December 2009, 2008 and 2007

	Notes	2009 £m	2008 £m	2007 £m
Interest and similar income	2	7,318	7,915	7,043
Interest expense and similar charges	2	(3,906)	(6,143)	(5,544)
Net interest income		3,412	1,772	1,499
Fee and commission income	3	986	768	785
Fee and commission expense	3	(162)	(97)	(90)
Net fee and commission income		824	671	695
Dividend income		-	-	1
Net trading and other income	4	460	561	587
Total operating income		4,696	3,004	2,782
Administration expenses	5	(1,848)	(1,343)	(1,369)
Depreciation and amortisation	6	(260)	(202)	(205)
Total operating expenses excluding provisions and charges		(2,108)	(1,545)	(1,574)
Impairment losses on loans and advances	8	(842)	(348)	(344)
Provisions for other liabilities and charges		(56)	(17)	-
Total operating provisions and charges		(898)	(365)	(344)
Profit before tax		1,690	1,094	864
Taxation charge	9	(445)	(275)	(179)
Profit for the year		1,245	819	685
Attributable to:
Equity holders of the parent		1,190	811	685
Non-controlling interest		55	8	-

The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.

All profits during the year were generated from continuing operations.

Consolidated Statement of Comprehensive Income

For the years ended 31 December 2009, 2008 and 2007

	Notes	2009 £m	2008 £m	2007 £m
Profit for the year		1,245	819	685
Other comprehensive income:
Actuarial losses on retirement benefit obligations	36	(606)	(44)	(113)
(Losses)/gains on available-for-sale securities	18	(6)	8	19
Exchange differences on translation of foreign operations		(4)	28	(1)
Tax on items taken directly to equity		171	8	9
Net loss recognised directly in equity		(445)	-	(86)
Gains on available-for-sale securities transferred to profit or loss on sale		(2)	-	(1)
Tax on items transferred to profit or loss		1	-	-
Net transfers to profit		(1)	-	(1)
Total other comprehensive expense for the year before tax		(618)	(8)	(96)
Tax relating to components of other comprehensive income		172	8	9
Total comprehensive income for the year		799	819	598

Attributable to: Equity holders of the parent		744	811	598
Non-controlling interest		55	8	-

Consolidated Balance Sheet

As at 31 December 2009 and 2008

	Notes	2009 £m	2008(1) £m
Assets
Cash and balances at central banks	11	4,163	4,017
Trading assets	12	33,290	26,264
Derivative financial instruments	13	22,827	35,125
Financial assets designated at fair value	14	12,358	11,377
Loans and advances to banks	15	9,151	16,001
Loans and advances to customers	16	186,804	180,176
Available for sale securities	18	797	2,663
Loans and receivables securities	19	9,898	14,107
Macro hedge of interest rate risk		1,127	2,188
Investment in associated undertakings	21	75	35
Intangible assets	22	1,446	1,347
Property, plant and equipment	23	938	854
Operating lease assets	24	312	348
Current tax assets		85	212
Deferred tax assets	25	946	1,274
Other assets	26	1,074	1,322
Total assets		285,291	297,310
Liabilities
Deposits by banks	27	5,811	14,488
Deposits by customers	28	143,893	130,245
Derivative financial instruments	13	18,963	27,810
Trading liabilities	29	46,152	40,738
Financial liabilities designated at fair value	30	4,423	5,673
Debt securities in issue	31	47,758	58,511
Other borrowed funds	32	1,352	2,076
Subordinated liabilities	33	5,597	6,787
Other liabilities	34	2,323	2,342
Provisions	35	91	207
Current tax liabilities		300	518
Deferred tax liabilities	25	336	405
Retirement benefit obligations	36	1,070	813
Total liabilities		278,069	290,613
Equity
Share capital	39	2,709	1,148
Share premium account	39	1,857	3,121
Retained earnings		1,911	1,678
Other reserves		29	39
		6,506	5,986
Non-controlling interests	38	716	711
Total shareholders' equity		7,222	6,697
Total liabilities and equity		285,291	297,310

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.

The Financial Statements on pages 102 to 188 were approved and authorised for issue by the Board on 27 April 2010 and signed on its behalf by:

Antonio Lorenzo

Chief Financial Officer

Company Registered Number: 2294747

Consolidated Statement of Changes in Equity

For the years ended 31 December 2009, 2008 and 2007

				Other reserves
	Notes	Share Capital £m	Share Premium £m		Available for sale reserve £m	Foreign currency translation reserve £m	Retained earnings £m	Total £m	Non-controlling interest £m	Total £m
1 January 2007		148	1,857		1	(6)	1,116	3,116	-	3,116
Total comprehensive income (gross)		-	-		18	(1)	572	589	-	589
Tax relating to components of other comprehensive income		-	-		(6)	-	15	9	-	9
Dividends declared	40	-	-		-	-	(370)	(370)	-	(370)
Arising through business part-disposal		-	-		-	-	-	-	98	98
31 December 2007		148	1,857		13	(7)	1,333	3,344	98	3,442

1 January 2008		148	1,857		13	(7)	1,333	3,344	98	3,442
Total comprehensive income (gross)		-	-		8	28	767	803	8	811
Tax relating to components of other comprehensive income		-	-		(3)	-	11	8	-	8
Dividends declared	40	-	-		-	-	(450)	(450)	-	(450)
Issued share capital	39	1,000	-		-	-	-	1,000	-	1,000
Capital contribution	39	-	1,264		-	-	17	1,281	-	1,281
Assumed through business combinations	38	-	-		-	-	-	-	605	605
31 December 2008(1)		1,148	3,121		18	21	1,678	5,986	711	6,697

1 January 2009		1,148	3,121		18	21	1,678	5,986	711	6,697
Total comprehensive income (gross)		-	-		(8)	(4)	584	572	55	627
Tax relating to components of other comprehensive income		-	-		2	-	170	172	-	172
Dividends declared	40	-	-		-	-	(521)	(521)	(50)	(571)
Reclassification of RCIs	39	297	-		-	-	-	297	-	297
Transfer to share capital	39	1,264	(1,264)		-	-	-	-	-	-
31 December 2009		2,709	1,857		12	17	1,911	6,506	716	7,222

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

Consolidated Cash Flow Statement

For the years ended 31 December 2009, 2008 and 2007

	Notes	2009 £m	2008(1) £m	2007 £m
Net cash flow from/(used in) operating activities
Profit for the year		1,245	819	685
Adjustments for:
Non cash items included in net profit		(24)	1,297	1,307
Change in operating assets		7,776	(30,381)	(12,411)
Change in operating liabilities		(2,351)	209	696
Income taxes received/(paid)		2	43	(5)
Effects of exchange rate differences		(3,719)	6,569	396
Net cash flow from/(used in) operating activities	41	2,929	(21,444)	(9,332)
Net cash flow from/(used in) investing activities
Acquisition of businesses, net of cash acquired	41	-	18,667	-
Dividends received from associates		-	2	-
Investment in associates		(35)	(8)	(8)
Disposal of subsidiaries, net of cash disposed	41	-	1,605	5
Disposal of non-controlling interest in subsidiaries		-	-	203
Purchase of tangible and intangible fixed assets		(463)	(278)	(407)
Proceeds from sale of tangible and intangible fixed assets		60	15	8
Purchase of non-trading securities		(1,133)	(891)	-
Proceeds from sale of non-trading securities		3,004	290	3
Net cash flow from/(used in) investing activities		1,433	19,402	(196)
Net cash flow (used in)/from financing activities
Issue of ordinary share capital		-	1,000	-
Issue of loan capital		1,556	-	13,363
Preference dividend paid		(19)	-	-
Interest paid on Tier 1		(17)	-	-
Repayment of loan capital		(5,895)	(7,786)	(8,587)
Dividends paid		(246)	(595)	-
Net cash flow (used in)/from financing activities		(4,621)	(7,381)	4,776
Net decrease in cash and cash equivalents		(259)	(9,423)	(4,752)
Cash and cash equivalents at beginning of the year		27,675	34,056	39,082
Effects of exchange rate changes on cash and cash equivalents		(1,052)	3,042	(274)
Cash and cash equivalents at the end of the year	41	26,364	27,675	34,056

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.

Company Balance Sheet

As at 31 December 2009 and 2008

	Notes	2009 £m	2008 £m
Assets
Cash and balances at central banks	11	3,266	2,456
Derivative financial instruments	13	2,539	2,735
Financial assets designated at fair value	14	37,145	47,525
Loans and advances to banks	15	109,658	116,486
Loans and advances to customers	16	131,749	123,319
Available for sale securities	18	30	25
Loans and receivables securities	19	2	-
Investment in subsidiary undertakings	20	7,038	5,147
Investment in associated undertakings	21	76	741
Intangible assets	22	552	484
Property, plant and equipment	23	561	569
Current tax assets		-	194
Deferred tax assets	25	428	458
Other assets	26	651	987
Total assets		293,695	301,126
Liabilities
Deposits by banks	27	116,414	124,846
Deposits by customers	28	159,187	155,466
Derivative financial instruments	13	3,353	5,393
Trading liabilities	29	-	739
Other borrowed funds	32	539	905
Subordinated liabilities	33	5,580	7,030
Other liabilities	34	1,611	1,283
Provisions	35	74	99
Current tax liabilities		92	128
Deferred tax liabilities	25	-	6
Retirement benefit obligations	36	922	797
Total liabilities		287,772	296,692
Equity
Share capital	39	2,709	1,148
Share premium account	39	1,857	1,857
Retained earnings		1,350	1,422
Available for sale reserve		7	7
Total shareholders' equity		5,923	4,434
Total liabilities and equity		293,695	301,126

The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.

The Financial Statements on pages 102 to 188 were approved and authorised for issue by the Board on 27 April 2010 and signed on its behalf by:

Antonio Lorenzo

Chief Financial Officer

Company Registered Number: 2294747

Company Statement of Comprehensive Income

For the years ended 31 December 2009, 2008 and 2007

	Notes	2009 £m	2008 £m	2007 £m
Profit for the year		747	1,328	351
Other comprehensive income/(expenses):
Actuarial losses on retirement benefit obligations	36	(414)	(43)	(116)
(Losses)/gains on available-for-sale securities	18	-	(4)	18
Tax on items taken directly to equity		116	12	10
Net loss recognised directly in equity		(298)	(35)	(88)
Gains on available-for-sale securities transferred to profit or loss on sale		-	-	(1)
Tax on items transferred to profit		-	-	-
Net transfers to profit		-	-	(1)
Total other comprehensive expense for the year before tax		(414)	(47)	(99)
Tax relating to components of other comprehensive income		116	12	10
Total comprehensive income for the year		449	1,293	262

Attributable to: Equity holders of the parent		449	1,293	262

Company Statement of Changes in Equity

For the years ended 31 December 2009, 2008 and 2007

	Notes	Share Capital £m	Share Premium £m	Available for sale reserve £m	Retained earnings £m	Total £m
1 January 2007		148	1,857	-	694	2,699
Total comprehensive income (gross)		-	-	17	235	252
Tax relating to components of other comprehensive income		-	-	(6)	16	10
Dividends declared	40	-	-	-	(370)	(370)
31 December 2007		148	1,857	11	575	2,591

1 January 2008		148	1,857	11	575	2,591
Total comprehensive income (gross)		-	-	(4)	1,285	1,281
Tax relating to components of other comprehensive income		-	-	-	12	12
Issued share capital	39	1,000	-	-	-	1,000
Dividends declared	40	-	-	-	(450)	(450)
31 December 2008		1,148	1,857	7	1,422	4,434

1 January 2009		1,148	1,857	7	1,422	4,434
Total comprehensive income (gross)		-	-	-	333	333
Tax relating to components of other comprehensive income		-	-	-	116	116
Capital contribution	39	1,264	-	-	-	1,264
Dividends declared	40	-	-	-	(521)	(521)
Reclassification of Reserve Capital Instruments	39	297	-	-	-	297
31 December 2009		2,709	1,857	7	1,350	5,923

Financial Statements

Company Cash Flow Statement

For the years ended 31 December 2009, 2008 and 2007

	Notes	2009 £m	2008 £m	2007 £m
Net cash flow (used in)/from operating activities
Profit for the year		747	1,328	351
Adjustments for:
Non cash items included in net profit		(207)	2,038	446
Change in operating assets		1,103	(80,636)	(8,761)
Change in operating liabilities		(6,166)	128,109	13,865
Income taxes received		21	80	48
Effects of exchange rate differences		(268)	897	-
Net cash flow (used in)/from operating activities	41	(4,770)	51,816	5,949
Net cash flow (used in)/from investing activities
Increase in investment in subsidiaries		-	(598)	(418)
Investment in associates		(35)	(708)	(8)
Disposal of subsidiaries, net of cash disposed		-	111	415
Disposal of non-controlling interest in subsidiaries		-	-	203
Purchase of tangible and intangible fixed assets		(209)	(174)	(181)
Proceeds from sale of tangible and intangible fixed assets		18	11	-
Purchase of non-trading securities		(9)	(9)	-
Proceeds from sale and redemption of non-dealing securities		3	8	3
Net cash flow (used in)/from investing activities		(232)	(1,359)	14
Net cash flow (used in)/from financing activities
Issue of ordinary share capital		-	1,000	-
Issue of loan capital		-	-	65
Repayment of loan capital		(557)	(253)	(641)
Dividends paid		(246)	(595)	-
Net cash flow (used in)/from financing activities		(803)	152	(576)
Net (decrease)/increase in cash and cash equivalents		(5,805)	50,609	5,387
Cash and cash equivalents at beginning of the year		61,203	10,594	5,207
Effects of exchange rate changes on cash and cash equivalents		-	-	-
Cash and cash equivalents at the end of the year	41	55,398	61,203	10,594

The Notes on pages 124 to 188 are an integral part of these Consolidated Financial Statements.

Accounting Policies

International Financial Reporting Standards

The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ('IFRS') as approved by the International Accounting Standards Board ('IASB'), and interpretations issued by the International Financial Reporting Interpretations Committee ('IFRIC') of the IASB that, under European Regulations, are effective and available for early adoption at the reporting date. Santander UK plc (formerly Abbey National plc) (the 'Company') and its subsidiaries (together the 'Group') have complied with IFRS as issued by the IASB in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union.

Disclosures required by IFRS 7 'Financial Instruments: Disclosure' relating to the nature and extent of risks arising from financial instruments can be found in the Risk Management section on pages 49 to 85 which form part of these Consolidated Financial Statements.

Recent developments

In 2009, the Group adopted the following new or revised IFRS:

a)	IAS 23 'Borrowing Costs' - On 29 March 2007, the IASB issued an amendment to IAS 23 'Borrowing costs' which removes the option to expense borrowing costs incurred during the acquisition, construction or production of a qualifying asset. The adoption of the amendment to IAS 23 did not have a material impact on the Group's profit or loss or financial position.
b)	IAS 1 'Presentation of Financial Statements' - On 6 September 2007, the IASB issued an amendment to IAS 1 'Presentation of Financial Statements' which changes the way in which non-owner changes in equity are required to be presented. As a result, a 'Statement of Changes in Equity' has been included as a separate primary financial statement showing changes in equity during the periods presented. In addition, the Statement of Recognised Income and Expense has been replaced with a 'Statement of Comprehensive Income'. The adoption of the amendment to IAS 1 did not have any impact on the Group's profit or loss or financial position.
c)	IFRS 2 'Share based payments - vesting conditions and cancellations' - On 17 January 2008, the IASB issued an amendment to IFRS 2 'Share based payments' which requires share option awards lapsing due to a failure to meet the service condition to be treated as cancellations rather than forfeitures. The adoption of the amendment to IFRS 2 did not have a material impact on the Group's profit or loss or financial position.
d)	IFRS 7 'Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments' - On 5 March 2009, the IASB issued an amendment to IFRS 7 'Financial Instruments: Disclosures' which requires enhanced disclosures about fair value measurements and liquidity risk. Among other things, the amendment (1) requires disclosure of any change in the method for determining fair value and the reasons for the change; (2) establishes a three-level hierarchy for making fair value measurement disclosures; (3) requires disclosure for each fair value measurement in the balance sheet of which level in the hierarchy was used, and any transfers between levels, with additional disclosures whenever level 3 of the hierarchy is used including a measure of sensitivity to a change in input data; (4) clarifies that the current maturity analysis for non-derivative financial liabilities should include issued financial guarantee contracts; and (5) amends the required disclosure of a maturity analysis for derivative financial liabilities. The disclosures required by the amendment to IFRS 7 may be found on pages 177 to 185 and pages 59 and 60.

Future developments

The Group has not yet adopted the following new or revised IFRS or IFRIC interpretations, which have been issued but which are not yet effective for the Group:

IFRS 3 'Business Combinations' - On 10 January 2008, the IASB issued an amendment to IFRS 3 'Business Combinations' which clarifies and changes certain elements of accounting for a business combination, including measurement of contingent consideration, step acquisition and intangible assets and also widens the scope of this standard. There are also associated amendments to IAS 27, IAS 28 and IAS 31. The amendment to IFRS 3 is effective for periods beginning on or after 1 July 2009.

IFRS 9 'Financial Instruments' - On 12 November 2009, the IASB issued IFRS 9 'Financial Instruments', which significantly overhauls the accounting requirements for financial instruments under IFRS. IFRS 9 is mandatory for annual periods beginning on or after 1 January 2013, with early application permitted. IFRS 9 requires that a financial asset be classified into one of three categories for measurement and income recognition: (1) Amortised cost, (2) Fair value through profit or loss (FVTPL) and (3) Fair value through other comprehensive income. The standard requires reclassification between amortised cost and FVTPL (or vice versa) if a financial asset no longer meets the criteria for its original classification. IFRS 9 replaces the existing classification and measurement requirements in IAS 39 for financial assets. It changes the manner in which entities classify and measure investments in debt and equity securities, loan assets, trade receivables and derivative financial assets by requiring entities to classify financial assets as being measured at either amortized cost or fair value depending on the entity's business model and the contractual cash flow characteristics of the asset. The Group is currently evaluating the requirements of IFRS 9.

Basis of preparation

The Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, financial assets and financial liabilities held at fair value through profit or loss and all derivative contracts, and on the going concern basis as disclosed in the Directors' statement of going concern set out in the Directors' Report on pages 89 and 90.

As described in Note 47, the Group has accounted for the transfer of Alliance & Leicester plc retrospectively from 10 October 2008, the date on which Alliance & Leicester plc was acquired by the Company's parent Banco Santander, S.A..

As described in Note 48, the Group has finalised the purchase price allocation in respect of the acquisition of Bradford & Bingley's savings business. As permitted by IFRS 3 "Business Combinations", the final allocation has been accounted for retrospectively from September 2008, the date on which Bradford & Bingley's savings business was acquired.

IAS 1 'Presentation of Financial Statements' requires the presentation of a balance sheet as at the beginning of the earliest period when a company applies an accounting policy retrospectively. In respect of both the above matters, for the Group, this balance sheet would be as at 31 December 2006. However, the retrospective accounting for the transfer of Alliance & Leicester plc and the finalisation of the purchase price allocation in respect of the acquisition of Bradford & Bingley's savings businesshad no impact on the balance sheet as at 31 December 2006, and so that balance sheet has not been represented in these Consolidated Financial Statements.

Consolidation

a) Subsidiaries

Subsidiaries, which are those companies and other entities (including Special Purpose Entities) over which the Group, directly or indirectly, has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. The Company recognises investments in subsidiaries at cost less impairment.

Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition, plus directly attributable acquisition costs. The excess of the cost of acquisition over the fair value of the tangible and intangible net assets of the subsidiary acquired is recorded as goodwill. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The accounting reference date of the Company and its subsidiary undertakings is 31 December, with the exception of those leasing, investment, insurance and funding companies which, because of commercial considerations, have various accounting reference dates. The Financial Statements of these subsidiaries have been consolidated on the basis of interim Financial Statements for the period to 31 December.

Transactions between entities under common control are outside the scope of IFRS 3 - Business Combinations, and there is no other guidance for such situations under IFRS. Business combinations between entities under common control transacted for non-cash consideration are accounted for by the Group in a manner consistent with group reconstruction relief under UK GAAP.

b) Associates

Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost. Under this method, the Group's share of the post-acquisition profits or losses of associates is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment. The Company recognises investments in associates at cost less impairment.

Associates are entities in which the Group has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group has significant influence over another entity. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group's investment in associates includes goodwill on acquisition. When the Group's share of losses in an associate equals or exceeds its interest in the associate the Group does not recognise further losses unless the Group has incurred obligations or made payments on behalf of the associates.

Foreign currency translation

Items included in the Financial Statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity ('the functional currency'). The Consolidated Financial Statements are presented in pounds sterling, which is the functional currency of the parent.

Income statements and cash flows of foreign entities are translated into the Group's reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders' equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Foreign currency transactions are translated into the functional currency of the entity involved at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement unless deferred in equity under the cash flow hedge.

The amount of exchange rate differences recognised in profit or loss on items not at fair value through profit and loss was £2,570m income (2008: £5,850m charge, 2007: £505m charge). This was offset by income/charges on items held at fair value.

Revenue recognition

(a) Interest income and expense

Income on financial assets that are classified as loans and receivables or available-for-sale, and interest expense on financial liabilities other than those at fair value through profit and loss are determined using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument excluding future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of the financial instrument and all other premiums or discounts. Interest income on assets classified as loans and receivables or available-for-sale, interest expense on liabilities classified at amortised cost and interest income and expense on hedging derivatives are recognised in interest and similar income and interest expense and similar charges in the income statement.

(b) Fee and commissions income

Fees and commissions that are not an integral part of the effective interest rate are recognised when the service has been provided. For retail products, fee and commission income consists principally of collection services fees, commission on foreign currencies, and fees for non-banking financial products. Revenue from these income streams is recognised as earned when the service is provided.

For insurance products, fee and commission income consists principally of commissions earned on the sale of building and contents insurance, life protection insurance and payment cover insurance.

Asset management fee and commission income comprises portfolio and other management advisory and service fees, investment fund management fees, and fees for private banking, financial planning and custody services. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees related to investment funds are recognised rateably over the period the service is provided. The same principle is applied for private banking, financial planning and custody services that are continuously provided over an extended period of time.

Except for equity securities classified as trading assets or financial assets held at fair value through profit or loss, described below, dividend income is recognised when the right to receive payment is established. This is the ex-dividend date for equity securities.

(d) Net trading and other income

Net trading and other income comprises all gains and losses from changes in the fair value of financial assets and liabilities held at fair value through profit or loss (including financial assets and financial liabilities held for trading and designated as fair value through profit or loss), together with related interest income, expense and dividends. It also includes income from operating lease assets, and profits/(losses) on the sales of fixed assets and subsidiary undertakings.

Changes in the fair value of financial assets and liabilities held for trading, including trading derivatives, are recognised in the income statement as net trading and other income together with dividends and interest receivable and payable. Changes in the fair value of assets and liabilities designated as fair value through profit or loss are recognised in net trading and other income together with dividends, interest receivable and payable and changes in fair value of derivatives managed in conjunction with these assets and liabilities. Changes in fair value of derivatives in a designated hedging relationship are recognised in net trading and other income along with the fair value of the hedged item.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, including computer software, which are assets that necessarily take a substantial period of time to develop for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised in profit or loss in the period in which they occur.

Pensions and other post retirement benefits

Group companies have various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds as determined by periodic actuarial calculations. A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions as they fall due into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior periods.

The liability recognised in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Full actuarial valuations of the Group's principal defined benefit schemes are carried out every year. The Group is responsible for the actuarial valuations and in doing so considers or relies in part on a report of a third party expert. The present value of the defined benefit obligation is determined by the estimated future cash outflows using interest rates of high quality corporate bonds, which have terms to maturity closest to the terms of the related liability, adjusted where necessary to match those terms.

The Group's consolidated income statement includes the current service cost of providing pension benefits, the expected return on schemes' assets net of expected administration costs, and the interest cost on the schemes' liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are taken directly to reserves and recognised in the statement of comprehensive income. Past-service costs are charged immediately to the income statement, unless the changes are conditional on the employees remaining in service for a specified period of time, known as the vesting period. In this case, the past-service costs are amortised on a straight-line basis over the average period until the benefits become vested.

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in staff costs. Curtailment gains and losses on sold businesses that meet the definition of discontinued operations are included in operating expenses in profit or loss for the year from discontinued operations.

Post-retirement medical benefit liabilities are determined using the Projected Unit Credit Method, with actuarial valuations updated at each year-end. The expected benefit costs are accrued over the period of employment using an accounting methodology similar to that for the defined benefit pension scheme.

Share-based payments

The Group engages in cash-settled and equity-settled share-based payment transactions in respect of services received from certain of its employees. Shares of the Group's parent, Banco Santander, S.A. are purchased in the open market by the Group (for the Executive Share Option Scheme, the Employee Sharesave scheme and awards granted under the Medium Term Incentive Plan) or are purchased by Banco Santander, S.A. or another group company (for awards granted under the Long Term Incentive Plan) to satisfy share options as they vest. The Executive Share Option scheme, the Employee Sharesave scheme and awards granted under the Medium Term Incentive Plan are accounted for as cash-settled share-based payment transactions. Awards granted under the Long Term Incentive Scheme are accounted for as equity-settled share-based payment transactions. Prior to the acquisition of the Company by Banco Santander, S.A., share options were satisfied by issue of new shares of the Company. These options were accounted for as equity settled share-based payments. The fair value of the services received is measured by reference to the fair value of the shares or share options initially on the date of the grant and then subsequently at each reporting date. The cost of the employee services received in respect of the shares or share options granted is recognised in the income statement within administration expenses, over the period that the services are received, which is the vesting period. A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled, share-based payments. A liability equal to the amount to be reimbursed to Banco Santander, S.A. is recognised at the current fair value determined at the grant date for equity-settled share based payments. The fair value of the options granted under the Executive Share Option scheme, the Employee Sharesave scheme and awards granted under the Medium Term Incentive Plan is determined using an option pricing model, which takes into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander, S.A. share price over the life of the option, the dividend growth rate and other relevant factors.

The fair value of the awards granted for the Long Term Incentive Plan were valued at the grant date using an option pricing model, which takes into account the expected life of the options, interest rates, volatility of the Banco Santander, S.A. share price over the life of the option, exercise price, market price and dividends. Except for those that include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value.

Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary, associate, or business at the date of acquisition. Goodwill on the acquisition of subsidiaries and businesses is included in Intangible assets. Goodwill on acquisitions of associates is included as part of Investment in associates. Goodwill is tested for impairment at each balance sheet date, or more frequently when events or changes in circumstances dictate, and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity or business include the carrying amount of goodwill relating to the entity or business sold.

Other intangible assets are recognised if they arise from contracted or other legal rights or if they are capable of being separated or divided from the Group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight-line basis over the useful economic life of the assets in question, which ranges from 9 to 20 years. Other intangible assets are reviewed annually for impairment indicators and tested for impairment where indicators are present.

Software development costs are capitalised when they are associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of these products can be measured reliably. Internally developed software meeting these criteria and externally purchased software are classified in intangible assets on the balance sheet and amortised on a straight-line basis over their useful life of 3-7 years, unless the software is an integral part of the related computer hardware, in which case it is treated as property, plant and equipment as described below. Costs associated with maintaining software programmes are expensed as incurred.

Property, plant and equipment

Property, plant and equipment include owner-occupied properties, office fixtures and equipment and computer software. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. A review for indications of impairment is carried out at each reporting date. Gains and losses on disposal are determined by reference to the carrying amount and are reported in net trading and other income. Repairs and renewals are charged to the income statement when the expenditure is incurred.

Software development costs are capitalised when they are associated with identifiable and unique software products that are expected to provide future economic benefits and the cost of these products can be measured reliably. Internally developed software meeting these criteria and externally purchased software are classified in property, plant and equipment on the balance sheet where the software is an integral part of the related computer hardware. Costs associated with maintaining software programmes are expensed as incurred. Classes of property, plant and equipment are depreciated on a straight-line basis over their useful life as follows:

Owner-occupied properties	Not exceeding 50 years
Office fixtures and equipment	3 to 15 years
Computer software	3 to 7 years

Depreciation is not charged on freehold land and assets under construction.

Financial assets

The Group classifies its financial assets as: financial assets at fair value through profit or loss, loans and receivables and available-for-sale financial assets. Management determines the classification of its investments at initial recognition. Financial assets that are classified at fair value through profit or loss, which have not been designated as such or are not accounted for as derivatives, or assets classified as available-for-sale, may subsequently in rare circumstances, be reclassified from the fair value through profit or loss category to the loans and receivables, available-for-sale or held to maturity categories. In order to meet the criteria for reclassification, the asset must no longer be held for the purpose of selling or repurchasing in the near term and must also meet the definition of the category into which it is to be reclassified had it not been required to classify it at fair value through profit or loss at initial recognition. The reclassified value is the fair value of the asset at the date of reclassification. The Group has not utilised this option and therefore has not reclassified any assets from the fair value through profit or loss category that were classified as such at initial recognition.

(a) Financial assets at fair value through profit or loss

Financial assets are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial asset is classified as held for trading if it is a derivative or it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

In certain circumstances financial assets other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognising the gains or losses on them on a different basis, where the assets are managed and their performance evaluated on a fair value basis, or where a financial asset contains one or more embedded derivatives which are not closely related to the host contract.

Trading assets, derivative financial instruments and financial assets designated at fair value are classified as fair value through profit or loss, except where in a hedging relationship. They are derecognised when the rights to receive cash flows from the asset have expired or when the Group has transferred substantially all the risks and rewards of ownership.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments, that are not quoted in an active market and which are not classified as available-for-sale or fair value through profit or loss. They arise when the Group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership. Loans and receivables consist of Loans and advances to banks and Loans and advances to customers and Loan and receivable securities.

Available-for-sale investments are non-derivative financial investments that are designated as available-for-sale and are not categorised into any of the other categories described. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is transferred to the income statement. Interest is determined using the effective interest method.

Income on investments in equity shares and other similar interests is recognised in the income statement as and when dividends are declared and interest is accrued. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement. The investments are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership. Available-for-sale securities are classified as available-for-sale.

(d) Held to maturity investments

Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership. Were the Group to sell other than an insignificant amount of held to maturity assets, the entire category would be tainted and reclassified as available-for-sale.

The Group does not hold any held to maturity financial assets.

Valuation of financial instruments

Financial instruments that are classified at fair value through profit or loss ('FVTPL'), including those held for trading purposes, or available-for-sale, and all derivatives, are stated at fair value. The fair value of such financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing, knowledgeable parties, other than in a forced or liquidation sale.

Initial measurement

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price unless the instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include significant data from observable markets. Any difference between the transaction price and the value based on a valuation technique where the inputs are not based on data from observable current markets is not recognised in profit or loss on initial recognition. Subsequent gains or losses are only recognised to the extent that they arise from a change in a factor that market participants would consider in setting a price.

Subsequent measurement

The Group applies the following fair value hierarchy that prioritises the inputs to valuation techniques used in measuring fair value. The hierarchy establishes three categories for valuing Financial Instruments, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three categories are: quoted prices in active markets (Level 1), internal models based on observable market data (Level 2) and internal models based on other than observable market data (Level 3). If the inputs used to measure an asset or a liability fall to different levels within the hierarchy, the classification of the entire asset or liability will be based on the lowest level input that is significant to the overall fair value measurement of the asset or liability.

The Group categorises assets and liabilities measured at fair value within the fair value hierarchy based on the inputs to the valuation techniques as follows:

Level 1:	Unadjusted quoted prices for identical assets or liabilities in an active market that the Group has the ability to access at the measurement date. Level 1 positions include debt securities, equity securities, exchange traded derivatives and short positions in securities.
Level 2:	Quoted prices in markets that are not active, quoted prices for similar assets or liabilities, recent market transactions, inputs other than quoted market prices for the asset or liability that are observable either directly or indirectly for substantially the full term, and inputs to valuation techniques that are derived principally from or corroborated by observable market data through correlation or other statistical means for substantially the full term of the asset or liability. Level 2 positions include loans and advances to banks, loans and advances to customers, equity securities, exchange rate derivatives, interest rate derivatives, equity and credit derivatives, debt securities, deposits by banks, deposits by customers, debt securities in issue, amounts due to banks, and amounts due to customers.
Level 3:	Inputs to the pricing or valuation techniques that are significant to the overall fair value measurement of the asset or liability are unobservable. Level 3 positions include equity securities, exchange rate derivative, equity and credit derivatives, loans and advances to customers, debt securities, and debt securities in issue.

The Group assesses active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument. The Group assesses active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity. The Group assesses active markets for exchange traded derivatives based on the average daily trading volume both in absolute terms and relative to the market capitalisation for the instrument. Market activity and liquidity is discussed in the relevant monthly Risk Forum as well as being part of the daily update given by each business at the start of the trading day. This information, together with the observation of active trading and the magnitude of the bid-offer spreads allow consideration of the liquidity of a financial instrument.

All underlying assets and liabilities are reviewed to consider the appropriate adjustment to mark the mid price reported in the trading systems to a realisable value. This process takes into account the liquidity of the position in the size of the adjustment required. These liquidity adjustments are presented and discussed at the monthly Risk Forum.

In determining the appropriate measurement levels, the Group performs regular analyses on the assets and liabilities. All underlying assets and liabilities are regularly reviewed to determine whether a position should be regarded as illiquid; the most important practical consideration being the observability of trading. Where the bid-offer spread is observable, this is tested against actual trades. Changes in the observability of significant valuation inputs during the reporting period may result in a reclassification of certain assets and liabilities within the fair value hierarchy.

Financial instruments valued using observable market prices

If a quoted market price in an active market is available for an instrument, the fair value is calculated based on the market price.

Financial instruments valued using a valuation technique

In the absence of a quoted market price in an active market, management uses internal models to make its best estimate of the price that the market would set for that financial instrument. In order to make these estimations, various techniques are employed, including extrapolation from observable market data and observation of similar financial instruments with similar characteristics. Wherever possible, valuation parameters for each product are based on prices directly observable in active markets or that can be derived from directly observable market prices. Valuation parameters for each type of financial instrument are discussed in Note 49 of the Consolidated Financial Statements.

Unrecognised gains as a result of the use of valuation models using unobservable inputs ('Day One profits')

The timing of recognition of deferred day one profit and loss is determined individually. It is deferred until either the instrument's fair value can be determined using market observable inputs or is realised through settlement. The financial instrument is subsequently measured at fair value, adjusted for the deferred day one profit and loss. Subsequent changes in fair value are recognised immediately in the consolidated income statement without immediate reversal of deferred day one profits and losses.

"Regular way" purchases of financial assets

A regular way purchase is a purchase of a financial asset under a contract whose terms require delivery of the asset within the timeframe established generally by regulation or convention in the market place concerned.

Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date. The assets are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.

Offsetting financial assets and liabilities

Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Sale and repurchase agreements (including stock borrowing and lending)

Securities sold subject to a linked repurchase agreement ('repos') are retained in the Financial Statements as trading assets and the counterparty liability is included in amounts 'Deposits by banks' or 'Deposits by customers' within trading liabilities as appropriate. Securities purchased under agreements to resell ('reverse repos') are recorded as 'Loans and advances to banks' or 'Loans and advances to customers' within trading assets as appropriate. The difference between the sale and repurchase price is treated as trading income in the income statement. Securities lent to counterparties that are collateralised by cash are also retained in the balance sheet. Securities borrowing and lending transactions collateralised with other securities are not recognised in the balance sheet.

Derivative financial instruments

Transactions are undertaken in derivative financial instruments ('derivatives'), which include interest rate, cross currency, equity, residential property and other index-related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options.

Derivatives are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement, which require no or little initial net investment and are settled at a future date.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative, except where netting is permitted.

Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the hybrid contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Contracts containing embedded derivatives are not subsequently reassessed for separation unless there has been a change in the terms of the contract which significantly modifies the cash flows, or where assets have been reclassified where they are reassessed at the time of reclassification.

Hedge accounting

The Group designates certain derivatives as hedging instruments of the fair value of recognised assets or liabilities or firm commitments (fair value hedge). Hedge accounting is used for derivatives designated in this way provided certain criteria are met.

At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s). Documentation includes risk management objectives and the strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been and will be highly effective in offsetting changes in the fair value of the hedged items. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Group can expect, and actual results indicate, that changes in the fair value of the hedged items are effectively offset by changes in the fair value of the hedging instrument, and actual results are within a range of 80% to 125%.

The Group discontinues hedge accounting when it is determined that: a derivative is not, or has ceased to be, highly effective as a hedge; when the derivative expires, or is sold, terminated or exercised; or when the hedged item matures or is sold or repaid. On discontinuance of hedge accounting amortisation of the adjustment to the hedged item is included in net trading and other income.

The hedge adjustment for fair value hedges is classified in the balance sheet in the same category as the hedged item, unless it relates to a macro hedging relationship where the hedge adjustment is recognised as a macro hedge on the face of the balance sheet. For fair value hedges, changes in the fair value of the hedging instrument and hedged item are recognised in net trading and other income. Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged item. Such gains and losses are recorded in current period earnings within net trading and other income.

Gains and losses on components of a hedging derivative that are excluded from assessing hedge effectiveness are also included in net trading and other income.

Securitisation transactions

The Group has entered into certain arrangements where undertakings have issued mortgage-backed securities or have entered into funding arrangements with lenders in order to finance specific loans and advances to customers. As the Group has retained substantially all the risks and rewards of the underlying assets, all such financial instruments continue to be held on the Group balance sheet, and a liability recognised for the proceeds of the funding transaction.

Impairment of financial assets

At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition, there is objective evidence that a financial asset or group of financial assets classified as available-for-sale or loans and receivables have become impaired. Evidence of impairment may include indications that the borrower or group of borrowers have defaulted, are experiencing significant financial difficulty, or the debt has been restructured to reduce the burden to the borrower.

(a) Financial assets carried at amortised cost

Retail assets

Impairment losses are assessed individually for the financial assets that are individually significant and individually or collectively for assets that are not individually significant. Balance sheet provisions are maintained at the level that management deems sufficient to absorb probable incurred losses in the Group's loan portfolio from homogeneous portfolios of assets and individually identified loans.

A provision for observed losses is established for all past due loans after a specified period of repayment default where it is probable that some of the capital will not be repaid or recovered through enforcement of any applicable security. Once a loan misses a payment (breach of contractual terms) an assessment of the likelihood of collecting the principal and overdue payments is made. This assessment is generally made using statistical techniques based on historic experience. These determinations are supplemented by various formulaic calculations and the application of management judgement.

For individually assessed assets, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of the estimated future cash flows from the asset or group of assets discounted at the original effective interest rate of the asset.

In making collective assessment for impairment, financial assets are assessed for each portfolio segmented by similar risk characteristics. For each risk segment, future cash flows from these portfolios are estimated through the use of historical loss experience. The historical loss experience is adjusted for current observable data, including estimated current property prices, to reflect the effects of current conditions not affecting the period of historical experience. The loss is discounted at the effective interest rate, except where portfolios meet the criteria for short-term receivables. The unwind of the discount over time is reported through interest receivable within the income statement, with the provision on the balance sheet increasing.

Loans that are part of a homogeneous pool of similar loans are placed on default status based on the number of months in arrears, which is determined through the number of missed payments or the number of months in collection. Loans that are not part of a homogeneous pool of similar loans are analysed based on the number of months in arrears on a case-by-case basis and are placed on default status when the probability of default is likely.

Generally, the length of time before an asset is placed on default status for provisioning is when one payment is missed. Repayment default periods vary depending on the nature of the collateral that secures the advances. On advances secured by residential or commercial property, the default period is three months. For advances secured by consumer goods such as cars or computers, the default period is less than three months, the exact period being dependent on the particular type of loan in this category.

On unsecured advances, such as personal term loans, the default period is generally four missed payments (three months in arrears). Exceptions to the general rule exist with respect to revolving facilities, such as bank overdrafts, which are placed on default upon a breach of the contractual terms governing the applicable account, and on credit card accounts where the default period is three months.

A provision for inherent losses is made for loan losses that have been incurred but have not been separately identified at the balance sheet date because the loan is not yet past due. An example of this situation is where a borrower has not yet missed a payment but is experiencing financial difficulties at the reporting date, e.g. due to loss of employment or divorce. In these circumstances, an inherent loss had been incurred at the reporting date. The provision for inherent losses is determined on a portfolio basis based on management's best estimate of the current position based on past experience adjusted by current trends. These statistical techniques involve the following (i) estimation of a period of time called the emergence period, which is discussed below, (ii) assessment of the number of accounts that go into arrears over the emergence period, and (iii) application of the provision methodology outlined for observed provisions to these accounts identified as impaired as a result of this exercise. Accounts that suffered credit deterioration after the reporting date are accordingly excluded from the statistical analysis.

The emergence period

This is the period which the Group's statistical analysis shows to be the period in which losses that had been incurred but have not been separately identified at the balance sheet date, become evident as the loans turn into past due. Based on the Group's statistical analysis at 31 December 2009, the emergence period was two to three months for unsecured lending and twelve months for secured lending. The longer emergence period for secured lending reflects the fact that a customer is more likely to default on unsecured debt before defaulting on secured lending. The factors considered in determining the length of the emergence period for unsecured lending are recent changes in customers' debit/credit payment profiles and credit scores. The factors considered for secured lending are the frequency and duration of exceptions from adherence to the contractual payment schedule.

Once a financial asset or a group of financial assets has been written down as a result of an impairment loss, the assets are not placed onto a non-accrual status. Subsequent interest income continues to be recognised on an effective interest rate basis, though on the asset value after provisions have been deducted.

Impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial assets is reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. For secured loans, a write-off is only made when all collection procedures have been exhausted and the security has been sold. For unsecured loans, a write-off is only made when all internal avenues of collecting the debt have been exhausted and the debt is passed over to external collection agencies. Write-offs are charged against previously established provisions for impairment.

Recoveries of loan losses are not included in the loan loss allowance, but are taken to income and offset against charges for loan losses. Loan loss recoveries are classified in the income statement as 'Impairment losses on loans and advances'.

Corporate assets

Impairments for these assets are assessed on both an individual and a collective basis. For individual assets impairment reviews are conducted monthly for those assets on the Group's 'Watchlist' of new, emerging and serious circumstances relating to the portfolio, with a particular focus on the following scenarios: (1) where an asset has a payment default which has been outstanding for 90 days or more; (2) where non-payment defaults have occurred and/or where it has become evident that some sort of workout or rescheduling exercise is to be undertaken; or (3) where, for example with Real Estate Finance, it has become evident that the value of the Group's security is no longer considered adequate.

In such situations the file is transferred to the Corporate Banking Workouts team within Credit Risk. As part of their assessment, a full review of the expected future cash flows in relation to the relevant asset, appropriately discounted, will be undertaken and the result compared to the current net book value of the asset. Any shortfall evidenced as a result of such a review, particularly where the shortfall is likely to be permanent, will lead to a suitable impairment recommendation.

Collective impairments are also looked at for portfolios where it is felt that market events, either specific or general, are likely to determine that losses are already inherent in a portfolio notwithstanding that these events may not have manifested themselves in specific defaults or other triggers that would lead to an individual impairment assessment. The amount of any such collective impairment will, for each portfolio concerned, represent management's best estimate of likely loss levels and will take into account inter alia estimates of future actual default rates and likely recovery levels.

For secured loans, a write-off is made when all collection procedures have been exhausted and the security has been sold. For unsecured loans, a write-off is made when all avenues for collecting the debt have been exhausted. There may be occasions where a write-off occurs for other reasons, for example, following a consensual restructure of the debt or where the debt is sold for strategic reasons into the secondary market at a value lower than the face value of the debt. Write-offs are charged against previously established provisions for impairment.

Loans and receivables securities

Loans and receivables securities are assessed individually for impairment. An impairment loss is incurred if there is objective evidence that an event has occurred since initial recognition of the assets that has an impact in the estimated future cash flows of the loans and receivables securities.

(b) Available-for-sale financial assets

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In assessing whether assets are impaired, a significant or prolonged decline in the fair value of the security below its cost is considered evidence. The cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously reported in the income statement and is removed from equity and recognised in the income statement.

If in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase is due to an event occurring after the impairment loss was recognised in the income statement (with objective evidence to support this), the impairment loss is reversed through the income statement.

Impairment of non-financial assets

At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment (including operating lease assets) and intangible assets (including goodwill) are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount: the higher of the asset's or cash-generating unit's fair value less costs to sell and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm's length transaction evidenced by an active market or recent transactions for similar assets, less costs to sell. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset's continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre tax basis.

The carrying values of fixed assets and goodwill are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. Impairment of a cash generating unit is allocated first to goodwill and then to other assets held within the unit on a pro-rata basis. An impairment loss recognised in an interim period is not reversed at the balance sheet date. A previously recognised impairment loss relating to a fixed asset may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the fixed asset's recoverable amount. The carrying amount of the fixed asset will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.

Leases

The Group as lessor - Operating lease assets are recorded at deemed cost and depreciated over the life of the asset after taking into account anticipated residual values. Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset. Amounts due from lessees under finance leases and hire purchase contracts are recorded as receivables at the amount of the Group's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's net investment outstanding in respect of the leases and hire purchase contracts.

The Group as lessee - The Group enters into operating leases for the rental of equipment or real estate. Payments made under such leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

If the lease agreement transfers the risk and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and depreciated over the lower of the estimated useful life and the life of the lease. The corresponding rental obligations are recorded as borrowings. The aggregate benefit of incentives, if any, is recognised as a reduction of rental expense over the lease term on a straight-line basis.

Income taxes, including deferred taxes

The tax expense represents the sum of the income tax currently payable and deferred income tax.

Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is provided in full, using the liability method, on income tax losses available to carry forward and on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which the assets may be utilised as they reverse. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill and the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on rates enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where the Group is able to control reversal of the temporary difference and it is probable that it will not reverse in the foreseeable future.

The Company reviews the carrying amount of deferred tax assets at each balance sheet date and reduces it to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months' maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, loans and advances to banks and short-term investments in securities.

Financial liabilities

Financial liabilities are initially recognised when the Group becomes contractually bound to the transfer of economic benefits in the future.

(a) Financial liabilities at fair value through profit or loss

Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial liability is classified as held for trading if it is a derivative or it is incurred principally for the purpose of selling or being unwound in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.

In certain circumstances financial liabilities other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets and liabilities or recognising the gains or losses on them on a different basis, or where a financial liability contains one or more embedded derivatives which are not closely related to the host contract. These liabilities are initially recognised at fair value and transaction costs are taken directly to the income statement. Gains and losses arising from changes in fair value are included directly in the income statement.

Derivative financial instruments, Trading liabilities and Financial liabilities designated at fair value are classified as fair value through profit or loss.

(b) Other financial liabilities

All other financial liabilities are initially recognised at fair value net of transaction costs incurred. They are subsequently stated at amortised cost and the redemption value recognised in the income statement over the period of the liability using the effective interest method.

Deposits by banks, Deposits by customers, Debt securities in issue (unless designated at fair value), Other borrowed funds and Subordinated liabilities are classified as amortised cost.

Equity index-linked deposits

Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for as equity index-linked deposits, and classified as deposits by customers within trading liabilities. Equity index-linked deposits are managed within the equity derivatives trading book as an integral part of the equity derivatives portfolio. There are two principal product types.

(a) Capital at Risk

These products are designed to replicate the investment performance of an equity index, subject to a floor. In the event the index falls under a certain predetermined level, customers forfeit a predetermined percentage of principal up to a predetermined amount.

(b) Capital Guaranteed/Protected:

These products give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed/protected.

Equity index-linked deposits are remeasured at fair value at each reporting date with changes in fair values recognised in the income statement. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. Other than new capital guaranteed products, which are treated as deposits by customers with any associated embedded derivatives bifurcated, embedded derivatives are not separated from the host instrument and are not separately accounted for as a derivative instrument, as the entire contract embodies both the embedded derivative and the host instrument and is remeasured at fair value at each reporting date. As such, there is no requirement to bifurcate the embedded derivatives in the equity index-linked deposits.

Borrowings

Borrowings, including subordinated liabilities, are recognised initially at fair value, being the proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost or fair value dependent on designation at initial recognition.

Preference shares which carry a contractual obligation to transfer economic benefits are classified as other financial liabilities and are presented in other borrowed funds. The dividends on these preference shares are recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.

Share capital

Incremental external costs directly attributable to the issue of new shares are deducted from equity net of related income taxes.

Provisions

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefits will be necessary to settle the obligation, and it can be reliably estimated. When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.

Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Group has a detailed formal plan for restructuring a business, and has raised valid expectations in those affected by the restructuring and has started to implement the plan or announce its main features.

Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.

Financial guarantee contracts

The Group accounts for guarantees that meet the definition of a financial guarantee contract at fair value on initial recognition. In subsequent periods, these guarantees are measured at the higher of the initial fair value less cumulative amortisation and the amount that would be recognised as a provision as described in the Accounting Policies above.

Dividends

Dividends on ordinary shares are recognised in equity in the period in which the right to receive payment is established.

Critical accounting policies and areas of significant management judgement

The preparation of the Group's Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the Financial Statements 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 on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following estimates and judgements are considered important to the portrayal of the Group's financial condition.

(a) Provisions for loans and advances

The Group estimates provisions for loans and advances to customers, treasury asset portfolio securities and loans and advances to banks with the objective of maintaining balance sheet provisions at the level believed by management to be sufficient to absorb actual losses ('observed provisions') and inherent losses ('incurred but not yet observed provisions') in the Group's loan portfolio from homogeneous portfolios of assets and individually identified loans in connection with loans and advances to banks and loans and advances to customers. The calculation of provisions on impaired loans and advances is based on the likelihood of the asset being written off (or repossessed in the case of mortgage loans) and the estimated loss on such a write-off. These assessments are made using statistical techniques based on historic experience. These determinations are supplemented by various formulaic calculations and the application of management judgement.

The Group considers accounting estimates related to provisions for loans and advances 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Group's estimated losses (as reflected in the provisions) and actual losses would require the Group to take provisions which, if significantly different, could have a material impact on its future income statement and its balance sheet. The Group's assumptions about estimated losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.

Provisions for loans and advances, less amounts released and recoveries of amounts written off in previous years are charged to the line item 'Impairment losses on loans and advances' in the income statement. The provisions are deducted from the 'Loans and advances to banks' and the 'Loans and advances to customers' line items on the balance sheet. If the Group believes that additions to the provisions for such credit losses are required, then the Group records additional provisions for credit losses, which would be treated as a charge in the line item 'Impairment losses on loans and advances' in the income statement. The Consolidated Financial Statements for the year ended 31 December 2009 include a net provision charge (i.e. after recoveries) for loans and advances in connection with retail lending for an amount equal to £711m, and corporate lending for an amount equal to £36m. The provision charges for retail and corporate lending increased from 2008 largely due to worsening market conditions.

In calculating the retail and corporate lending provisions, principally within the Retail Banking and Corporate Banking segments, a range of outcomes was calculated based principally on management's conclusions regarding the current economic outlook relative to historic experience. Had management used different assumptions regarding the current economic outlook, a larger or smaller provision for loans and advances would have resulted that could have had a material impact on the Group's reported profit on continuing operations before tax in 2009. Specifically, if management's conclusions as to the current economic outlook were different, but within the range of what management deemed to be reasonably possible economic outlooks, the provision charge for loans and advances in the Retail Banking segment could have decreased in 2009 from an actual provision charge of £711m (2008: £322m, 2007: £344m) by up to £127m (2008: £78m, 2007: £163m), with a potential corresponding increase in the Group's profit before tax in 2009 of up to 8% (2008: 7%, 2007: 19%), or increased by up to £115m (2008: £66m, 2007: £52m), with a potential corresponding decrease in the Group's profit before tax in 2009 of up to 7% (2008: 6%, 2007: 6%). The provision charge for loans and advances in the Corporate Banking segment could have decreased in 2009 from an actual provision charge of £36m by up to £15m, with a potential corresponding increase in the Group's profit before tax in 2009 of up to 1%, or increased by up to £10m, with a potential corresponding decrease in the Group's profit before tax in 2009 of up to 1%.

The actual provision charge for retail lending of £711m (2008: £322m, 2007: £344m) and corporate lending of £36m (2008: £26m, 2007: £nil) in 2009 was based on what management estimated to be the most probable economic outlook within the range of reasonably possible assumptions.

The provision charge for the Treasury asset portfolio acquired on 10 October 2008 of £93m (2008: £nil) was based on management's assessment of impairment of each individual asset based on data available at 31 December 2009. A detailed analysis of the Treasury asset portfolio by type of instrument, credit structure, credit rating and geography can be found in the Risk Management Report on pages 77 to 85.

(b) Valuation of financial instruments

The Group considers that the accounting estimate related to the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available is a 'critical accounting estimate' because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific features of the transactions; and (ii) the impact that recognising a change in the valuations would have on the assets reported on its balance sheet as well as its net profit/(loss) could be material.

Changes in the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available are accounted for in the line item 'Net trading and other income' in the income statement and the 'Trading assets', 'Financial assets designated at fair value', 'Trading liabilities', 'Financial liabilities designated at fair value' and 'Derivative financial instruments' line items in the Group's balance sheet.

The Group trades in a wide variety of financial instruments in the major financial markets and therefore considers a range of interest rates, volatility, exchange rates, counterparty credit ratings, valuation adjustments and other similar inputs, all of which vary across maturity bands. These are chosen to best reflect the particular characteristics of each transaction. Had management used different assumptions regarding the interest rates, volatility, exchange rates, the credit rating of the counterparty, and valuation adjustments, a larger or smaller change in the valuation of financial assets and financial liabilities including derivatives where quoted market prices are not available would have resulted that could have had a material impact on the Group's reported profit before tax in 2009. Detailed disclosures on financial instruments, including sensitivities, can be found in Note 49 on page 173. Further information about sensitivities (including value-at-risk) to market risk arising from financial instrument trading activities can be found in the Risk Management Report on page 72.

The Group estimates provisions for misselling with the objective of maintaining reserve levels believed by management to be sufficient to absorb current estimated probable losses in connection with compensation from customers who claim reimbursement of bank charges, and misselling of endowment policies, payment protection insurance policies, and other products. The calculation of provisions for misselling is based on the estimated number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. These assessments are based on management's estimate for each of these three factors. In certain instances, the extent to which the Group is required to uphold claims is driven by binding legal decisions or precedents, as described in Note 37.

The Group considers accounting estimates related to misselling provisions 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period per the three factors above, and (ii) any significant difference between the Group's estimated losses as reflected in the provisions and actual losses would require the Group to take provisions which, if significantly different, could have a material impact on its future income statement and its balance sheet. The Group's assumptions about estimated losses are based on past claims uphold rates, past customer behaviour, and past average settlements, which are not necessarily an indication of future losses.

Provisions for misselling are charged to the line item 'Provisions for other liabilities and charges' in the income statement. The provision is included in the 'Provisions' line item on the balance sheet. If the Group believes that additions to the misselling provision are required, then the Group records additional provisions, which would be treated as a charge in the line item 'Provisions for other liabilities and charges' in the income statement.

The Consolidated Financial Statements for the year ended 31 December 2009 include a provision charge for misselling in the Retail Banking segment for an amount equal to £10m (2008: £40m release, 2007: £nil). The balance sheet provision decreased from £141m in 2008 to £43m in 2009, reflecting settlement of claims principally relating to Payment Protection Insurance.

In calculating the misselling provision within the Retail Banking segment, management's best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. Had management used different assumptions regarding these factors, a larger or smaller provision for misselling would have resulted in the Retail Banking segment that could have had a material impact on the Group's reported profit on continuing operations before tax in 2009. Specifically, if management's conclusions as to the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case were different, but within the range of what management deemed to be reasonably possible, the provision charge for misselling in the Retail Banking segment could have decreased in 2009 by up to £7m (2008: £8m, 2007: £29m), with a potential corresponding increase in the Group's profit before tax in 2009 of up to 0.4% (2008: 1%, 2007: 3%), or increased by up to £8m (2008: £9m, 2007: £19m), with a potential corresponding decrease in the Group's profit before tax in 2009 of up to 0.5% (2008: 1%, 2007: 2%). The actual charge in 2009 was based on what management estimated to be the most probable number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case within the range of reasonably possible outcomes.

(d) Pensions

The Group operates a number of defined benefit pension schemes as described in Note 36 to the Consolidated Financial Statements. The assets of the schemes are measured at their fair values at the balance sheet date. The liabilities of the schemes are estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, discounted to present value using the interest rate applicable to high-quality AA rated corporate bonds of the same currency and term as the scheme liabilities. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme. In determining the value of scheme liabilities, assumptions are made by management as to mortality, price inflation, discount rates, pensions increases, and earnings growth. Financial assumptions are based on market conditions at the balance sheet date and can generally be derived objectively. Demographic assumptions require a greater degree of estimation and judgement to be applied to externally derived data.

The Group considers accounting estimates related to pension provisions 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period, and (ii) any significant difference between the Group's estimates of the scheme liabilities and actual liabilities could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. The Group's assumptions principally about mortality, but also about price inflation, discount rates, pensions increases, and earnings growth are based on past experience and current economic trends, which are not necessarily an indication of future experience. Pension costs are charged to the line item 'Administration expenses', with the interest cost on liabilities and the expected return on scheme assets included within 'Net trading and other income' in the income statement. The provision is included in the Retirement benefit obligations line item in the balance sheet. If the Group believes that increases to the pensions cost are required, then the Group records additional costs that would be treated as a charge in the line item Administration expenses in the income statement.

The Consolidated Financial Statements for the year ended 31 December 2009 include current year defined benefit service cost of £44m and a pension scheme deficit of £1,060m. The current year service cost of £44m (2008: £55m, 2007: £67m) decreased, reflecting reductions in active scheme membership, salary reviews, changes in pension increases, changes in mortality assumptions, changes in price inflation assumptions and changes in discount rate. The current year pension scheme deficit of £1,060m (2008: £803m, 2007: £979m) increased as a result of a reduction of 100 basis points in the net discount rate (i.e. the discount rate less the inflation rate) used to value the defined benefit scheme liabilities. The increase in assumed inflation also impacted the expected rate of pension increase, in turn leading to a further increase in scheme liabilities. These increases were partly offset by employer contributions made and improvements in asset values.

In calculating the current year service cost and deficit, a range of outcomes was calculated based principally on management's estimates regarding mortality, price inflation, discount rates, pensions increases, and earnings growth. Had management used different assumptions principally regarding mortality, but also price inflation, discount rate, pensions increases, and earnings growth, a larger or smaller charge for pension costs would have resulted that could have had a material impact on the Group's reported profit before tax in 2009. Specifically, if management's conclusions as to mortality, price inflation, discount rates, pensions increases, and earnings growth were different, but within the range of what management deemed to be reasonably possible conclusions, the charge for pension costs could have decreased in 2009 from an actual pension charge of £44m (2008: £55m, 2007: £67m) by up to £9m (2008: £8m, 2007: £13m), with a potential corresponding increase in the Group's profit before tax in 2009 of up to 1% (2008: 1%, 2007: 2%), or increased by up to £6m (2008: £8m, 2007: £7m), with a potential corresponding decrease in the Group's profit before tax in 2009 of up to 0.4% (2008: 1%, 2007: 1%). The actual current year service pension charge of £44m (2008: £55m, 2007: £67m) in 2009 was based on what management estimated to be the most probable mortality, price inflation, discount rates, pensions increases, and earnings growth within the range of reasonably possible values. Detailed disclosures on the pension deficit including sensitivities can be found in Note 36 on page 153.

(e) Deferred tax

The Group recognises deferred tax assets with respect to tax losses carried forward to the extent that it is probable that future taxable profits will be available against which the unused tax losses and unused tax credits can be utilised. At 31 December 2009 and 2008 the Group has recognised such deferred tax assets in full. As at 31 December 2009 this amounted to £297m (2008: £368m). The value of the deferred tax asset is based on management's best estimate of the amount that will be recoverable in the foreseeable future. This estimate is based on management's assessment of future taxable profits that are expected to arise over this period.

The Group considers accounting estimates in respect of £297m (2008: £368m) of the deferred tax assets relating to the Alliance & Leicester group 'critical accounting estimates' because: (i) they are highly susceptible to change from period to period as the assumptions about future taxable profits represent forward-looking estimates which are inherently vulnerable to changes in economic and market conditions, and (ii) any significant shortfall between the Group's estimated taxable profits and actual taxable profits could require the Group to take charges which, if significant, could have a material impact on its future income statement and its balance sheet. The Group's assumptions about estimated future taxable profits are based on assumptions about future performance within the Group of which Alliance & Leicester plc is a part, and general economic conditions, which are not necessarily an indication of future performance.

Changes to the value of deferred tax assets are charged to the line item 'Taxation charge' in the income statement. Changes in deferred tax assets are deducted from the 'Deferred tax assets' line item on the balance sheet. The Consolidated Financial Statements for the year ended 31 December 2009 do not include a charge for changes in the value of deferred tax assets arising in connection with the non recoverability of taxable losses. If management estimates of future tax profits were not met, it is possible that the deferred tax asset would still be recovered, but over a longer period, therefore it is not possible to quantify reliably a meaningful sensitivity or range of possible outcomes. Under current UK tax legislation, the tax losses in respect of which deferred tax assets have been recognised do not expire.

It is management's view that the recoverable value of the deferred tax asset will be unaffected by the scheme allowed by Part VII of the Financial Services and Markets Act 2000 under which the Company intends to transfer Alliance & Leicester plc's business into Santander UK plc later this year, as described in Note 46.

Notes to the Financial Statements

1. Segments

The principal activity of the Group is financial services. The Group's business is managed and reported on the basis of the following segments:

>	Retail Banking;
>	Corporate Banking;
>	Global Banking & Markets;
>	Private Banking; and
>	Group Infrastructure.

In 2009, the Bradford & Bingley off-shore deposit-taking business was managed and reported as part of Private Banking rather than Retail Banking. The segmental analysis of the Group's results for 2008 has been amended to reflect this change. In addition, in 2009, the Group's transfer pricing arrangements were updated to reflect the greater benefit of retail deposits in a period of higher funding costs. Prior years' segmental analyses have been adjusted for consistency. In this report, the Retail Banking, Corporate Banking, Global Banking & Markets, Private Banking and Group Infrastructure segments are referred to as the Personal Financial Services ('PFS') businesses.

The Group's segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Group has five segments. Retail Banking offers a range of personal banking, savings and mortgage products and services, under the brands Santander and Alliance & Leicester. Corporate Banking offers banking services principally to small and mid-sized UK companies under the brands Santander and Alliance & Leicester. Global Banking & Markets provides financial markets sales, trading and risk management services, as well as manufacturing retail structured products. It also contains operations in run down. Private Banking offers specialist banking services and offered self-invested pension plans and WRAP products. Group Infrastructure consists of Asset and Liability Management activities, Group Capital, Funding and the Treasury asset portfolio of the Alliance & Leicester group.

The segment information below is presented on the basis used by the Company's board of directors (the 'Board') to evaluate performance, in accordance with IFRS 8. The Board reviews discrete financial information for each of its segments, including measures of operating results and assets. The segments are managed primarily on the basis of their results, which are measured on a 'trading' basis. The trading basis differs from the statutory basis (described in the Accounting Policies section on pages 109 to 123) as a result of the application of various adjustments. Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business. The adjustments are:

>	Alliance & Leicester pre-acquisition trading basis results - Following the transfer of Alliance & Leicester plc to the Company in January 2009, the statutory results for the year ended 31 December 2009 include the consolidated results of the Alliance & Leicester group, whereas the statutory results for the year ended 31 December 2008 do not. In order to enhance the comparability of the results for the two periods, management reviews the 2008 results including the pre-acquisition results of the Alliance & Leicester group for that period.
>	Reorganisation and other costs - These comprise implementation costs in relation to the cost reduction projects including integration-related expenses, as well as certain remediation administration expenses and credit provisions. Management needs to understand the underlying drivers of the cost base that will remain after these exercises are complete, and does not want this view to be clouded by these costs, which are managed independently.
>	Depreciation of operating lease assets - The operating lease businesses are managed as financing businesses and, therefore, management needs to see the margin earned on the businesses. Residual value risk is separately managed. As a result, the depreciation is netted against the related income.
>	Profit on part sale of PFS subsidiaries - These profits are excluded from the results to allow management to understand the underlying performance of the business. In 2009, there were no such profits. In 2008, the profit on the sale of the Porterbrook businesses was excluded. In 2007, the profit on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing, and small recoveries on certain other transactions were similarly excluded.
>	Hedging and other variances - The Balance Sheet and Income Statement are subject to mark-to-market volatility including that arising from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as hedges. Volatility also arises on certain assets previously managed on a fair value basis, and hence classified as fair value through profit or loss under IFRS, that are now managed on an accruals basis. Where appropriate, such volatility is separately identified to enable management to view the underlying performance of the business. In addition, other variances include the reversal of coupon payments on certain equity instruments which are treated as interest expense in the trading results but are reported below the profit after tax line for statutory purposes.
>	Capital and other charges - These principally comprise internal nominal charges for capital invested in the Group's businesses. Management implemented this charge to assess the effectiveness of capital investments.

Transactions between the business segments are on normal commercial terms and conditions. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Internal charges and transfer pricing adjustments have been reflected in the performance of each business. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in total trading income. Interest charged for these funds is based on the Group's cost of capital.

Interest receivable and interest payable have not been reported separately. The majority of the revenues from the segments presented below are from interest and the Board relies primarily on net interest revenues to both assess the performance of the segment and to make decisions regarding allocation of segmental resources.

Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet.

a) Segmental information

2009	Retail Banking £m	Corporate Banking £m	Global Banking & Markets £m	Private Banking £m	Group Infra- structure £m	Total £m	Adjust-ments £m	Group Total £m
Net interest income	3,257	294	-	130	(340)	3,341	71	3,412
Non-interest income	707	163	380	34	33	1,317	(33)	1,284
Total trading income	3,964	457	380	164	(307)	4,658	38	4,696
Administration expenses	(1,312)	(168)	(101)	(66)	(145)	(1,792)	(56)	(1,848)
Depreciation & amortisation	(130)	(13)	(3)	(2)	(4)	(152)	(108)	(260)
Total trading expenses	(1,442)	(181)	(104)	(68)	(149)	(1,944)	(164)	(2,108)
Impairment losses on loans and advances	(712)	(31)	-	(2)	(57)	(802)	(40)	(842)
Provisions for other liabilities and charges	-	-	-	-	-	-	(56)	(56)
Trading profit/(loss) before tax	1,810	245	276	94	(513)	1,912	(222)	1,690
Adjust for:
Reorganisation and other costs	(79)	-	-	-	(107)	(186)
Hedging and other variances	(11)	-	-	-	(25)	(36)
Capital and other charges	(180)	(86)	-	8	258	-
Profit/(loss) before tax	1,540	159	276	102	(387)	1,690

Average number of staff	18,985	522	115	819	289	20,730
Total assets	175,816	21,816	53,260	176	34,223	285,291

Adjustments comprise:	Net interest income £m	Non interest income £m	Administration expenses £m	Depreciation and amortisation £m	Impairment on loans and advances £m	Provisions for other liabilities and charges £m	Profit before tax £m
Reorganisation and other costs	-	-	(56)	(34)	(40)	(56)	(186)
Depreciation on operating lease assets	-	74	-	(74)	-	-	-
Hedging and other variances	71	(107)	-	-	-	-	(36)
	71	(33)	(56)	(108)	(40)	(56)	(222)

Changes in interest and exchange rates mean that period on period comparisons of gross interest and other trading income and expense are not meaningful and therefore management only consider these items on a net basis. Similarly, management consider the trading income generated by each segment on the basis of the margin earned on the customer relationship. There is therefore no split that is meaningful of trading income between external customers and intra-Group. No analysis of total trading income from external customers and intra-Group is therefore presented.

2008	Retail Banking £m	Corporate Banking £m	Global Banking & Markets £m	Private Banking £m	Group Infra- structure £m	Total £m	Adjust-ments £m	Group Total £m
Net interest income	2,282	134	-	99	(126)	2,389	(617)	1,772
Non-interest income	836	264	326	37	42	1,505	(273)	1,232
Total trading income	3,118	398	326	136	(84)	3,894	(890)	3,004
Administration expenses	(1,274)	(219)	(104)	(63)	(169)	(1,829)	486	(1,343)
Depreciation & amortisation	(84)	(20)	(3)	(1)	(3)	(111)	(91)	(202)
Total trading expenses	(1,358)	(239)	(107)	(64)	(172)	(1,940)	395	(1,545)
Impairment losses on loans and advances	(442)	(44)	-	(3)	-	(489)	141	(348)
Provisions for other liabilities and charges	-	-	-	-	-	-	(17)	(17)
Trading profit/(loss) before tax	1,318	115	219	69	(256)	1,465	(371)	1,094
Adjust for:
A&L pre-acquisition trading basis results	(300)	(34)	-	(8)	178	(164)
Reorganisation and other costs	(121)	-	-	-	(42)	(163)
Profit on part sale of PFS subsidiaries	-	40	-	-	-	40
Hedging and other variances	-	-	-	-	(84)	(84)
Capital and other charges	(103)	(14)	-	16	101	-
Profit/(loss) before tax	794	107	219	77	(103)	1,094

Average number of staff	13,475	226	300	638	190	14,829
Total assets	166,681	20,057	52,558	179	57,835	297,310

Adjustments comprise:	Net interest income £m	Non interest income £m	Administration expenses £m	Depreciation and amortisation £m	Impairment on loans and advances £m	Provisions for other liabilities and charges £m	Profit before tax £m
A&L pre-acquisition trading basis results	(617)	(330)	552	48	183	-	(164)
Reorganisation and other costs	-	(16)	(66)	(22)	(42)	(17)	(163)
Depreciation on operating lease assets	-	117	-	(117)	-	-	-
Profit on part sale of PFS subsidiaries	-	40	-	-	-	-	40
Hedging and other variances	-	(84)	-	-	-	-	(84)
	(617)	(273)	486	(91)	141	(17)	(371)

The comparative trading basis segmental results analyses above for the year ended 31 December 2008 include the pre-acquisition trading basis results for the Alliance & Leicester group for the reasons described in the section entitled 'Alliance & Leicesterpre-acquisition trading basis results' on the previous page.

The Alliance & Leicester groupwas not part of the Group at that time, and the inclusion of these pre-acquisition trading basis results in the 2008 comparatives in the internal segmental information reviewed by the Board is intended only to enhance the comparability of the results for the two periods. These pre-acquisition trading basis results do not form part of the statutory results of the Group for the year ended 31 December 2008. The inclusion of these results in the internal segmental information reviewed by the Board is not intended to imply that the Alliance & Leicester group was part of the Group at that time, and should not be interpreted as attempting to do so.

Details of the pre-acquisition financial information included above, by segment, are as follows:

Alliance & Leicester group full year trading basis results for the year ended 31 December 2008

	Retail Banking £m	Corporate Banking £m	Private Banking £m	Group Infra-structure £m	Total £m
Net interest income	592	147	10	(132)	617
Non-interest income	211	131	2	(14)	330
Total trading income	803	278	12	(146)	947
Administration expenses	(344)	(174)	(4)	(30)	(552)
Depreciation & amortisation	(26)	(20)	-	(2)	(48)
Total operating expenses excluding provisions and charges	(370)	(194)	(4)	(32)	(600)
Impairment losses on loans and advances	(133)	(50)	-	-	(183)
Total operating provisions and charges	(133)	(50)	-	-	(183)
Trading profit/(loss) before tax	300	34	8	(178)	164

2007	Retail Banking £m	Corporate Banking £m	Global Banking & Markets £m	Private Banking £m	Group Infra- structure £m	Total £m	Adjust-ments £m	Group Total £m
Net interest income	1,538	(31)	-	70	(78)	1,499	-	1,499
Non-interest income	635	132	260	34	55	1,116	167	1,283
Total trading income	2,173	101	260	104	(23)	2,615	167	2,782
Administration expenses	(937)	(30)	(105)	(59)	(105)	(1,236)	(133)	(1,369)
Depreciation & amortisation	(59)	-	(2)	(2)	-	(63)	(142)	(205)
Total trading expenses	(996)	(30)	(107)	(61)	(105)	(1,299)	(275)	(1,574)
Impairment losses on loans and advances	(239)	29	-	(2)	-	(212)	(132)	(344)
Trading profit/(loss) before tax	938	100	153	41	(128)	1,104	(240)	864
Adjust for:
Reorganisation and other costs	(139)	-	(6)	(1)	(132)	(278)
Profit on part sale of PFS subsidiaries	-	5	-	-	105	110
Hedging and other variances	-	-	-	-	(72)	(72)
Capital and other charges	(89)	(11)	-	19	81	-
Profit/(loss) before tax	710	94	147	59	(146)	864

Average number of staff	13,269	166	389	858	221	14,903
Total assets	114,306	9,357	54,029	211	21,720	199,623

Adjustments comprise:	Non interest income £m	Administration expenses £m	Depreciation and amortisation £m	Impairment on loans and advances £m	Provisions for other liabilities and charges £m	Profit before tax £m
Reorganisation and other costs	-	(133)	(13)	(132)	-	(278)
Depreciation on operating lease assets	129	-	(129)	-	-	-
Profit on part sale of PFS subsidiaries	110	-	-	-	-	110
Hedging and other variances	(72)	-	-	-	-	(72)
	167	(133)	(142)	(132)	-	(240)

b) Geographical information

	Group
	2009 £m	2008 £m	2007 £m
Total operating income
United Kingdom	4,625	2,974	2,678
Other	71	30	104
	4,696	3,004	2,782

	2009 £m	2008 £m
Total assets other than financial instruments, current tax assets and deferred tax assets
United Kingdom	2,842	2,704
Other	4	2
	2,846	2,706

2. Net interest income

	Group
	2009 £m	2008 £m	2007 £m
Interest and similar income:
Loans and advances to banks	155	448	227
Loans and advances to customers	6,823	7,394	6,747
Other interest-earning financial assets	340	73	69
Total interest and similar income	7,318	7,915	7,043
Interest expense and similar charges:
Deposits by banks	193	218	200
Deposits by customers	2,256	3,155	2,905
Debt securities in issue and other borrowed funds	865	2,218	1,955
Other interest-bearing financial liabilities	592	552	484
Total interest expense and similar charges	3,906	6,143	5,544
Net interest income	3,412	1,772	1,499

3. Net fee and commission income

	Group
	2009 £m	2008 £m	2007 £m
Fee and commission income:
Retail products	674	461	450
Insurance products	158	155	201
Asset management	154	152	134
Total fee and commission income	986	768	785
Fee and commission expense:
Other fees paid	162	97	90
Total fee and commission expense	162	97	90
Net fee and commission income	824	671	695

4. Net trading and other income

	Group
	2009 £m	2008 £m	2007 £m
Net trading and funding of other items by the trading book	187	54	260
Income from operating lease assets	95	223	245
Income on assets designated at fair value through profit or loss	95	916	368
Expense on liabilities designated at fair value through profit or loss	(117)	(435)	(382)
Gains/(losses) on derivatives managed with assets/liabilities held at fair value through profit or loss	230	(396)	(19)
Profit on sale of a non-controlling interest in subsidiary undertakings	-	-	105
Profit on sale of subsidiary undertakings	-	40	7
Profit/(loss) on sale of fixed assets	2	(17)	5
Hedge ineffectiveness and other	(32)	176	(2)
	460	561	587

5. Administration expenses

	Group
	2009 £m	2008 £m	2007 £m
Staff costs:
Wages and salaries	697	545	529
Social security costs	71	45	42
Pensions costs: - defined contribution plans	20	8	7
- defined benefit plans	55	47	62
Other personnel costs	62	50	77
	905	695	717
Property, plant and equipment expenses	227	182	191
Information technology expenses	311	201	195
Other administration expenses	405	265	266
	1,848	1,343	1,369

Included in wages and salaries is £5m (2008: £7m, 2007: £3m) which arose from equity-settled share-based payments, of which £nil (2008: £nil, 2007: £3m) related to option-based schemes. Also included in wages and salaries was £5m (2008: release of £28m, 2007: £8m) which arose from cash-settled share-based payments.

6. Depreciation and amortisation

	Group
	2009 £m	2008 £m	2007 £m
Depreciation of property, plant and equipment excluding operating lease assets	163	78	76
Depreciation of operating lease assets	75	117	129
Amortisation of intangible fixed assets	22	7	-
	260	202	205

7. Audit and other services

The fees for audit and other services payable to the Company's auditors, Deloitte LLP, are analysed as follows:

	Group
	2009 £m	2008 £m	2007 £m
Audit fees:
- Fees payable to the Company's auditor for the audit of the Group's annual accounts	1.9	1.6	1.2
- Fees payable to the Company's auditor and its associates for the audit of the Company's subsidiaries pursuant to legislation	2.3	1.6	1.6
Total audit fees	4.2	3.2	2.8
Non-audit fees:
Other assurance services
- Other services pursuant to legislation	1.2	0.7	1.4
- Tax compliance services	-	-	-
- Other assurance	0.4	0.8	0.6
Total assurance services fees	1.6	1.5	2.0
Other services
- Tax services	0.7	0.4	-
- Other services	-	-	0.1
Total other services	0.7	0.4	0.1
Total non-audit fees	2.3	1.9	2.1

Other services pursuant to legislation relate to services carried out by the auditors in relation to statutory and regulatory filings of the Company and its associates. Of this category, £1.1m (2008: £0.6m, 2007: £1.2m) accords with the definition of 'Audit fees' per US Securities and Exchange Commission guidance. The remaining £0.1m (2008: £0.1m, 2007: £0.2m) accords with the definition of 'Other services' per that guidance.

Other assurance relates to services performed in connection with securitisation and debt issuances. Of this category, £nil (2008: £0.2m, 2007: £0.1m) accords with the definition of 'Audit fees' per US Securities and Exchange Commission guidance. Of the remaining balance £0.3m (2008: £0.3m, 2007: £0.2m) accords with the definition of 'Audit related fees' per that guidance and £0.1m (2008: £0.3m, 2007: £0.3m) accords with the definition of 'Other services' per that definition.

No information technology, internal audit, valuation and actuarial, litigation, recruitment and remuneration or corporate finance services were provided by the external auditors during these years. A framework for ensuring auditors' independence has been adopted which defines unacceptable non-audit assignments, pre-approval of acceptable non-audit assignments and procedures for approval of acceptable non-audit assignments by the Audit and Risk Committee. All services provided by the Group's external auditors are either pre-approved or approved by the Audit and Risk Committee.

8. Impairment losses/(recoveries) on loans and advances

	Group
	2009 £m	2008 £m	2007 £m
Impairment losses on loans and advances	897	394	388
Recoveries of loans and advances	(55)	(46)	(44)
	842	348	344

9. Taxation charge

	Group
	2009 £m	2008 £m	2007 £m
Current tax:
UK corporation tax on profit of the year	124	218	122
Adjustments and reclassifications in respect of prior periods	(117)	(65)	(31)
Total current tax	7	153	91
Deferred tax:
Current year	388	95	68
Adjustments and reclassifications in respect of prior periods	50	27	20
Total deferred tax	438	122	88
Tax on profit for the year	445	275	179

UK corporation tax is calculated at 28% (2008: 28.5%, 2007: 30%) of the estimated assessable profits for the year. The standard rate of UK corporation tax was reduced from 30% to 28% with effect from 1 April 2008. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdictions.

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the basic tax rate of the Company as follows:

	Group
	2009 £m	2008 £m	2007 £m
Profit before tax	1,690	1,094	864
Tax calculated at a tax rate of 28% (2008: 28.5%, 2007: 30%)	473	310	259
Non taxable gain on sale of subsidiary undertakings	(5)	(11)	(33)
Non deductible preference dividends paid	8	8	9
Effect of non-allowable provisions and other non-equalised items	51	19	(10)
Non-taxable dividend income	(4)	(5)	(3)
Effect of non-UK profits and losses	(8)	(8)	(11)
Utilisation of capital losses for which credit not previously recognised	(3)	-	(11)
Effect of change in tax rate on deferred tax provision	-	-	(10)
Adjustment to prior year provisions	(67)	(38)	(11)
Income tax expense	445	275	179

In addition to the income tax expense charged to profit or loss, a deferred tax asset of £172m (2008: £8m, 2007: £9m) has been recognised in equity in the year. Further information about deferred income tax is presented in Note 25.

10. Profit/(loss) on ordinary activities after tax

The profit after tax of the Company attributable to the shareholders was £747m (2008: £1,328m, 2007: £351m). As permitted by Section 408 of the UK Companies Act 2006, the Company's profit and loss account has not been presented in these Consolidated Financial Statements.

11. Cash and balances with central banks

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Cash in hand	710	804	308	347
Balances with central banks	3,453	3,213	2,958	2,109
	4,163	4,017	3,266	2,456

For regulatory purposes, certain minimum cash balances are required to be maintained with the Bank of England. At 31 December 2009, these amounted to £184m (2008: £171m).

12. Trading assets

	Group
	2009 £m	2008 £m
Balances with central banks	-	2,498
Loans and advances to banks	5,252	4,947
Loans and advances to customers	10,628	1,310
Debt securities	15,932	16,801
Equity securities	1,478	708
	33,290	26,264

Debt securities can be analysed by type of issuer as follows:

	Group
	2009 £m	2008 £m
Issued by public bodies:
- Government securities	2,856	3,139
Issued by other issuers:
- Bank and building society certificates of deposit: Government guaranteed	205	3,119
- Bank and building society certificates of deposit: Other	1,730	5,266
- Floating rate notes	3,038	4,724
- Floating rate notes: Government guaranteed	8,090	553
- Other debt securities: Other	13	-
	15,932	16,801

Debt securities and equity securities can be analysed by listing status as follows:

	Group
	2009 £m	2008 £m
Debt securities:
- Listed in the UK	12,803	9,576
- Listed elsewhere	3,129	7,225
- Unlisted	-	-
	15,932	16,801
Equity securities:
- Listed in the UK	1,183	317
- Listed elsewhere	295	391
	1,478	708

The Company has no trading assets (2008: nil).

13. Derivative financial instruments

All derivatives are required to be held at fair value through profit or loss. Derivatives are classified as held for trading unless they are designated as being in a hedge relationship. Derivatives are held for trading or for risk management purposes. The Group chooses to designate certain derivatives as in a hedging relationship if they meet specific criteria.

Derivatives held for trading purposes

Global Banking & Markets is the only area of the Group actively trading derivative products and is additionally responsible for implementing Group derivative hedging with the external market. For trading activities, its objectives are to gain value by:

>	Marketing derivatives to end users and hedging the resulting exposures efficiently; and
>	The management of trading exposure reflected on the Group's balance sheet.

Trading derivatives include interest rate, cross currency, equity, property and other index related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options.

Derivatives held for risk management purposes

The main derivatives are interest rate and cross-currency swaps, which are used to hedge the Group's exposure to interest rates and exchange rates. These risks are inherent in non-trading assets, liabilities and positions, including fixed-rate lending and structured savings products within the relevant operations throughout the Group, including medium-term note issues, capital issues and fixed-rate asset purchases.

The derivatives table in the Market Risk discussion within the Group Infrastructure section of the Risk Management Report summarises activities undertaken by the Group, the related risks associated with such activities and the types of derivative used in managing such risks. Such risks may also be managed using natural offsets within other on-balance sheet instruments as part of an integrated approach to risk management.

Derivative products which are combinations of more basic derivatives (such as swaps with embedded option features), or which have leverage features, may be used in circumstances where the underlying position being hedged contains the same risk features. In such cases, the derivative used will be structured to match the risks of the underlying asset or liability. Exposure to market risk on such contracts is therefore hedged. The fair values of derivative instruments held both for trading and hedging purposes are set out in the following tables. The tables below show the contract or underlying principal amounts, positive and negative fair values of derivatives analysed by contract. Contract or notional amounts indicate the volume of business outstanding at the balance sheet date and do not represent amounts of risk. The fair values represent the amount at which a contract could be exchanged in an arm's length transaction, calculated at market rates at the balance sheet date.

Derivatives classified as held for trading or held for risk management purposes that have not been designated as in a hedging relationship are classified as derivatives held for trading in the table below. Derivatives that have been designated as in a hedging relationship are classified as derivatives held for hedging below.

	Group
2009 Derivatives held for trading	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	113,036	3,101	409
- Foreign exchange swaps and forwards	22,496	164	112
	135,532	3,265	521
Interest rate contracts:
- Interest rate swaps	554,709	14,905	13,226
- Caps, floors and swaptions	80,075	1,767	737
- Futures (exchange traded)	89,379	4	-
- Forward rate agreements	77,170	56	61
	801,333	16,732	14,024
Equity and credit contracts:
- Equity index and similar products	4,736	881	1,311
- Equity index options (exchange traded)	71,662	563	871
- Credit default swaps and similar products	3,737	31	48
	80,135	1,475	2,230
Total derivative assets and liabilities held for trading	1,017,000	21,472	16,775

	Group
2009 Derivatives held for fair value hedging	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	6,515	860	-
Interest rate contracts:
- Interest rate swaps	45,093	495	2,185
Equity and credit contracts:
- Equity index and similar products	-	-	3
Total derivative assets and liabilities held for fair value hedging	51,608	1,355	2,188
Total recognised derivative assets and liabilities	1,068,608	22,827	18,963

	Company
2009 Derivatives held for trading	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	19,983	123	2,810
Interest rate contracts:
- Interest rate swaps	57,029	1,093	1
- Caps, floors and swaptions	146	2	-
	57,175	1,095	1
Equity and credit contracts:
- Equity index and similar products	273	38	190
Total derivative assets and liabilities held for trading	77,431	1,256	3,001
	Company
2009 Derivatives held for fair value hedging	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	1,846	796	-
Interest rate contracts:
- Interest rate swaps	4,797	487	352
Total derivative assets and liabilities held for fair value hedging	6,643	1,283	352
Total recognised derivative assets and liabilities	84,074	2,539	3,353

	Group
2008 Derivatives held for trading	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	33,507	8,236	551
- Foreign exchange swaps and forwards	19,563	1,421	1,129
	53,070	9,657	1,680
Interest rate contracts:
- Interest rate swaps	471,976	16,887	16,658
- Caps, floors and swaptions	44,529	1,782	1,842
- Futures (exchange traded)	55,534	232	-
- Forward rate agreements	250,324	604	599
	822,363	19,505	19,099
Equity and credit contracts:
- Equity index and similar products	16,245	1,597	3,659
- Equity index options (exchange traded)	11,564	843	803
- Credit default swaps and similar products	1,854	111	179
	29,663	2,551	4,641
Total derivative assets and liabilities held for trading	905,096	31,713	25,420

	Group
2008 Derivatives held for fair value hedging	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	2,595	1,136	-
Interest rate contracts:
- Interest rate swaps	85,183	2,276	2,390
Total derivative assets and liabilities held for fair value hedging	87,778	3,412	2,390
Total recognised derivative assets and liabilities	992,874	35,125	27,810

	Company
2008 Derivatives held for trading	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	22,004	1,611	3,334
Interest rate contracts:
- Interest rate swaps	56,457	490	162
- Caps, floors and swaptions	246	3	-
	56,703	493	162
Equity and credit contracts:
- Equity index and similar products	685	8	176
Total derivative assets and liabilities held for trading	79,392	2,112	3,672

	Company
2008 Derivatives held for fair value hedging	Contract/notional amount £m	Fair value assets £m	Fair value liabilities £m
Exchange rate contracts:
- Cross-currency swaps	1,570	-	1,394
Interest rate contracts:
- Interest rate swaps	5,141	623	327
Total derivative assets and liabilities held for fair value hedging	6,711	623	1,721
Total recognised derivative assets and liabilities	86,103	2,735	5,393

Net gains or losses arising from fair value hedges included in net trading and other income

			Group
	2009 £m	2008 £m	2007 £m
Net gains/(losses):
- on hedging instruments	647	39	(413)
- on hedged items attributable to hedged risks	(579)	53	449
	68	92	36

The Group hedges its exposures to various risks, including interest rate risk and foreign currency risk, in connection with certain mortgage assets, covered bond issuances, and subordinated and senior debt securities in issue. The gains/(losses) arising on these assets and liabilities are presented in the table above on a combined basis.

14. Financial assets designated at fair value

		Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Loans and advances to banks	-	-	160	162
Loans and advances to customers	6,379	6,687	45	44
Debt securities	5,979	4,690	36,940	47,319
	12,358	11,377	37,145	47,525

Financial assets are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis, or where a contract contains one or more embedded derivatives.

The following assets have been designated at fair value through profit or loss:

>	Loans and advances to customers, representing certain loans secured on residential property to housing associations. These would otherwise have been measured at amortised cost with the associated derivatives used to economically hedge the risk held for trading and measured at fair value through profit or loss.
>	Debt securities representing holdings of asset-backed securities of £5,929m (2008: £4,690m) and collateralised synthetic obligations of £50m (2008: £nil):
	>	At the date of their acquisition, the asset-backed securities were managed, and their performance was evaluated, on a fair value basis in accordance with a documented investment strategy, and information about them was provided internally on that basis to the Group's key management personnel. Almost all of these securities are now managed on an accruals basis, but are not eligible for reclassification under IAS 39.
	>	The collateralised synthetic obligations contain embedded derivatives which would otherwise require bifurcation and separate recognition as derivatives. The collateralised synthetic obligations were initially recognised in 2009 upon the consolidation of the assets of the Group's Conduit vehicles as described in 'Exposure to Off-Balance Sheet Entities sponsored by the Group - Secured Loan to Conduit' in the Risk Management Report.

The maximum exposure to credit risk on loans and advances designated as held at fair value through profit or loss at the balance sheet date was £6,261m (2008: £6,335m) for the Group and £204m (2008: £206m) for the Company. The maximum exposure was mitigated by the Group having a charge over the residential properties in respect of lending to housing associations. Of the movement in the fair value of the loans and advances to banks, loans and advances to customers and debt securities an amount of £247m (2008: £474m) was due to changes in credit spreads.

Debt securities can be analysed by listing status as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Listed in the UK	-	-	18,463	26,978
Listed elsewhere	3,224	4,120	18,016	20,341
Unlisted	2,755	570	461	-
	5,979	4,690	36,940	47,319

15. Loans and advances to banks

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Placements with other banks	1,605	6,648	995	970
Amounts due from parent	5,995	9,353	1	1,004
Amounts due from associated undertakings	1,551	-	1	334
Amounts due from subsidiaries	-	-	108,661	114,178
	9,151	16,001	109,658	116,486

During the year, no impairment losses were incurred (2008: £nil, 2007: £nil).

	Group		Company
Repayable:	2009 £m	2008 £m	2009 £m	2008 £m
On demand	1,457	3,555	5,551	7,826
In not more than 3 months	5,055	1,985	46,580	50,759
In more than 3 months but not more than 1 year	2,390	8,980	14,552	6,135
In more than 1 year but not more than 5 years	95	61	21,951	18,263
In more than 5 years	154	1,420	21,024	33,503
	9,151	16,001	109,658	116,486

16. Loans and advances to customers

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Advances secured on residential properties	160,802	152,493	122,746	115,474
Corporate loans	12,173	13,284	-	24
Finance leases	1,602	1,792	-	-
Other secured advances	3,819	4,209	3,759	4,133
Other unsecured advances	5,250	6,747	5,036	3,082
Amounts due from fellow group subsidiaries	4,457	2,652	71	-
Amounts due from subsidiaries	-	-	1,036	1,328
Loans and advances to customers	188,103	181,177	132,648	124,041
Less: loan loss allowances	(1,299)	(1,001)	(899)	(722)
Loans and advances to customers, net of loan loss allowances	186,804	180,176	131,749	123,319

	Group		Company
Repayable:	2009 £m	2008 £m	2009 £m	2008 £m
On demand	997	636	534	523
In no more than 3 months	6,591	6,712	1,575	1,418
In more than 3 months but not more than 1 year	4,909	5,974	3,311	2,532
In more than 1 year but not more than 5 years	26,411	25,585	14,653	13,248
In more than 5 years	149,195	142,270	112,575	106,320
Loans and advances to customers	188,103	181,177	132,648	124,041
Less: loan loss allowances	(1,299)	(1,001)	(899)	(722)
Loans and advances to customers, net of loan loss allowances	186,804	180,176	131,749	123,319

The Group's leasing subsidiaries enter into finance lease and hire purchase arrangements with customers, as follows.

Gross investment in finance leases and hire purchase contracts receivable	2009 £m	2008 £m
Within 1 year	240	333
Between 1-5 years	543	699
In more than 5 years	1,570	1,557
	2,353	2,589
Unearned future finance income on finance leases and hire purchase contracts	(751)	(797)
Net investment in finance leases and hire purchase contracts	1,602	1,792

The net investment in finance leases and hire purchase contracts is analysed as follows:	2009 £m	2008 £m
Within 1 year	246	231
Between 1-5 years	435	484
In more than 5 years	921	1,077
Net investment in finance leases and hire purchase contracts	1,602	1,792

Included in the carrying value of Net investment in finance leases and hire purchase contracts is £13m (2008: £48m) residual value at the end of the current lease terms, which will be recovered through re-letting or sale.

Included within loans and advances to customers are £15,150m (2008: £24,101m) of mortgage advances assigned to bankruptcy remote special purpose entities, Abbey Covered Bonds LLP and Alliance & Leicester Covered Bonds LLP. These loans provide security to issues of covered bonds made by the Company and Alliance & Leicester plc.

Loans and advances to customers have the following interest rate structures:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Fixed rate	77,427	90,214	62,222	66,682
Variable rate	110,676	90,963	70,426	57,359
Less: loan loss allowances	(1,299)	(1,001)	(899)	(722)
	186,804	180,176	131,749	123,319

Movement in loan loss allowances:

						Group
2009	Loans secured on residential property £m	Corporate Loans £m	Finance leases £m	Other secured advances £m	Other unsecured advances £m	Total £m
As at 1 January 2009
- Individually assessed	174	13	-	37	227	451
- Collectively assessed	184	289	1	11	65	550
	358	302	1	48	292	1,001
Charge/(release) to the income statement:
- Individually assessed	223	172	5	30	539	969
- Collectively assessed	(13)	(117)	-	1	(12)	(141)
	210	55	5	31	527	828
Write offs	(84)	-	(4)	(17)	(425)	(530)
At 31 December 2009:
- Individually assessed	313	185	1	50	341	890
- Collectively assessed	171	172	1	12	53	409
	484	357	2	62	394	1,299

						Group
2008	Loans secured on residential property £m	Corporate Loans £m	Finance leases £m	Other secured advances £m	Other unsecured advances £m	Total £m
As at 1 January 2008:
- Individually assessed	74	-	-	32	250	356
- Collectively assessed	102	-	-	8	85	195
	176	-	-	40	335	551
Charge/(release) to the income statement:
- Individually assessed	132	13	-	14	239	398
- Collectively assessed	21	13	-	3	(41)	(4)
	153	26	-	17	198	394
Write offs	(32)	-	-	(9)	(262)	(303)
Acquired through business combinations	61	276	1	-	21	359
At 31 December 2008:
- Individually assessed	174	13	-	37	227	451
- Collectively assessed	184	289	1	11	65	550
	358	302	1	48	292	1,001

						Group
2007	Loans secured on residential property £m	Corporate Loans £m	Finance leases £m	Other secured advances £m	Other unsecured advances £m	Total £m
As at 1 January 2007:
- Individually assessed	45	-	1	73	243	362
- Collectively assessed	60	-	-	3	111	174
	105	-	1	76	354	536
Charge/(release) to the income statement:
- Individually assessed	38	-	-	(17)	346	367
- Collectively assessed	42	-	-	5	(26)	21
	80	-	-	(12)	320	388
Write offs	(9)	-	(1)	(24)	(339)	(373)
At 31 December 2007:
- Individually assessed	74	-	-	32	250	356
- Collectively assessed	102	-	-	8	85	195
	176	-	-	40	335	551
						Company
	Loans secured on residential property £m	Amounts due from subsidiaries £m	Finance leases £m	Other secured advances £m	Other unsecured advances £m	Total £m
As at 1 January 2009	297	113	-	42	270	722
Charge/(release) to the income statement	182	(15)	-	31	421	619
Write offs	(84)	-	-	(18)	(340)	(442)
At 31 December 2009	395	98	-	55	351	899

As at 1 January 2008	176	136	-	11	331	654
Charge/(release) to the income statement	153	(23)	-	32	197	359
Write offs	(32)	-	-	(1)	(258)	(291)
At 31 December 2008	297	113	-	42	270	722

As at 1 January 2007	105	161	1	4	352	623
Charge/(release) to the income statement	80	(25)	-	8	316	379
Write offs	(9)	-	(1)	(1)	(337)	(348)
At 31 December 2007	176	136	-	11	331	654

Recoveries:

						Group
	Loans secured on residential property £m	Corporate Loans £m	Finance leases £m	Other secured advances £m	Other unsecured advances £m	Total £m
2009	1	23	1	-	30	55
2008	1	-	-	12	33	46
2007	2	-	-	6	36	44

17. Securitisation of assets

Loans and advances to customers include portfolios of residential mortgage loans, which are subject to non-recourse finance arrangements. These loans have been purchased by, or assigned to, special purpose securitisation companies, and have been funded primarily through the issue of mortgage-backed securities. No gain or loss has been recognised as a result of these sales. These securitisation companies are consolidated and included in the Group financial statements as subsidiaries.

Master Trust Structures

The Group makes use of a type of securitisation known as a master trust structure. In this structure, a pool of assets is assigned to a trust company by the asset originator, initially funded by the originator. A funding entity acquires beneficial interests in a share of the portfolios of assets with funds borrowed from qualifying special purpose entities, which at the same time issue asset-backed securities to third-party investors or the Group. The purpose of the special purpose entities is to obtain diverse, low cost funding through the issue of asset-backed securities, or to use the asset-backed securities as collateral for raising funds. The share of the pool of assets not purchased from the trust company by the funding entity is known as the beneficial interest of the originator.

Using this structure, the Group has assigned portfolios of residential mortgages and their related security to Holmes Trustees Limited, a trust company that holds the portfolios of mortgages on trust for the Company and Holmes Funding Limited and Holmes Funding 2 Limited. In June 2009, two new entities were incorporated (Holmes Master Issuer 2 plc and Holmes Funding 2 Limited) in order to enable the separation of the intercompany issuances from the third party issuances. Holmes Funding Limited and Holmes Funding 2 Limited acquire beneficial interests in the portfolios of mortgages with funds borrowed from the securitisation companies Holmes Financing (No.s 1, 9, and 10) plc, Holmes Master Issuer plc and Holmes Master Issuer 2 plc.

In January 2009 the remaining mortgages backed securities in Holmes Financing (No. 8) plc were redeemed. The remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Limited belongs to Santander UK plc, and amounts to £13.0bn at 31 December 2009. Mortgage backed notes totalling £3.0bn equivalent were redeemed during the year. In April 2008 the remaining mortgage backed securities in issue in Holmes Financing (No. 6) plc and Holmes Financing (No. 7) plc were redeemed.

Alliance & Leicester plc established the Fosse Master Trust securitisation structure in 2006. Notes were issued by Fosse Master Issuer plc to third party investors and the proceeds loaned to Fosse Funding (No. 1) Limited, which in turn used the funds to purchase beneficial interests in mortgages held by Fosse Trustee Limited. Mortgage backed notes totalling £0.6bn equivalent were redeemed during the year.

Alliance & Leicester plc established the Langton Master Trust securitisation structure on 25 January 2008. Notes were issued by Langton Securities (2008-1) plc, Langton Securities (2008-2) plc and Langton Securities (2008-3) plc to Alliance & Leicester plc, either for the purpose of creating collateral to be used for funding or for subsequent transfer of Notes to investors outside the Group. Each entity loaned the proceeds of the Notes issued to Langton Funding (No.1) Limited, which in turn used the funds to purchase a beneficial interest in the mortgages held by Langton Mortgages Trustee Limited.

The Company and its subsidiaries are under no obligation to support any losses that may be incurred by the Holmes, Fosse and Langton securitisation companies or holders of the securities and do not intend to provide such further support. Holders of the securities are only entitled to obtain payment of principal and interest to the extent that the resources of the Holmes, Fosse and Langton securitisation companies are sufficient to support such payments, and the holders of the securities have agreed in writing not to seek recourse in any other form.

The Company and its subsidiaries receive payments from the securitisation companies in respect of fees for administering the loans, and payment of deferred consideration for the sale of the loans. The Company and its subsidiaries have no right or obligation to repurchase the benefit of any securitised loan, except if certain representations and warranties given by the Company or its subsidiaries at the time of transfer are breached.

In April and December 2008, Holmes Funding Limited acquired, at book value, additional beneficial interests in the trust property vested in Holmes Trustees Limited. These further beneficial interests of £8.2bn and £13.4bn, respectively, were acquired through borrowing from Holmes Master Issuer plc, which funded its advances to Holmes Funding Limited through the issue of mortgage backed securities. All of the mortgage backed securities issued in 2008 were acquired by the Company. It is intended that any future issues will continue to be made from Holmes Master Issuer plc or Holmes Master Issuer 2 plc.

Bracken Securities plc

In October 2007 Alliance & Leicester plc securitised £10,367m of residential mortgage assets to Bracken Securities plc. Notes of £10,367m were issued by Bracken Securities plc to Alliance & Leicester plc, either for the purpose of creating collateral to be used for funding or for subsequent transfer of Notes to investors outside the Alliance & Leicester group.

Outstanding balances of assets securitised and non-recourse finance under the Holmes structure at 31 December 2009 were:

Securitisation company	Closing date of securitisation	Gross assets securitised £m	Non-recourse finance £m	Issued to Santander UK plc as collateral £m
Holmes Financing (No. 1) plc	26 July 2000	275	275	-
Holmes Financing (No. 9) plc	8 December 2005	1,053	1,658	-
Holmes Financing (No. 10) plc	8 August 2006	1,526	1,639	-
Holmes Master Issuer plc - 2006/1	28 November 2006	1,767	2,015	-
Holmes Master Issuer plc - 2007/1	28 March 2007	3,392	4,985	-
Holmes Master Issuer plc - 2007/2	20 June 2007	4,319	5,263	-
Holmes Master Issuer plc - 2007/3	21 December 2007	7,259	-	8,914
Holmes Master Issuer plc - 2008/1	10 April 2008	8,240	-	9,103
Holmes Master Issuer plc - 2008/2	19 December 2008	12,758	-	13,209
Beneficial interest in mortgages held by Holmes Trustees Ltd		12,980	-	-
		53,569	15,835	31,226

The gross assets securitised represent the interest in the trust property held by Holmes Funding Limited related to the debt issued by the securitisation companies. The beneficial interest in the mortgages held by Holmes Trustees Limited represents the proportion of the funds required to be retained in the trust as part of the master trust structure.

The Holmes securitisation companies have placed cash deposits totalling £1.8bn, which have been accumulated to finance the redemption of a number of securities issued by the Holmes securitisation companies. The Holmes securitisation companies' contractual interest in advances secured on residential property is therefore reduced by this amount. The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the securitisation companies.

The Fosse, Bracken and Langton securitisation companies have cash deposits totalling £115m, which have been accumulated to finance the redemption of a number of securities issued by the Fosse, Bracken and Langton securitisation companies. The Fosse, Bracken and Langton securitisation companies' contractual interest in advances secured on residential property is therefore reduced by this amount. The Company and its subsidiaries do not own directly, or indirectly, any of the share capital of any of the above securitisation companies or their parents.

In March 2010 the Group issued through the Fosse Master Trust the first publicly-placed mortgage-backed securitisation transaction from a UK bank since 2007; other recent transactions from UK banks had included an investor put. The transaction was denominated in both pounds sterling and euro and raised approximately £1.4bn.

Outstanding balances of assets securitised and non-recourse finance under the Fosse, Bracken and Langton structures at 31 December 2009 were:

Securitisation company	Closing date of securitisation	Gross assets securitised £m	Non-recourse finance £m	Issued to A&L plc as collateral £m
Fosse Master Issuer plc	28 November 2006	1,859	1,924	-
Fosse Master Issuer plc	1 August 2007	2,050	2,080	-
Fosse Master Issuer plc	21 August 2008	287	314	-
Bracken Securities plc	11 October 2007	6,736	-	6,909
Langton Securities (2008-1) plc	25 January 2008	1,227	-	1,228
Langton Securities (2008-2) plc	5 March 2008	2,210	-	2,211
Langton Securities (2008-3) plc	17 June 2008	3,521	-	3,522
Beneficial interest in mortgages held by Fosse Master Trust Ltd		2,251	-	-
Beneficial interest in mortgages held by Langton Master Trust Ltd		1,572	-	-
		21,713	4,318	13,870

18. Available-for-sale securities

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Debt securities	747	2,618	-	-
Equity securities	50	45	30	25
	797	2,663	30	25

Maturities of debt securities:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Due in less than 3 months	91	1,644	-	-
Due in more than 3 months but less than 1 year	405	970	-
Due in more than 1 year but less than 5 years	251	4	-	-
Due in more than one year but not more than 5 years	-	-	-	-
	747	2,618	-	-

Equity securities do not bear interest. Equity securities can be analysed by listing status as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Listed in the UK	11	10	-	-
Unlisted	39	35	30	25
	50	45	30	25

The movement in available-for-sale securities can be summarised as follows:

	Group £m	Company £m
At 1 January 2009	2,663	25
Additions	1,133	8
Redemptions and maturities	(3,001)	(3)
Amortisation of discount	8	-
Movement in fair value	(6)	-
At 31 December 2009	797	30

	Group £m	Company £m
At 1 January 2008	40	28
Additions	1,222	9
Acquired through business combinations	1,658	-
Redemptions and maturities	(286)	(8)
Amortisation of discount	21	-
Movement in fair value	8	(4)
At 31 December 2008	2,663	25

	Group £m	Company £m
At 1 January 2007	23	12
Redemptions and maturities	(2)	(2)
Movement in fair value	19	18
At 31 December 2007	40	28

19. Loan and receivable securities

Group

Company

2009

£m

2008

£m

2009

£m

2008

£m

Loan and receivable securities

9,898

14,107

These assets were acquired as part of the transfer of Alliance & Leicester plc to the Group. Upon initial recognition by the Group, the securities were classified as 'loans and receivables' as the Group identified that a rare circumstance of extreme market illiquidity existed at that time. The Group has the intention to hold the assets for the foreseeable future or until maturity.

In 2009, the Group recognised additional securities as a result of the requirement to consolidate the assets of the Group's Conduit vehicles, rather than recognising the Group's loans to the Conduit vehicles and treating the assets of the Conduit vehicles as off-balance sheet, as described in "Exposure to Off-Balance Sheet Entities sponsored by the Group - Secured Loan to Conduit" in the Risk Management Report on page 84. Upon initial recognition by the Group, these securities were classified as 'loans and receivables'.

Detailed analysis of these securities is contained in the Risk Management Report.

20. Investment in subsidiary undertakings

Investments in subsidiaries are held at cost subject to impairment. The movement in investments in subsidiary undertakings was as follows:

	Company
	Cost £m	Impairment £m	Net book value £m
At 1 January 2009	5,252	(105)	5,147
Additions	2,136	(211)	1,925
Disposals within the Group/repayment of investment	(45)	11	(34)
At 31 December 2009	7,343	(305)	7,038

	Cost £m	Impairment £m	Net book value £m
At 1 January 2008	5,213	(160)	5,053
Additions	133	-	133
Disposals within the Group	(94)	-	(94)
Write-back of impairments/repayment of investment	-	55	55
At 31 December 2008	5,252	(105)	5,147

On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial efficiency of the Santander group,Banco Santander, S.A. transferred all of its Alliance & Leicester plc (wholly owned by Banco Santander, S.A. and the Company) shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of the Company (the 'Transfer'). The result of this was to increase the Company's holding of 35.6% of Alliance & Leicester plc's equity voting interests to 100%. Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc. As described more fully in Note 47, the transfer of Alliance & Leicester plc has been accounted for by the Company with effect from 10 October 2008, the date on which Banco Santander, S.A. acquired control of Alliance & Leicester plc.

On 17 December 2007, the Company sold 100% of its shareholdings in James Hay, Cater Allen and Abbey Sharedealing to Santander Private Banking UK Limited, at the time of the transaction a 100% owned direct subsidiary of the Company, for a total cash consideration of £414m. The companies sold were Cater Allen Limited, Abbey Stockbrokers Limited, Abbey Stockbrokers (Nominees) Limited, James Hay Holdings Limited, James Hay Wrap Managers Limited, James Hay Insurance Company Limited, James Hay Administration Company Limited, James Hay Pension Trustees Limited and Sarum Trustees Limited. Subsequently, on 17 December 2007, the Company sold 49% of its shareholding in Santander Private Banking UK Limited to Santander PB UK (Holdings) Limited, a direct subsidiary of Banco Santander, S.A. for a total cash consideration of £203m.

The principal subsidiaries of the Company at 31 December 2009 are shown below. The Directors consider that to give full particulars of all subsidiary undertakings would lead to a statement of excessive length. In accordance with Section 410(2) of the UK Companies Act 2006, the following information relates to those subsidiary undertakings whose results or financial position, in the opinion of the Directors, principally affect the results of the Group. Full particulars of all subsidiary undertakings will be annexed to the Company's next annual return in accordance with Section 410(3)(b) of the UK Companies Act 2006.

Principal subsidiary	Nature of business	% Interest held	Country of incorporation or registration
Abbey National International Limited*	Personal finance	100	Jersey
Abbey National North America LLC*	Funding	100	United States
Abbey National Treasury Services plc	Treasury operations	100	England & Wales
Alliance & Leicester plc	Bank, deposit taker	100	England & Wales
Alliance & Leicester International Limited*	Offshore deposit taking	100	Isle of Man
Bradford & Bingley International Limited	Bank, deposit taker	100	Isle of Man
Cater Allen International Limited*	Securities financing	100	England & Wales
Cater Allen Limited*	Bank, deposit taker	51	England & Wales

* Held indirectly through subsidiary companies.

All the above companies are included in the Consolidated Financial Statements. The Company holds directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries, except for Cater Allen Limited as described above. All companies operate principally in their country of incorporation or registration. Abbey National Treasury Services plc also has a branch office in the US and the Cayman Islands. The Company has a branch in the Isle of Man. Alliance & Leicester plc has a branch in the Isle of Man. The ability of Alliance & Leicester International Limited to pay dividends to the Company is restricted by regulatory capital requirements. Abbey National International Limited had a branch in the Isle of Man, which was closed on 1 April 2010.

21. Investment in associated undertakings

The movement in interests in associated undertakings was as follows:

	Group	Company
	£m	£m
At 1 January 2009	35	741
Additional investment	35	35
Share of results	5	-
Transfer to investment in subsidiary	-	(700)
At 31 December 2009	75	76

	Group	Company
	£m	£m
At 1 January 2008	29	33
Additional investments	8	708
Share of results	(2)	-
At 31 December 2008	35	741

The principal associated undertakings at 31 December 2009 and 2008 were:

2009

Name and nature of business

Country of

registration

Assets

£m

Liabilities

£m

Income

£m

Profit/(loss)

£m

% interest

held

PSA Finance plc, personal finance

England and Wales

50.0

Santander Consumer (UK) plc, consumer finance

England and Wales

2,361

(2,215)

(134)

123

49.9

2008

Name and nature of business

Country of

registration

Assets

£m

Liabilities

£m

Income

£m

Profit/(loss)

£m

% interest

held

PSA Finance plc, personal finance

England and Wales

50.0

Santander Consumer (UK) plc, consumer finance

England and Wales

714

(647)

(2)

49.9

All associated undertakings have a year-end of 31 December and are unlisted.

22. Intangible assets

a) Goodwill

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Cost
At 1 January	1,281	112	419	-
Acquisitions	4	1,169	-	419
At 31 December	1,285	1,281	419	419
Accumulated impairment
At 1 January and 31 December	22	22	-	-
Net book value	1,263	1,259	419	419

On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial efficiency of the Santander group,Banco Santander, S.A. transferred all of its Alliance & Leicester plc (wholly owned by Banco Santander, S.A. and the Company) shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares in the Company (the 'Transfer'). The result of this was to increase the Company's holding of 35.6% of Alliance & Leicester plc's equity voting interests to 100%. Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc. As described more fully in Note 47, the transfer of Alliance & Leicester plc has been accounted for by the Company with effect from 10 October 2008, the date on which Banco Santander, S.A. acquired control of Alliance & Leicester plc.

The ordinary shares of the Company issued as consideration for Banco Santander, S.A.'s holding of Alliance & Leicester plc shares have been recognised at their nominal value, which is the same as the fair value of the shares issued by Banco Santander, S.A. in exchange for the shares of Alliance & Leicester plc plus acquisition costs, and the net assets of Alliance & Leicester plc have been accounted for by the Company at the fair values recognised by Banco Santander, S.A. at the time of its acquisition of Alliance & Leicester plc on 10 October 2008. The acquisition price was £1,281m. In connection with the acquisition, goodwill of £774m was recognised, which is attributable to the anticipated increase in revenues arising from a strengthened market position and greater critical mass, and the anticipated future operating cost synergies arising from the elimination of duplicated back office and support functions. Adjustments to the value of goodwill arising from the final allocation of the aggregate purchase price as at the acquisition date are set out in Note 48.

In September 2008, following the announcement by HM Treasury to take Bradford & Bingley plc into public ownership, the retail deposits, branch network and its related employees transferred, under the provisions of the Banking (Special Provisions) Act 2008, to the Company. All of Bradford & Bingley plc's customer loans and treasury assets, which include all its mortgage assets, were taken under public ownership. The transfer to the Company consisted of the £20.0bn retail deposit base with 2.7 million customers, as well as Bradford & Bingley plc's direct channels including 197 retail branches, 141 agencies (distribution outlets in third party premises) and related employees. The acquisition price was £612m, including the transfer of £208m of capital from Bradford & Bingley plc relating to offshore entities. In connection with the acquisition, goodwill of £395m was recognised at a Group level, which is attributable to the anticipated increase in revenues arising from a strengthened market position and greater critical mass, and the anticipated future operating cost synergies arising from the elimination of duplicated back office and support functions. Adjustments to the value of goodwill arising from the finalisation of the allocation of the aggregate purchase price as at the acquisition date are set out in Note 48.

Prior to their acquisition by the Company, the retail deposits, branch network and related employees of Bradford & Bingley plc were not managed or reported on a stand-alone basis. As a result, it is not practicable to prepare separate combined financial information for this business and the Group for the year ended 31 December 2008 as though the acquisition date for the business combination had been 1 January 2008.

Impairment of goodwill

During the year there was no impairment of goodwill (2008: £nil, 2007: £nil). Impairment testing in respect of goodwill is performed annually, more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount: the higher of the cash-generating unit's net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm's length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset's continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre-tax basis.

The following cash-generating units include in their carrying values goodwill that comprises the goodwill reported by the Group. The cash-generating unit does not carry on its balance sheet any other intangible assets with indefinite useful lives.

		Goodwill
Business Division	Cash Generating Unit	2009 £m	2008 £m	Basis of valuation	Key assumptions	Discount rate	Growth rate
Retail Banking	Alliance & Leicester	774	774	Value in use: cash flow	3 year plan	10.1%	10%
Retail Banking	Cater Allen Private Bank	90	90	Value in use: cash flow	3 year plan	10.1%	10%
Retail Banking	Bradford & Bingley savings business	395	395	Value in use: cash flow	3 year plan	10.1%	5%

b) Other intangibles

	Group	Company
	2009 £m	2009 £m
Cost
At 1 January 2009	95	72
Additions	120	82
Disposals	(3)	(3)
At 31 December 2009	212	151
Accumulated amortisation / impairment
At 1 January 2009	7	7
Charge for the year	22	11
At 31 December 2009	29	18
Net book value	183	133

	Group	Company
	2008 £m	2008 £m
Cost
At 1 January 2008	-	-
Additions	81	68
Acquired through business combinations	21	4
Disposals	(7)	-
At 31 December 2008	95	72
Accumulated amortisation / impairment
At 1 January 2008	-	-
Charge for the year	7	7
At 31 December 2008	7	7
Net book value	88	65

Other intangible assets of the Group and the Company consist of computer software.

23. Property, plant and equipment (excluding operating lease assets)

	Group
	Owner-occupied properties £m	Office fixtures and equipment £m	Computer software £m	Total £m
Cost:
At 1 January 2009	340	570	385	1,295
Additions	126	120	16	262
Disposals	(1)	(51)	(14)	(66)
At 31 December 2009	465	639	387	1,491
Accumulated depreciation:
At 1 January 2009	24	312	105	441
Charge for the year	21	81	61	163
Disposals	-	(51)	-	(51)
At 31 December 2009	45	342	166	553
Net book value	420	297	221	938

	Group
	Owner-occupied properties £m	Office fixtures and equipment £m	Computer software £m	Total £m
Cost:
At 1 January 2008	74	479	359	912
Acquired through business combinations	257	60	-	317
Additions	11	59	39	109
Disposals	(2)	(28)	(13)	(43)
At 31 December 2008	340	570	385	1,295
Accumulated depreciation:
At 1 January 2008	18	283	83	384
Charge for the year	7	49	22	78
Disposals	(1)	(20)	-	(21)
At 31 December 2008	24	312	105	441
Net book value	316	258	280	854

	Company
	Owner-occupied properties £m	Office fixtures and equipment £m	Computer software £m	Total £m
Cost:
At 1 January 2009	112	498	315	925
Additions	11	101	15	127
Disposals	-	(2)	(15)	(17)
At 31 December 2009	123	597	315	1,035
Accumulated depreciation:
At 1 January 2009	22	299	35	356
Charge for the year	8	52	60	120
Disposals	-	(2)	-	(2)
At 31 December 2009	30	349	95	474
Net book value	93	248	220	561

	Company
	Owner-occupied properties £m	Office fixtures and equipment £m	Computer software £m	Total £m
Cost:
At 1 January 2008	68	453	279	800
Acquired through business combinations	34	10	-	44
Additions	11	56	39	106
Disposals	(1)	(21)	(3)	(25)
At 31 December 2008	112	498	315	925
Accumulated depreciation:
At 1 January 2008	15	271	13	299
Charge for the year	7	45	22	74
Disposals	-	(17)	-	(17)
At 31 December 2008	22	299	35	356
Net book value	90	199	280	569

At 31 December 2009, capital expenditure contracted, but not provided for was £1m (2008: £3m, 2007: £nil) in respect of property, plant and equipment. Of the carrying value at the balance sheet date £99m (2008: £107m) related to assets under construction.

The cost of office fixtures and equipment held under finance leases was £26m (2008: £26m). At the balance sheet date, the Group had contracted with lessees for the following future minimum lease payments in leases relating to freehold properties:

		Group		Company
Leases which expire	2009 £m	2008 £m	2009 £m	2008 £m
Within 1 year	1	-	1	-
Between 1-5 years	2	3	1	2
In more than 5 years	3	5	3	5
	6	8	5	7

24. Operating lease assets

	Group
	2009 £m	2008 £m
Cost
At 1 January	348	3,474
Additions	81	88
Acquired through business combinations	-	348
Disposals	(101)	-
Disposals of subsidiary undertaking	-	(3,562)
At 31 December	328	348
Depreciation and impairment
At 1 January	-	1,310
Charge for the year	75	117
Disposals	(59)	-
Disposals of subsidiary undertaking	-	(1,427)
At 31 December	16	-
Net book value	312	348

The operating lease assets of the Group consist of commercial vehicles. The Group's trains and related assets were sold in 2008 as described in Note 41. The Company has no operating lease assets.

Future minimum lease receipts under non-cancellable operating leases are due over the following periods:

	Group
	2009 £m	2008 £m
In no more than 1 year	72	81
In more than 1 year but no more than 5 years	99	133
In more than 5 years	26	17
	197	231

25. Deferred tax

Deferred taxes are calculated on temporary differences under the liability method using the tax rates expected to apply when the liability is settled or the asset is realised. The movement on the deferred tax account was as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
At 1 January	869	121	452	614
Income statement credit/(charge)	(438)	(122)	(149)	(174)
Credited/(charged) to equity	172	8	116	12
Acquired through business combinations	7	416	9	-
Disposal of subsidiary undertaking	-	446	-	-
At 31 December	610	869	428	452

Deferred tax assets and liabilities are attributable to the following items:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Deferred tax liabilities
Accelerated tax depreciation	(236)	(193)	-	-
Other temporary differences	(100)	(212)	-	(6)
	(336)	(405)	-	(6)

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Deferred tax assets
Pensions and other post retirement benefits	306	244	264	224
Accelerated book depreciation	178	271	55	66
IAS 32 & IAS 39 transitional adjustments	78	95	72	76
Provision for loan impairment and other provisions	13	22	-	-
Other temporary differences	74	228	37	46
Tax losses carried forward	297	414	-	46
	946	1,274	428	458

The aggregate current and deferred tax relating to items charged or credited to equity is:

Group

Company

2009

£m

2008

£m

2007

£m

2009

£m

2008

£m

2007

£m

Pensions and other post retirement benefits

119

291

300

173

289

301

The deferred tax assets scheduled above have been recognised in both the Company and the Group on the basis that sufficient future taxable profits are forecast within the foreseeable future, in excess of the profits arising from the reversal of existing taxable temporary differences, to allow for the utilisation of the assets as they reverse. Under current UK tax legislation, the tax losses in respect of which deferred tax assets have been recognised do not expire. The benefit of the tax losses carried forward in the Company may only be realised by utilisation against the future taxable profits of the Company.

The deferred tax charge in the income statement comprises the following temporary differences:

	Group
	2009 £m	2008 £m	2007 £m
Accelerated tax depreciation	(133)	24	1
Pensions and other post-retirement benefits	(104)	(63)	(4)
Provision for loan impairment and other provisions	-	-	-
IAS 32 & IAS 39 transition adjustments	(11)	(20)	(23)
Tax losses carried forward	(63)	(100)	(48)
Other temporary differences	(127)	37	(14)
	(438)	(122)	(88)

26. Other assets

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Trade and other receivables	881	1,061	515	831
Prepayments	75	122	48	47
Accrued income	30	30	-	-
General insurance assets	88	109	88	109
	1,074	1,322	651	987

27. Deposits by banks

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Items in the course of transmission	652	1,100	570	895
Sale and repurchase agreements	-	8,816	-	3,620
Amounts due to subsidiaries	-	-	115,564	120,285
Amounts due to fellow subsidiaries	1,846	1,443	20	-
Amounts due to ultimate parent	644	667	29	-
Other deposits	2,669	2,462	231	46
	5,811	14,488	116,414	124,846

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Repayable:
On demand	3,716	2,375	3,333	2,907
In not more than 3 months	1,916	8,519	23,732	17,600
In more than 3 months but not more than 1 year	24	661	10,203	18,575
In more than 1 year but not more than 5 years	155	2,933	71,927	53,245
In more than 5 years	-	-	7,219	32,519
	5,811	14,488	116,414	124,846

28. Deposits by customers

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Retail deposits	127,992	120,483	89,436	85,150
Amounts due to subsidiaries	-	-	64,531	67,801
Amounts due to fellow subsidiaries	473	-	79	-
Wholesale deposits by customers	15,428	9,762	5,141	2,515
	143,893	130,245	159,187	155,466
Repayable:
On demand	105,157	102,170	77,240	67,856
In no more than 3 months	7,046	9,202	15,611	14,204
In more than 3 months but no more than 1 year	18,059	14,982	12,028	13,506
In more than 1 year but not more than 5 years	13,017	3,165	13,029	8,804
In more than 5 years	614	726	41,279	51,096
	143,893	130,245	159,187	155,466

Retail deposits and wholesale deposits by customers are interest-bearing.

29. Trading liabilities

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Deposits by banks	40,824	34,341	-	-
Deposits by customers	4,115	4,622	-	-
Short positions in securities and unsettled trades	1,071	751	-	739
Debt securities in issue	142	1,024	-	-
	46,152	40,738	-	739

The total fair value of equity index-linked deposits included above at the balance sheet date was £2,144m (2008: £2,205m).

30. Financial liabilities designated at fair value

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Deposits by banks	45	153	-	-
Deposits by customers	12	252	-	-
Debt securities in issue - US$4bn Euro Commercial Paper Programme	662	-	-	-
- US$20bn Euro Medium Term Note Programme	3,577	4,274	-	-
- Other bonds	127	994	-	-
	4,423	5,673	-	-

Financial liabilities are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets and liabilities or recognising the gains or losses on them on a different basis. The 'fair value option' has been used where deposits by banks, deposits by customers and debt securities in issue would otherwise be measured at amortised cost, and the associated derivatives used to economically hedge the risk are held at fair value.

Of the movements in the fair value of the above debt securities in issue £27m (2008: £88m) result from changes in the Group's own credit risk. This was calculated by applying current spreads at the next call date or maturity date to the nominal value of the debt security to determine the extra cost of the debt for the remaining period of the debt security were it to have been issued at current spreads.

The amount that would be required to be contractually paid at maturity of the deposits by banks, deposits by customers, and debt securities in issue above is £129m (2008: £53m) higher than the carrying value.

US$4bn Euro Commercial Paper Programme

Abbey National Treasury Services plc may from time to time issue the commercial paper under the US$4bn Euro Commercial Paper Programme that may be denominated in any currency as agreed between Abbey National Treasury Services plc and the relevant dealer. The Notes rank at least pari passu with all other unsecured and unsubordinated obligations of Abbey National Treasury Services plc. The payments of all amounts due in respect of the Notes have been unconditionally and irrevocably guaranteed by the Company.

The Notes are issued in bearer form, subject to a minimum maturity of 1 day and a maximum maturity of 364 days. The Notes may be issued on a discounted basis or may bear fixed or floating rate interest or a coupon calculated by reference to an index or formula. The maximum aggregate nominal amount of all Notes outstanding from time to time under the Programme will not exceed US$4bn (or its equivalent in other currencies). The Notes are not listed on any stock exchange.

US$20bn Euro Medium Term Note Programme

Abbey National Treasury Services plc and the Company may from time to time issue notes denominated in any currency as agreed between the relevant Issuer and the relevant dealer under the US$20bn Euro Medium Term Note Programme. The payment of all amounts payable in respect of the Senior Notes is unconditionally and irrevocably guaranteed by the Company. The Programme provides for issuance of Fixed Rate Notes, Floating Rate Notes, Index Linked Notes, Credit Linked Notes, Equity Linked Notes and any other structured Notes, and also Dual Currency Notes, Zero Coupon/Discount Notes and Non-Interest Bearing Notes.

The maximum aggregate nominal amount of all Notes outstanding under the Programme may not exceed US$20bn (or its equivalent in other currencies) subject to any modifications in accordance with the terms of the Programme agreement. Notes may be issued in bearer or registered form and can be listed on the London Stock Exchange or any other or further stock exchange(s) or may be unlisted, as agreed.

31. Debt securities in issue

	Group
	2009 £m	2008 £m
Bonds and medium term notes:
- Euro 25bn Global Covered Bond Programme	5,268	3,963
- Euro 10bn Global Covered Bond Programme	-	2,800
- US$20bn euro Medium Term Note Programme (see Note 30)	1,566	3,313
- US$40bn euro Medium Term Note Programme	5,876	9,683
- US$20bn Commercial Paper Programme	6,366	4,234
- Euro 2bn structured notes	600	-
- Certificates of deposit in issue	9,188	9,214
	28,864	33,207
Securitisation programmes:
- Holmes	14,704	20,269
- Fosse	4,103	4,331

Other debt securities in issue	87	704
	47,758	58,511

The Company did not have any outstanding debt securities in issue as at 31 December 2008 and 2009.

Euro 25bn Global Covered Bond Programme

Abbey National Treasury Services plc issues the Covered Bonds under the euro 25bn Global Covered Bond Programme that may be denominated in any currency as agreed between Abbey National Treasury Services plc and the relevant dealers under the Programme. The Programme provides that Covered Bonds may be listed or admitted to trading, on the official list of the UK Listing Authority and on the London Stock Exchange's Regulated Market or any other stock exchanges or regulated or unregulated markets. Abbey National Treasury Services plc may also issue unlisted Covered Bonds and/or Covered Bonds not admitted to trading on any regulated or unregulated market.

The payments of all amounts due in respect of the Covered Bonds have been unconditionally guaranteed by the Company. Abbey Covered Bonds LLP ("LLP"), together with the Company have guaranteed payments of interest and principal under the Covered Bonds pursuant to a guarantee which is secured over its portfolio of mortgages and its other assets. Recourse against the LLP under its guarantee is limited to its portfolio of mortgages and such assets.

Covered Bonds may be issued in bearer or registered form. The maximum aggregate nominal amount of all Covered Bonds from time to time outstanding under the Programme will not exceed euro 25bn (or its equivalent in other currencies), subject to increase in accordance with the Programme.

On 2 July 2008, the size of the global covered bond programme established in 2005 was increased from euro 12bn to euro 25bn. On 8 July 2008, the Group issued a series of Covered Bonds totalling approximately £13bn. All notes were denominated in sterling and were subscribed for by the Company.

On 11 November 2008, Abbey National Treasury Services plc was admitted to the register of issuers and the Programme and the Covered Bonds issued previously under the Programme were admitted to the register of regulated covered bonds, pursuant to Regulation 14 of the Regulated Covered Bonds Regulations 2008 (SI 2008/346).

Euro 10bn Global Covered Bond Programme

Alliance & Leicester plc previously issued certain Covered Bonds under the euro 10bn Global Covered Bond Programme. On 17 November 2009, the outstanding Covered Bonds issued under the Programme were redeemed and the Programme was discontinued.

The Programme provided that Covered Bonds may be listed or admitted to trading, on the official list of the UK Listing Authority and on the London Stock Exchange's Regulated Market or any other stock exchanges or regulated or unregulated markets. The Programme also provided for the issue of unlisted Covered Bonds and/or Covered Bonds not admitted to trading on any regulated or unregulated market.

Alliance & Leicester Covered Bonds LLP ("LLP") guaranteed payments of interest and principal under the Covered Bonds pursuant to a guarantee which was secured over its portfolio of mortgages and its other assets. Recourse against LLP under its guarantee was limited to its portfolio of mortgages and such assets.

US$40bn Euro Medium Term Note Programme

In January 2009, it was decided that no further issuance would be made under the US$40bn Euro Medium Term Note Programme. Outstanding notes will remain in issue until maturity.

Alliance & Leicester plc issued both senior notes and subordinated notes and from time to time issued notes denominated in any currency as agreed with the relevant dealer under the US$40bn Euro Medium Term Notes Programme. The notes are direct, unsecured and unconditional obligations of Alliance & Leicester plc. The Programme provided for issuance of Fixed Rate Notes, Floating Rate Notes, Index Linked Notes, Dual Currency Notes and Zero-Coupon Notes. The notes are listed on the London Stock Exchange or may be listed on any other or further stock exchange(s) or may be unlisted, as agreed.

The notes were issued in bearer form. The maximum aggregate nominal amount of all notes from time to time outstanding under the Programme did not exceed US$40bn (or its equivalent in other currencies), subject to any modifications in accordance with the terms of the Programme agreement.

US$20bn Commercial Paper Programme

Abbey National North America LLC may from time to time issue unsecured notes denominated in United States dollars as agreed between Abbey National North America LLC and the relevant dealers under the US$20bn US commercial paper programme. The Notes will rank at least pari passu with all other unsecured and unsubordinated indebtedness of Abbey National North America LLC and the Company. The payments of all amounts due in respect of the Notes have been unconditionally and irrevocably guaranteed by the Company.

The Notes are not redeemable prior to maturity or subject to voluntary prepayment. The maximum aggregate nominal amount of all Notes from time to time outstanding under the Programme will not exceed US$20bn (or its equivalent in other currencies).

Euro 2bn structured notes

Abbey National Treasury Services plc may from time to time issue structured notes denominated in any currency as agreed between Abbey National Treasury Services plc and the relevant dealers under the euro 2bn structured note programme. Structured notes are direct, unsecured and unconditional obligations of Abbey National Treasury Services plc that rank pari passu without preference among themselves and, subject as to any applicable statutory provisions or judicial order, at least equally with all other present and future unsecured and unsubordinated obligations of Abbey National Treasury Services plc. The payments of all amounts due in respect of the structured notes have been unconditionally and irrevocably guaranteed by the Company.

The structured note programme provides for the issuance of Commodity Linked Notes, Credit Linked Notes, Currency Linked Notes, Equity Linked Notes, Equity Index Linked Notes, Fixed Rate Notes, Floating Rate Notes, Fund Linked Notes, Inflation Linked Notes, Property Linked Notes, Zero Coupon/Discount Notes and any other structured notes as agreed between Abbey National Treasury Services plc and the relevant dealers. Structured notes may be issued in bearer or registered (or inscribed) form and may be listed on the London Stock Exchange or any other or further stock exchange(s) or may be unlisted, as agreed between Abbey National Treasury Services plc and the relevant dealers. Structured notes issued in bearer form may also be issued in new global note form.

The maximum aggregate nominal amount of all structured notes from time to time outstanding under the Programme will not exceed euro 2bn (or its equivalent in other currencies).

Securitisation Programmes

The Group has provided prime retail mortgage-backed securitised products to a diverse investor base through its mortgage backed funding programmes, as described in Note 17. Funding has historically been raised via mortgage-backed notes, both issued to third parties and retained (the latter being central bank eligible collateral, both via the Bank of England's Special Liquidity Scheme facility and for contingent funding purposes in other Bank of England, European Central Bank, Swiss National Bank and US Federal Reserve facilities).

An analysis of the above debt securities in issue by issue currency is as follows:

			Group
Issue currency	Interest rate	Maturity	2009 £m	2008 £m
Euro	0.00% - 3.99%	Up to 2010	2,452	4,818
		2011 - 2019	5,415	3,898
		2020 - 2029	1,600	-
		2040 - 2059	3,976	-
	4.00% - 4.99%	Up to 2010	-	525
		2011 - 2019	-	193
		2020 - 2029	1,362	1,469
	5.00% - 7.99%	Up to 2010	276	406
		2011 - 2029	-	2,982
		2030 - 2039	-	2,722
		2040 - 2059	-	2,105
US dollar	0.00% - 3.99%	Up to 2010	14,676	9,184
		2011 - 2019	618	95
		2020 - 2029	3,841	-
		2030 - 2039	556	-
		2040 - 2059	3,194	-
	4.00% - 5.99%	Up to 2010	20	985
		2011 - 2019	49	743
		2020 - 2029	-	4,340
		2030 - 2039	-	4,916
		2040 - 2059	-	1,650
	7.00% - 8.99%	Up to 2010	-	221
Pounds sterling	0.00% - 3.99%	Up to 2010	963	3,930
		2011 - 2019	1,643	1,411
		2020 - 2029	838	-
		2040 - 2059	3,739	-
	5.00% - 5.99%	Up to 2010	155	2,485
		2011 - 2019	815	18
	6.00% - 6.99%	Up to 2010	471	1,407
		2011 - 2019	351	976
		2020 - 2029	-	856
		2030 - 2039	-	3,460
		2040 - 2060	-	1,388
	7.00% - 8.99%	2011 - 2040	-	73
Other currencies	0.00% - 5.99%	Up to 2010	337	852
		2011 - 2019	47	40
		2020 - 2029	352	337
	6.00% - 6.87%	2011 - 2019	12	11
		2011 - 2040	-	15
			47,758	58,511

32. Other borrowed funds

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
£300m Step Up Callable Perpetual Reserve Capital Instruments	-	356	-	356
£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities	195	205	195	205
US$1,000m Non-Cumulative Trust Preferred Securities	813	1,171	-	-
£325m sterling Preference Shares	344	344	344	344
	1,352	2,076	539	905

During the year the £300m Step Up Callable Perpetual Reserve Capital Instruments were reclassified to equity as described in Note 39.

£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities

The Tier One Preferred Income Capital Securities were issued on 9 August 2002 by the Company. The Tier One Preferred Income Capital Securities are redeemable by the Company in whole but not in part on 9 February 2018 or on any coupon payment date thereafter, subject to the prior approval of the UK Financial Services Authority. The Tier One Preferred Income Capital Securities bear interest at a rate of 6.984% per annum, payable semi-annually in arrears. From (and including) 9 February 2018, the Tier One Preferred Income Capital Securities will bear interest, at a rate reset semi-annually of 1.86% per annum above the six-month sterling LIBOR rate, payable semi-annually in arrears. Interest payments may be deferred in limited circumstances, such as when the payment would cause the Company to become insolvent or breach applicable Capital Regulations.

The Tier One Preferred Income Capital Securities are not redeemable at the option of the holders and the holders do not have any rights against other Group companies. Where interest payments have been deferred, the Company may not declare or pay dividends on or redeem or repurchase any junior securities until it next makes a scheduled payment on the Tier One Preferred Income Capital Securities and the Reserve Capital Instruments.

The Tier One Preferred Income Capital Securities are unsecured securities of the Company and are subordinated to the claims of unsubordinated creditors and subordinated creditors holding loan capital of the Company. Upon the winding up of the Company, holders of Tier One Preferred Income Capital Securities will rank pari passu with the holders of the most senior class or classes of preference shares (if any) of the Company then in issue and in priority to all other Company shareholders.

US$1,000m Non-Cumulative Trust Preferred Securities

Abbey National Capital Trust I and Abbey National Capital LP I are 100% owned finance subsidiaries of the Company. On 7 February 2000, Abbey National Capital Trust I issued US$1bn of 8.963% Non-cumulative Trust Preferred Securities, which have been registered under the US Securities Act of 1933, as amended. Abbey National Capital Trust I serves solely as a passive vehicle holding the partnership preferred securities issued by Abbey National Capital LP I and each has passed all the rights relating to such partnership preferred securities to the holders of trust preferred securities issued by Abbey National Capital Trust I. All of the trust preferred securities and the partnership preferred securities have been fully and unconditionally guaranteed on a subordinated basis by the Company. The terms of the securities do not include any significant restrictions on the ability of the Company to obtain funds, by dividend or loan, from any subsidiary. After 30 June 2030, the distribution rate on the preferred securities will be 2.825% per annum above the three-month US dollar LIBOR rate for the relevant distribution period.

The trust preferred securities are not redeemable at the option of the holders and the holders do not have any rights against other Group companies. The partnership preferred securities may be redeemed by the partnership, in whole or in part, on 30 June 2030 and on each distribution payment date thereafter. Redemption by the partnership of the partnership preferred securities may also occur in the event of a tax or regulatory change. Generally, holders of the preferred securities will have no voting rights.

Upon the return of capital or distribution of assets in the event of the winding up of the partnership, holders of the partnership preferred securities will be entitled to receive, for each partnership preferred security, a liquidation preference of US $1,000, together with any due and accrued distributions and any additional amounts, out of the assets of the partnership available for distribution.

£325m sterling Preference Shares

Size of shareholding	Shareholders	Preference shares of £1 each
1-100	1	100
101-1,000	52	38,160
1,001+	1,908	324,961,740
	1,961	325,000,000

Holders of sterling preference shares are entitled to receive a biannual non-cumulative preferential dividend payable in sterling out of the distributable profits of the Company. The rate per annum will ensure that the sum of the dividend payable on such date and the associated tax credit (as defined in the terms of the sterling preference shares) represents an annual rate of 8 5/8% per annum of the nominal amount of shares issued in 1997, and an annual rate of 10 3/8% for shares issued in 1995 and 1996.

On a return of capital or on a distribution of assets on a winding up, the sterling preference shares shall rank pari passu with any other shares that are expressed to rank pari passu therewith as regards participation in assets, and otherwise in priority to any other share capital of the Company. On such a return of capital or winding up, each sterling preference share shall, out of the surplus assets of the Company available for distribution amongst the members after payment of the Company's liabilities, carry the right to receive an amount equal to the amount paid up or credited as paid together with any premium paid on issue and the full amount of any dividend otherwise due for payment. Other than as set out above, no sterling preference share confers any right to participate on a return of capital or a distribution of assets of the Company.

Holders of the sterling preference shares are not entitled to receive notice of or attend, speak and vote at general meetings of the Company unless the business of the meeting includes the consideration of a resolution to wind up the Company or any resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the sterling preference shares or if the dividend on the sterling preference shares has not been paid in full for the three consecutive dividend periods immediately prior to the relevant general meeting. In any such case, the sterling preference shareholders are entitled to receive notice of and attend the general meeting at which such resolution is proposed and will be entitled to speak and vote on such a resolution but not on any other resolution.

33. Subordinated liabilities

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Dated subordinated liabilities:
5.00% Subordinated bond 2009 (euro 511m)	-	515	-	515
4.625% Subordinated notes 2011 (euro 500m)	478	515	478	515
10.125% Subordinated guaranteed bond 2023	220	231	-	-
11.50% Subordinated guaranteed bond 2017	226	238	-	-
11.59% Subordinated loan stock 2017	-	-	226	221
10.18% Subordinated loan stock 2023	-	-	220	217
7.57% Subordinated notes 2029 (US$1,000m)	805	1,141	805	1,142
6.50% Subordinated notes 2030	174	194	174	194
8.9% Subordinated notes 2030 (US$1,000m)	-	-	813	1,170
5.25% Subordinated notes 2015	210	215	210	215
Subordinated floating rate EURIBOR notes 2015	445	485	445	485
Subordinated floating rate EURIBOR notes 2016	-	-	65	65
5.875% Subordinated notes 2031	80	97	-	-
5.25% Subordinated notes 2023	119	122	-	-
Subordinated floating rate EURIBOR notes 2017	134	145	-	-
Subordinated floating rate US$ LIBOR notes 2015	92	102	-	-
Subordinated floating rate EURIBOR notes 2017	88	97	-	-
9.625% Subordinated notes 2023	382	399	-	-
	3,453	4,496	3,436	4,739
Undated subordinated liabilities:
10.0625% Exchangeable subordinated capital securities	204	204	204	204
5.56% Subordinated guaranteed notes (Yen 15,000m)	123	143	123	143
5.50% Subordinated guaranteed notes (Yen 5,000m)	41	47	41	47
Fixed/Floating rate subordinated notes (Yen 5,000m)	39	45	39	45
7.50% 10 Year step-up perpetual subordinated notes	344	354	344	354
7.50% 15 Year step-up perpetual subordinated notes	497	514	497	514
7.38% 20 Year step-up perpetual subordinated notes	209	223	209	223
7.13% 30 Year step-up perpetual subordinated notes	311	348	311	348
7.13% Fixed to floating rate perpetual subordinated notes	376	413	376	413
	2,144	2,291	2,144	2,291
Total subordinated liabilities	5,597	6,787	5,580	7,030

The subordinated floating rate notes pay a rate of interest related to the LIBOR of the currency of denomination.

The 10.0625% exchangeable subordinated capital securities are exchangeable into fully paid 10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of the Company. Exchange may take place on any interest payment date providing that between 30 and 60 days notice has been given to the holders. The holders will receive one new sterling preference share for each £1 principal amount of capital securities held. Note 32 details the rights attaching to these shares, as they are the same.

The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of the Company, on 31 January 2015 and each fifth anniversary thereafter.

The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of the Company, on 27 June 2015 and each fifth anniversary thereafter.

The Fixed/Floating rate subordinated notes are redeemable at par, at the option of the Company, on 27 December 2016 and each interest payment date anniversary thereafter.

The 7.50% 10 Year step-up perpetual subordinated notes are redeemable at par, at the option of the Company, on 28 September 2010 and each fifth anniversary thereafter.

The 7.50% 15 Year step-up perpetual subordinated notes are redeemable at par, at the option of the Company, on 28 September 2015 and each fifth anniversary thereafter.

The 7.38% 20 Year step-up perpetual subordinated notes are redeemable at par, at the option of the Company, on 28 September 2020 and each fifth anniversary thereafter.

The 7.13% 30 Year step-up perpetual subordinated notes are redeemable at par, at the option of the Company, on 30 September 2030 and each fifth anniversary thereafter.

The 7.13% Fixed to Floating rate perpetual subordinated notes are redeemable at par, at the option of the Company, on 28 September 2010 and each fifth anniversary thereafter.

In common with other debt securities issued by Group companies, the subordinated liabilities are redeemable in whole at the option of the Company, on any interest payment date, in the event of certain tax changes affecting the treatment of payments of interest on the subordinated liabilities in the UK, at their principal amount together with any accrued interest.

In 2009, the 5.00% subordinated bonds 2009 (euro 511m) were redeemed in full.

Subordinated liabilities including convertible debt securities in issue are repayable:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
In no more than 3 months	-	515	-	515
In more than 3 months but no more than 1 year	-	-	-	-
In more than 1 year but no more than 5 years	478	515	478	515
In more than 5 years	2,975	3,466	2,958	3,709
Undated	2,144	2,291	2,144	2,291
	5,597	6,787	5,580	7,030

34. Other liabilities

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Trade and other payables	2,263	2,303	1,611	1,283
Deferred income	60	39	-	-
	2,323	2,342	1,611	1,283

Trade and other payables include £37m (2008: £40m) of finance lease obligations mainly relating to a lease and leaseback of Group property.

The maturity of net obligations under finance leases are as follows:

		Group
Leases which expire	2009 £m	2008 £m
Within 1 year	5	4
Between 1-5 years	20	21
In more than 5 years	12	15
	37	40

Future minimum lease payments are:

Leases which expire		Group
Leases which expire	2009 £m	2008 £m
Within 1 year	7	6
Between 1-5 years	25	27
In more than 5 years	13	17
	45	50

At the balance sheet date, the Group had contracted with lessees for the following future minimum lease payments on sub-leases:

Leases which expire		Group
Leases which expire	2009 £m	2008 £m
Within 1 year	-	1
Between 1-5 years	-	2
	-	3

During the year, £3m (2008: £nil) was incurred as a finance lease interest charge.

35. Provisions

	Group
	Misselling £m	Other £m	Total £m
At 1 January 2009	141	66	207
Additional provisions	13	46	59
Provisions released	(3)	-	(3)
Used during the year	(108)	(81)	(189)
Reclassifications	-	17	17
At 31 December 2009	43	48	91

To be settled:
Within 12 months	43	47	90
In more than 12 months	-	1	1
	43	48	91

	Company
	Misselling £m	Other £m	Total £m
At 1 January 2009	41	58	99
Additional provisions	9	35	44
Acquired through business combinations	16	14	30
Provisions released	(3)	-	(3)
Used during the year	(20)	(76)	(96)
At 31 December 2009	43	31	74

To be settled:
Within 12 months	43	30	73
In more than 12 months	-	1	1
	43	31	74

	Group
	Misselling £m	Other £m	Total £m
At 1 January 2008	95	36	131
Additional provisions	-	58	58
Acquired through business combinations	100	-	100
Provisions released	(40)	(1)	(41)
Disposal of subsidiary undertakings	-	(2)	(2)
Used during the year	(14)	(25)	(39)
At 31 December 2008	141	66	207

To be settled:
Within 12 months	136	63	199
In more than 12 months	5	3	8
	141	66	207

	Company
	Misselling £m	Other £m	Total £m
At 1 January 2008	95	5	100
Additional provisions	-	56	56
Provisions released	(39)	-	(39)
Used during the year	(14)	(4)	(18)
At 31 December 2008	42	57	99

To be settled:
Within 12 months	37	57	94
In more than 12 months	5	-	5
	42	57	99

The charge disclosed in the income statement in respect of provisions for other liabilities and charges of £56m (2008: £17m), comprises the additional provisions of £59m (2008: £58m), less the provisions released of £3m (2008: £41m) in the table above.

The misselling provision comprises various claims with respect to product misselling. In calculating the misselling provision, management's best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. Further information on misselling provisions can be found in 'Critical Accounting Policies' within the Accounting Policies on page 122.

Other provisions comprise amounts in respect of litigation and related expenses, restructuring expenses and other post retirement benefits.

36. Retirement benefit obligations

The amounts recognised in the balance sheet were as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Assets/(Liabilities)
Funded defined benefit pension scheme	1	4	-	-
Funded defined benefit pension scheme	(1,048)	(796)	(922)	(797)
Unfunded defined benefit pension scheme	(13)	(11)	-	-
Net defined benefit obligation	(1,060)	(803)	(922)	(797)
Post-retirement medical benefits (unfunded)	(10)	(10)	-	-
Total net liabilities	(1,070)	(813)	(922)	(797)

Defined Contribution Pension schemes

The Group operates a number of defined contribution pension schemes. The Stakeholder scheme introduced in 2001 was the principal scheme until 1 December 2009 when the Santander Retirement Plan, an occupational defined contribution scheme was introduced, into which eligible employees were enrolled automatically. From 1 April 1998, employees of the Alliance & Leicester group were eligible to join a defined contribution section of the Alliance & Leicester Pension Scheme.

The assets of the schemes are held and administered separately from those of the Company. In the case of the Stakeholder scheme the assets are held in an independently administered fund, and in the case of the Santander Retirement Plan and the Alliance & Leicester Pension Scheme, the assets are held in separate trustee-administered funds.

An expense of £20m (2008: £8m, 2007: £7m) was recognised for defined contribution plans in the year, and is included in staff costs classified within administration expenses in the Income Statement. None of this amount was recognised in respect of key management personnel for the years ended 31 December 2009, 2008 and 2007.

Defined Benefit Pension schemes

The Group operates a number of defined benefit pension schemes. The Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund, the National & Provincial Building Society Pension Fund, the Scottish Mutual Assurance Staff Pension Scheme, the Scottish Provident Institution Staff Pension Fund and the Alliance & Leicester Pension Scheme are the principal pension schemes within the Group, covering 27% (2008: 38%, 2007: 45%) of the Group's employees, and are all funded defined benefit schemes. All are closed schemes, and under the projected unit method, the current service cost when expressed as a percentage of pensionable salaries will gradually increase over time.

Formal actuarial valuations of the assets and liabilities of the schemes are carried out on a triennial basis (and currently a biennial basis for the Alliance & Leicester Pension Scheme) by an independent professionally qualified actuary and valued for accounting purposes at each balance sheet date. The latest formal actuarial valuation was made as at 31 March 2007 for the Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund and the National & Provincial Building Society Pension Fund; as at 31 December 2006 for the Scottish Mutual Assurance Staff Pension Scheme and the Scottish Provident Institution Staff Pension Fund; and as at 31 March 2008 for the Alliance & Leicester Pension Scheme.

The total amount charged to the income statement, including amounts classified as redundancy costs, was determined as follows:

	Group
	2009 £m	2008 £m	2007 £m
Current service cost	44	55	67
Past service cost	50	16	14
Gain on settlements or curtailments	-	(2)	(10)
Expected return on pension scheme assets	(285)	(237)	(194)
Interest cost	326	264	220
	135	96	97

The net liability recognised in the balance sheet is determined as follows:

	Group
	2009 £m	2008 £m	2007 £m	2006 £m	2005 £m
Present value of defined benefit obligation	(6,308)	(5,175)	(4,581)	(4,264)	(4,354)
Fair value of plan assets	5,248	4,372	3,602	3,230	2,974
Net defined benefit obligation	(1,060)	(803)	(979)	(1,034)	(1,380)

	Company
	2009 £m	2008 £m	2007 £m	2006 £m	2005 £m
Present value of defined benefit obligation	(4,805)	(3,944)	(4,559)	(4,241)	(3,822)
Fair value of plan assets	3,883	3,147	3,577	3,208	2,582
Net defined benefit obligation	(922)	(797)	(982)	(1,033)	(1,240)

Movements in the defined benefit obligations during the year were as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Balance at 1 January	(5,175)	(4,581)	(3,944)	(4,559)
Current service cost	(44)	(55)	(26)	(42)
Interest cost	(326)	(264)	(249)	(262)
Employee contributions	(11)	(7)	(6)	(7)
Past service cost	(50)	(16)	(35)	(16)
Actuarial (loss)/gain	(935)	818	(723)	793
Actual benefit payments	233	148	178	147
Settlement/curtailment	-	2	-	2
Assumed through business combinations	-	(1,220)	-	-
Balance at 31 December	(6,308)	(5,175)	(4,805)	(3,944)

Movements in the present value of fair value of scheme assets during the year were as follows:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Balance at 1 January	4,372	3,602	3,147	3,577
Expected return on scheme assets	285	237	209	236
Actuarial gain/(loss) on scheme assets	329	(862)	309	(836)
Company contributions paid	484	323	390	310
Employee contributions	11	7	6	7
Actual benefit payments	(233)	(148)	(178)	(147)
Acquired through business combinations	-	1,213	-	-
Balance at 31 December	5,248	4,372	3,883	3,147

The amounts recognised in the Consolidated Statement of Comprehensive Income for each of the five years indicated were as follows:

	Group
	2009 £m	2008 £m	2007 £m	2006 £m	2005 £m
Actuarial (gain)/loss on scheme assets	(329)	862	(33)	9	(282)

Experience (gain)/loss on scheme liabilities	(34)	51	80	(25)	-
Loss/(gain) from changes in actuarial assumptions	969	(869)	66	(203)	436
Actuarial loss/(gain)/ on scheme liabilities	935	(818)	146	(228)	436
Total net actuarial loss/(gain)	606	44	113	(219)	154

	Company
	2009 £m	2008 £m	2007 £m	2006 £m	2005 £m
Actuarial (gain)/loss on scheme assets	(309)	836	(33)	-	(242)

Experience (gain)/loss on scheme liabilities	(33)	51	81	(20)	7
Loss/(gain) from changes in actuarial assumptions	756	(844)	68	(160)	387
Actuarial loss/(gain) on scheme liabilities	723	(793)	149	(180)	394
Total net actuarial loss/(gain)	414	43	116	(180)	152

The actual gain/(loss) on scheme assets was £614m (2008: £(625)m, 2007: £227m). Cumulative net actuarial losses of £768m (2008: £162m, 2007: £118m) were recognised in the Consolidated Statement of Comprehensive Income. The Group's pension schemes did not directly hold any equity securities of the Company or any of its related parties at 31 December 2009, 2008 and 2007. In addition, the Group does not hold insurance policies over the schemes, and has not entered into any significant transactions with the schemes.

The assets of the funded plans are held independently of the Group's assets in separate trustee administered funds. The principal duty of the trustees is to act in the best interests of the members of the schemes. Ultimate responsibility for investment strategy rests with the trustees of the schemes who are required under the Pensions Act 2004 to prepare a statement of investment principles.

The trustees of the Group's schemes have developed the following investment principles:

>	To maintain a portfolio of suitable assets of appropriate quality, suitability and liquidity which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits which the pension scheme provides, as set out in the trust deed and rules.
>	To limit the risk of the assets failing to meet the liabilities, over the long-term and on a shorter-term basis as required by prevailing legislation.
>	To minimise the long-term costs of the pension scheme by maximising the return on the assets whilst having regard to the objectives shown above.

Asset allocation strategies were reviewed in 2008 and 2009, and automatic rebalancing to the central benchmark positions was suspended as a result of the unprecedented volatility in asset markets during this period. Future allocation strategies will be set to allow for a more dynamic approach. Implementation of these strategies began in 2009 and will continue during 2010 whilst taking into account market conditions.

Previously, the statement of investment principles for the main schemes (other than the Alliance & Leicester Pension Scheme) had set the long-term target allocation of plan assets during 2006-2008 as 48% Equities, 30% Bonds and 22% Gilts. The statement of investment principles for the Alliance & Leicester Pension Scheme had set the long-term target allocation of plan assets at 25% Equities, 25% alternative return-seeking assets (including Property), 25% Bonds and 25% Gilts for 2009 and 2008. Movement towards this long-term target commenced during 2009, and progress will depend upon market conditions.

The categories of assets in the scheme by value and as a percentage of total scheme assets, and the expected rates of return are as follows:

					Group and Company
	Fair value of scheme assets		Expected rate of return	Fair value of scheme assets		Expected rate of return
	2009 £m	2009 %	2009 %	2008 £m	2008 %	2008 %
UK equities	1,045	20	8.1	911	21	8.2
Overseas equities	1,027	20	8.5	821	19	8.5
Corporate bonds	1,503	29	6.2	1,155	26	5.7
Government Fixed Interest	686	13	3.9	657	15	4.6
Government Index Linked	664	13	3.9	616	14	4.4
Property funds	58	1	6.3	64	1	6.4
Cash	177	3	4.1	24	1	5.3
Other	88	1	8.3	124	3	8.3
	5,248	100	6.4	4,372	100	6.7

Other assets consist of asset-backed securities, annuities, funds and derivatives that are used to protect against exchange rate, inflation and interest rate movements.

The expected return on plan assets is determined by considering the expected returns available on the assets underlying the current investment policy, as follows:

>	Equities	Long-term median real rate of return experienced after considering projected movements in asset indices
>	Corporate bonds	Gross redemption yields as at the balance sheet date, less a margin for default risk
>	Government bonds	Gross redemption yields as at the balance sheet date
>	Property funds	Average of returns for UK equities and government bonds
>	Cash	Expected long term bank rate, after considering projected inflation rate

The following tables summarise the fair values at 31 December 2009 and 2008 of the financial asset classes accounted for at fair value, by the valuation methodology used by the investment managers of the schemes assets to determine their fair value. The table also discloses the percentages that the recorded fair values of financial assets represent of the schemes' total financial assets that are recorded at fair value.

At 31 December 2009

Category of plan assets	Quoted prices in active markets		Internal models based on market observable data		Total
	£m	%	£m	%	£m	%
UK equities	1,045	21	-	-	1,045	21
Overseas equities	1,028	20	-	-	1,028	20
Corporate bonds	1,503	30	-	-	1,503	30
Government Fixed Interest	686	14	-	-	686	14
Government Index Linked	663	13	-	-	663	13
Other	-	-	88	2	88	2
Total	4,925	98	88	2	5,013	100

At 31 December 2008

Category of plan assets	Quoted prices in active markets		Internal models based on market observable data		Total
	£m	%	£m	%	£m	%
UK equities	911	21	-	-	911	21
Overseas equities	821	19	-	-	821	19
Corporate bonds	1,155	27	-	-	1,155	27
Government Fixed Interest	657	15	-	-	657	15
Government Index Linked	616	15	-	-	616	15
Other	-	-	124	3	124	3
Total	4,160	97	124	3	4,284	100

Plan assets are stated at fair value based upon quoted prices in active markets with the exception of those classified under "Other". Assets in the "Other" category comprise investments in absolute return funds and foreign exchange, equity and interest rate derivatives valued by investment managers by reference to market observable data. Private equity funds were valued by reference to their latest published accounts whilst the insured annuities were valued by scheme actuaries based on the liabilities insured.

Actuarial assumptions

The principal actuarial assumptions used were as follows:

	Group and Company
	2009 %	2008 %	2007 %
To determine benefit obligations:
- Discount rate for scheme liabilities	5.8	6.4	5.8
- General price inflation	3.4	3.0	3.5
- General salary increase	3.4	3.5	4.0
- Expected rate of pension increase	3.3	3.0	3.5
To determine net periodic benefit cost:
- Discount rate	6.4	5.8	5.2
- Expected rate of pension increase	3.0	3.5	3.0
- Expected rate of return on plan assets	6.4	6.7	6.1
Medical cost trend rates:
- Initial rate	5.5	6.0	6.5
- Ultimate rate	4.5	4.5	4.5
- Year of ultimate rate	2013	2013	2013

	Years	Years	Years
Longevity at 60 for current pensioners, on the valuation date:
- Males	27.6	27.5	27.2
- Females	30.0	29.9	29.8
Longevity at 60 for future pensioners currently aged 40, on the valuation date:
- Males	29.7	29.6	29.3
- Females	31.3	31.2	31.1

The rate used to discount the retirement benefit obligation is determined to reflect duration of the liabilities based on the annual yield at 31 December of the sterling 15+ year AA Corporate Bond iBoxx Index, representing the market yield of high quality corporate bonds on that date, adjusted to match the terms of the scheme liabilities. The inflation assumption is set based on the Bank of England projected inflation rates over the duration of scheme liabilities weighted by projected scheme cash flows.

The mortality assumption used in preparation of the valuation was the Continuous Mortality Investigation Table PXA 92MCC 2009 with a future improvement underpin of 1% for males and 0.5% for females. The table above shows that a participant retiring at age 60 as at 31 December 2009 is assumed to live for, on average, 27.6 years in the case of a male and 30.0 years in the case of a female. In practice, there will be variation between individual members but these assumptions are expected to be appropriate across all participants. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 40 now, when they retire in 20 years time at age 60.

The Group determined its expense measurements above based upon long-term assumptions taking into account target asset allocations of assets set at the beginning of the year, offset by actual returns during the year. Year-end obligation measurements are determined by reference to market conditions at the balance sheet date. Assumptions are set in consultation with third party advisors and in-house expertise.

The following table shows the effect of changes in actuarial assumptions on the principal pension schemes of the Group:

		Increase/(decrease)
		2009 £m	2008 £m
Discount rate	Change in pension obligation at year end from a 25 bps increase	(345)	(263)
	Change in 2010 pension cost from a 25 bps increase	(6)	(6)

General price inflation	Change in pension obligation at year end from a 25 bps increase	332	255
	Change in 2010 pension cost from a 25 bps increase	21	17

Expected rate of return on plan assets	Change in 2010 pension cost from a 25 bps increase	13	11

Mortality	Change in pension obligation from each additional year of longevity assumed	141	102

The Group currently expects to contribute £128m to its defined benefit pension schemes in 2010.

The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are:

Year ending 31 December:	£m
2010	248
2011	264
2012	282
2013	301
2014	322
Five years ended 2019	1,975

Participation of Group companies in the principal pension schemes is governed by the Pensions Acts 1995 and 2004. Under the 1995 Pensions Act, a company ceasing to participate in a pension scheme is required under section 75 to pay a deficit reduction contribution certified by the scheme actuary, of any deficit relating to its employees, assessed on the basis of the cost of securing accrued benefits with an insurance company unless other arrangements are agreed with the trustees.

As part of revised arrangements relating to the funding of the Group's defined benefit pension schemes, £814m (2008: £970m) of securities classified as available-for-sale have been pledged during the year to cover the Group's obligations.

Post Retirement Medical Benefit Plans

The Group also operates unfunded post retirement medical benefit plans for certain of its former employees. The post retirement medical benefit plans in operation are accounted for in the same manner as defined benefit pension plans.

Formal actuarial valuations of the liabilities of the schemes are carried out on a triennial basis by an independent professionally qualified actuary and updated for accounting purposes at each balance sheet date. The latest formal actuarial valuation was made as at 31 December 2006 and updated to 31 December 2009 by a qualified independent actuary.

Actuarial assumptions used for the Group's post retirement medical benefit plans are the same as those used for the Group's defined benefit pension schemes. There was an actuarial loss during the year of £1m (2008: £1m) on the Group's post-retirement medical benefits liability. A one percentage point movement in medical cost trends would increase or decrease the post-retirement medical benefit liability and interest cost by £1m (2008: £1m).

37. Contingent liabilities and commitments

The estimated maximum exposure in respect of contingent liabilities and commitments granted is:

	Group		Company
	2009 £m	2008 £m	2009 £m	2008 £m
Guarantees given to subsidiaries	-	-	156,580	109,022
Guarantees given to third parties	194	571	-	-
Formal standby facilities, credit lines and other commitments with original term to maturity of:
- One year or less	5,570	2,263	3,423	1,883
- More than one year	4,982	8,267	1,738	3,688
	10,746	11,101	161,741	114,593

Group

Company

2009

£m

2008

£m

2009

£m

2008

£m

Other contingent liabilities

Unauthorised overdraft fees

The Company, along with seven other financial institutions, has been involved in legal proceedings with the Office of Fair Trading ("OFT"), regarding the legal status and enforceability of unarranged overdraft fees (the "OFT Proceedings"). The OFT Proceedings were concerned with whether certain of the financial institutions' terms and conditions are subject to the fairness test in the Unfair Terms in Consumer Contract Regulations 1999 (the "Regulations") and whether they are capable of being 'penalties' at common law.

In April 2008 the High Court confirmed that the Company's then current terms and conditions were not capable of being penalties at common law. This finding was not appealed by the OFT. The High Court also found that the relevant terms were assessable for fairness under the Regulations. On 26 February 2009, the Court of Appeal dismissed the appeal against the High Court's judgment made by the relevant financial institutions and held that unarranged overdraft fees were assessable for fairness under the Regulations.

The House of Lords gave the relevant financial institutions permission to appeal this judgment. The hearing before the House of Lords took place on 23 to 25 June 2009. The Supreme Court (previously The House of Lords) gave its judgment on 25 November 2009 and ruled that the level of the unauthorised overdraft fees of the relevant financial institutions could not be assessed for fairness under the Regulations (to the extent that the terms pursuant to which the fees are levied are in plain and intelligible language), although they may be assessed for fairness on some other basis.

On 22 December 2009, the OFT announced that it would not be continuing with its investigation into the fairness of unarranged overdraft fees.

The Company has rejected the vast majority of complaints which remained in respect of unarranged overdraft fees after the Supreme Court decision, and it is understood that the Financial Ombudsman Service has also rejected the vast majority of complaints that it had had on hold since the commencement of the OFT Proceedings. The Company has started to invite County Courts to dismiss those claims against them which have been stayed since the commencement of the OFT Proceedings and which relate to the issues covered in the OFT Proceedings. It is presently anticipated that the Company will continue with this approach.

Financial Services Compensation Scheme

The Financial Services Compensation Scheme ('FSCS'), the UK's statutory fund of last resort for customers of authorised financial services firms, pays compensation if a firm is unable to meet its obligations as they fall due. As a result of the failure of a number of deposit-taking institutions during the second half of 2008, the FSCS now stands as a creditor of Bradford & Bingley plc and the administrations of Heritable Bank, Kaupthing Singer & Friedlander and Landsbanki 'Icesave'. The FSCS has borrowed from HM Treasury to fund the compensation costs associated with those failures. These borrowings are currently on an interest-only basis until 31 March 2012.

The FSCS fulfils its obligations by raising management expenses levies and compensation levies on the industry. In relation to compensation relating to protected deposits, each deposit-taking institution contributes towards these levies in proportion to their share of total protected deposits, subject to a threshold set by the Financial Services Authority establishing the maximum that FSCS can levy for compensation in any one year. The limit on the FSCS management expenses for the three years from September 2008 in relation to the above-mentioned failures has been capped at £1bn per annum. The FSCS has the power to raise levies on firms who have ceased to participate in the scheme and are in the process of ceasing to be authorised (so called 'exit levies') for the amount that the firm would otherwise have been asked to pay during the relevant levy year. The Group has an accrual for its share of management expenses levies for the 2009/10 and 2010/11 levy years as at 31 December 2009 of £101m (2008: £84m).

The FSCS will receive funds from asset sales, surplus cashflow, or other recoveries from each of the above-named banks. These recoveries will be used to reduce the principal amount outstanding on the FSCS's borrowings. Only after the interest only period, which is expected to end on 31 March 2012, will a schedule for repayment of any remaining principal outstanding (after recoveries) on the borrowings be agreed between the FSCS and HM Treasury. It is expected that, from that point, the FSCS will begin to raise compensation levies (principal repayments) relating to the above-named banks. No provision for compensation levies, which could be significant, has been made in these Consolidated Financial Statements.

Overseas tax claim

Abbey National Treasury Services plc has received a demand from an overseas tax authority relating to the repayment of certain tax credits and related charges. Following modifications to the demand, its nominal amount stands at £74m at the balance sheet exchange rate (2008: £80m). At 31 December 2009, additional interest in relation to the demand could amount to £34m at the balance sheet exchange rate (2008: £34m). Abbey National Treasury Services plc received legal advice that it had strong grounds to challenge the validity of the demand. In September 2006, Abbey National Treasury Services plc won its case at the first stage of the litigation process. In January 2007, the tax authority appealed this decision. However, in December 2006, a ruling was published of a similar case unconnected to the Group but which might affect Abbey National Treasury Services plc's position. In this instance, the courts ruled against the taxpayer.

Regulatory

The Group engages in discussion, and fully co-operates with the UK Financial Services Authority in their enquiries, including those exercised under statutory powers, regarding its interaction with past and present customers and policyholders both as part of the UK Financial Services Authority's general thematic work and in relation to specific products and services.

Other

As part of the sale of subsidiaries, and as is normal in such circumstances, the Group has given warranties and indemnities to the purchasers.

Obligations under stock borrowing and lending agreements

Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations totalling £37,525m at 31 December 2009 (2008: £19,934m) are offset by a contractual right to receive stock under other contractual agreements.

Other off-balance sheet commitments

The Group has commitments to lend at fixed interest rates which expose it to interest rate risk.

Operating lease commitments

	Group	Company
	£m	£m
Rental commitments under operating leases expiring:
- No later than 1 year	115	94
- Later than 1 year but no later than 5 years	383	322
- Later than 5 years	470	412
	968	828

At 31 December 2009, the Group held various leases on land and buildings, many for extended periods, and other leases for equipment, which require the following aggregate minimum lease payments:

	Group	Company
Year ended 31 December:	£m	£m
2010	115	94
2011	112	95
2012	103	87
2013	87	72
2014	81	68
Total thereafter	470	412

Under the terms of these leases, the Group has the opportunity to extend its occupation of properties by a minimum of three years subject to 12 months' notice and lease renewal being available from external landlords during the term of the lease. At expiry, the Group has the option to reacquire the freehold of certain properties.

Group rental expense comprises:

	Group
	2009 £m	2008 £m	2007 £m
In respect of minimum rentals	116	107	96
Less: sub-lease rentals	-	(1)	-
	116	106	96

Appropriate provisions are maintained to cover the above matters.

38. Non-controlling interests

	Group
	2009 £m	2008 £m
Non-controlling interest in subsidiary	125	106
£300m Innovative Tier 1 Capital Securities	297	311
£300m fixed/floating rate non-cumulative callable preference shares	294	294
	716	711

Non-controlling interests represent the 49% shareholding in Santander Private Banking UK Limited not owned by the Company, Innovative Tier 1 capital securities issued by Alliance & Leicester plc, a subsidiary of the Company, and preference shares issued by Alliance & Leicester plc.

£300m Innovative Tier 1 Capital Securities

The Tier 1 securities issued by Alliance & Leicester plc are perpetual securities and pay a coupon on 22 March each year. At each payment date, Alliance & Leicester plc can decide whether to declare or defer the coupon indefinitely. If a coupon is deferred then Alliance & Leicester plc may not pay a dividend on any share until it next makes a coupon payment. Alliance & Leicester plc can be obliged to make payment in the event of winding up. The coupon is 5.827% per annum until 22 March 2016. Thereafter the coupon steps up to a rate, reset every five years, of 2.13% per annum above the gross redemption yield on a UK Government Treasury Security. The Tier 1 securities are redeemable at the option of Alliance & Leicester plc on 22 March 2016 or on each payment date thereafter. No such redemption may be made without the consent of the UK Financial Services Authority. In 2009, 2008 and 2007 the coupon was paid.

£300m fixed/floating rate non-cumulative callable preference shares

On 24 May 2006, Alliance & Leicester plc issued £300m fixed/floating rate non-cumulative callable preference shares, resulting in net proceeds of £294m. The preference shares entitle the holders to a fixed non-cumulative dividend, at the discretion of Alliance & Leicester plc, of 6.22% per annum payable annually from 24 May 2007 until 24 May 2019 and quarterly thereafter at a rate of 1.13% per annum above three month sterling LIBOR. The preference shares are redeemable only at the option of Alliance & Leicester plc on 24 May 2019 or on each quarterly dividend payment date thereafter. No such redemption may be made without the consent of the UK Financial Services Authority.

Movements in non-controlling interests were as follows:

	Group
	2009 £m	2008 £m
At 1 January	711	98
Share of profit	55	8
Distributions	(50)	-
Acquired through business combinations	-	605
At 31 December	716	711

39. Share capital

	Group and Company
	2009 £m	2008 £m
Ordinary share capital	2,412	1,148
£300m Step-up Callable Perpetual Reserve Capital Instruments	297	-
	2,709	1,148

Share capital consists of ordinary shares and the £300m Step-up Callable Perpetual Reserve Capital Instruments. The Company's preference shares are classified as Other Borrowed Funds under IFRS.

Issued and fully paid share capital	Ordinary shares of 10 pence each £m	Preference shares of £1 each £m	Preference shares of US$0.01 each £m	Preference shares of euro0.01 each £m	Total £m
At 1 January 2008	148	325	-	-	473
Shares issued	1,000	-	-	-	1,000
At 31 December 2008	1,148	325	-	-	1,473
Shares issued	1,264	-	-	-	1,264
At 31 December 2009	2,412	325	-	-	2,737

	Group
Share Premium	2009 £m	2008 £m
At 1 January	3,121	1,857
Capital contribution	-	1,264
Transfer to ordinary shares	(1,264)	-
At 31 December	1,857	3,121

	Company
Share Premium	2009 £m	2008 £m
At 1 January and 31 December	1,857	1,857

The Companyhas one class of ordinary shares which carry no right to fixed income.

On 12 October 2008, Banco Santander, S.A. agreed to inject capital of £1bn into the Company fulfilling its agreed commitment to the UK Government's banking support scheme announced on 8 October 2008. Consequently, on 12 October 2008, the Company issued ten billion ordinary shares of £0.10 each at par, to Banco Santander, S.A..

On 9 January 2009, in order to optimise the capital, liquidity funding and overall financial efficiency of the enlarged Santander group, Banco Santander, S.A. transferred all of its Alliance & Leicester plc shares to the Company in exchange for 12,631,375,230 newly issued ordinary shares of the Company of £0.10 each. As described earlier, the Group accounted for the transfer of Alliance & Leicester plc with effect from 10 October 2008 in a manner consistent with the requirements of group reconstruction relief under UK GAAP. The fair value of Alliance & Leicester plc's tangible and intangible net assets transferred was accounted for by the Group as a capital contribution on 10 October 2008. This was transferred to ordinary share capital on 9 January 2009 when the shares were actually issued. The Company accounted for the transfer of Alliance & Leicester plc with effect from 9 January 2009.

£300m Step-up Callable Perpetual Reserve Capital Instruments

During the year, the Group changed its accounting for its £300m Step-up Callable Perpetual Reserve Capital Instruments in order to align its accounting with that of its subsidiary Alliance & Leicester plc. The effect of this change was to reclassify the balance as equity rather than liabilities, and to account for the coupon as dividends rather than interest expense. The change was adjusted prospectively from 1 January 2009 as the effect was qualitatively and quantitatively immaterial to the prior years' financial statements, liquidity and regulatory measures taken as a whole.

The Reserve Capital Instruments were issued in 2001 by the Company. Reserve Capital Instruments are redeemable by the Company on 14 February 2026 or on any coupon payment date thereafter, subject to the prior approval of the UK Financial Services Authority and provided that the auditors have reported to the trustee within the previous six months that the solvency condition is met. The Reserve Capital Instruments bear interest at a rate of 7.037% per annum, payable annually in arrears, from 14 February 2001 to 14 February 2026. Thereafter, the reserve capital instruments will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on the UK five year benchmark gilt rate. Interest payments may be deferred by the Company.

The Reserve Capital Instruments are not redeemable at the option of the holders and the holders do not have any rights against other Group companies. Upon the occurrence of certain tax or regulatory events, the Reserve Capital Instruments may be exchanged, their terms varied, or redeemed. Where interest payments have been deferred, the Company may not declare or pay dividends on or redeem or repurchase any junior securities until it next makes a scheduled payment on the Reserve Capital Instruments and Tier One Preferred Income Capital Securities.

The Reserve Capital Instruments are unsecured securities of the Company and are subordinated to the claims of unsubordinated creditors and subordinated creditors holding loan capital of the Company. Upon the winding up of the Company, holders of Reserve Capital Instruments will rank pari passu with the holders of the most senior class or classes of preference shares (if any) of the Company then in issue and in priority to all other Company shareholders.

40. Dividends

Analysis of dividends paid is as follows:

	Group			Company
	2009 Pence per Share	2008 Pence per Share	2007 Pence per Share	2009 Pence per Share	2008 Pence per Share	2007 Pence per Share
Ordinary shares (equity):
2007 interim	-	13.46	-	-	13.46	-
2007 interim	-	11.44	-	-	11.44	-
2008 interim	-	15.14	-	-	15.14	-
2009 interim	0.93	-	-	0.93	-
	0.93	40.04	-	0.93	40.04	-

The dividend of 0.93 pence per ordinary share equated to a total ordinary dividend payment of £225m. In addition, £21m of dividends were paid on the Step-up Callable Perpetual Reserve Capital Instruments during 2009.

41. Cash flow statement

a) Reconciliation of profit after tax to net cash inflow/(outflow) from operating activities:

	Group			Company
	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2007 £m
Profit for the year	1,245	819	685	747	1,328	351
Non-cash items included in net profit
Decrease/(increase) in prepayments and accrued income	262	(126)	(105)	1,024	(902)	(353)
(Decrease)/increase in accruals and deferred income	(2,171)	346	531	(2,016)	1,260	411
Depreciation and amortisation	260	202	205	132	81	72
Profit on sale of subsidiary and associated undertakings	-	(40)	-	-	-	-
Amortisation of premiums/(discounts) on debt securities	(8)	(21)	-	-	-	-
Provisions for liabilities and charges	56	17	-	41	16	-
Provision for impairment	897	394	388	830	302	346
Corporation tax charge	445	275	179	288	126	69
Other non-cash items	235	250	109	(506)	1,155	(99)
	1,221	2,116	1,992	540	3,366	797

	Group			Company
Changes in operating assets and liabilities	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2007 £m
Net (increase)/ decrease in trading assets	(1,636)	9,398	(695)	-	-	-
Net decrease/(increase) in derivative assets	12,298	(23,096)	(1,615)	196	(2,046)	(43)
Net (increase)/decrease in financial assets designated at fair value	(981)	465	(3,107)	10,218	(39,863)	(7,434)
Net (increase)/decrease in loans and advances to banks & customers	(3,008)	(16,959)	(8,908)	(10,146)	(38,835)	(1,641)
Net decrease/(increase) in other assets	1,103	(189)	1,914	835	108	357
Net increase/(decrease) in deposits by banks and customers	6,647	(3,652)	4,104	(2,731)	123,614	13,813
Net (decrease)/increase in derivative liabilities	(8,847)	16,979	(287)	(2,041)	4,342	370
Net increase/(decrease) in trading liabilities	5,533	(14,054)	(2,850)	(739)	739	-
Net (decrease)/increase in financial liabilities designated at fair value	(1,238)	(3,284)	(619)	-	-	-
Net (decrease)increase in debt issued	(3,077)	5,027	368	1	-	(3)
Net (decrease)/increase in other liabilities	(1,369)	(807)	(20)	(656)	(586)	(315)
Effects of exchange rate differences	(3,719)	6,569	396	(268)	897	-
Net cash flow from/(used in) operating activities before tax	2,927	(21,487)	(9,327)	(4,791)	51,736	5,901
Income tax received/(paid)	2	43	(5)	21	80	48
Net cash flow from/(used in) operating activities	2,929	(21,444)	(9,332)	(4,770)	51,816	5,949

b) Analysis of the balances of cash and cash equivalents in the balance sheet

	Group			Company
	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2007 £m
Cash and balances with central banks	4,163	4,017	1,038	3,266	2,456	1,032
Debt securities	1,966	5,208	5,819	-	-	-
Loans and advances to banks	4,881	5,763	-	-	-	-
Net trading other cash equivalents	8,827	532	24,989	-	-	-
Net non trading other cash equivalents	6,527	12,155	2,210	52,132	58,747	9,562
Cash and cash equivalents	26,364	27,675	34,056	55,398	61,203	10,594

c) Sale of subsidiaries

	Group
Net assets disposed of:	2009 £m	2008 £m	2007 £m
Operating lease assets	-	2,134	-
Current tax accounts	-	8	-
Other assets	-	60	-
Deposits by banks	-	(8)	-
Other liabilities	-	(163)	-
Other provisions	-	(2)	-
Current tax liabilities	-	(19)	-
Deferred tax liabilities	-	(446)	-
Retirement benefit obligations	-	1	-
	-	1,565	-
Profit/ (loss) on disposal	-	40	-
	-	1,605	-
Satisfied by:
Cash and cash equivalents	-	1,605	-
Less: Cash and cash equivalents in subsidiary sold	-	-	-
Net cash inflow of sale	-	1,605	-

On 8 December 2008, the Group completed the disposal of Porterbrook, its rolling stock leasing business, by the sale of 100% of Porterbrook Leasing Company Limited and its subsidiaries to a consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored infrastructure fund), Deutsche Bank and Lloyds Banking Group plc, for a cash consideration of approximately £1.6bn, with the Group providing £0.6bn medium term, senior loan funding to the acquisition vehicle.

In addition, as described in Note 20, on 17 December 2007, the Company sold 49% of its shareholding in Santander Private Banking UK Limited to a direct subsidiary of Banco Santander, S.A. for a total cash consideration of £203m. Further, in 2007, recoveries of £5m were received in respect of subsidiaries sold in 2003.

d) Acquisitions of subsidiaries and businesses

2008			Group
Net assets acquired:	Alliance & Leicester £m	Bradford & Bingley savings business £m	Total £m
Assets
Cash and balances at central banks	666	18,613	19,279
Derivative financial instruments	2,111	-	2,111
Financial assets designated at fair value	492	-	492
Loans and advances to banks	423	1,549	1,972
Loans and advances to customers	50,349	-	50,349
Available-for-sale securities	1,658	3	1,661
Loans and receivables securities	14,253	-	14,253
Intangible assets	17	4	21
Property, plant and equipment	273	44	317
Other assets	2,051	449	2,500
Liabilities
Deposits by banks	(10,216)	-	(10,216)
Deposits by customers	(39,765)	(20,434)	(60,199)
Derivative financial instruments	(933)	-	(933)
Financial liabilities designated at fair value	(1,421)	-	(1,421)
Debt securities in issue	(17,146)	-	(17,146)
Subordinated liabilities	(1,296)	-	(1,296)
Other liabilities	(1,009)	(11)	(1,020)
Net identified assets and liabilities	507	217	724
Goodwill	774	395	1,169
Consideration	1,281	612	1,893

Satisfied by:
Cash and cash equivalents	-	612	612
Less: Cash and cash equivalents in businesses acquired	(666)	(18,613)	(19,279)
Net cash (inflow) acquired	(666)	(18,001)	(18,667)

The transfer of Alliance & Leicester plc to the Company from Banco Santander, S.A. in exchange for ordinary shares of the Company represents a combination of entities under common control. Transactions between entities under common control are outside the scope of IFRS 3 - Business Combinations, and there is no other guidance for such situations under IFRS. In the absence of authoritative guidance under IFRS, the transfer has been accounted for by the Group in a manner consistent with group reconstruction relief under UK GAAP. As a result, the transfer of Alliance & Leicester plc has been accounted for by the Group with effect from 10 October 2008, the date on which Banco Santander, S.A. acquired Alliance & Leicester plc. For further information see Note 47.

42. Collateral pledged and received

The Group provides assets as collateral in the following areas of the business.

The Company and certain of its subsidiaries enter into securitisation transactions whereby portfolios of residential mortgage loans are purchased by or assigned to special purpose securitisation companies, and have been funded through the issue of mortgage backed securities. Holders of the securities are only entitled to obtain payments of principal and interest to the extent that the resources of the securitisation companies are sufficient to support such payments and the holders of the securities have agreed in writing not to seek recourse in any other form. At 31 December 2009 £58,479m (2008: £63,451m) of residential mortgage loans were so assigned.

The Company and certain of its subsidiaries have also established covered bond programmes, whereby securities are issued to investors and are secured by a pool of ring-fenced residential mortgages. At 31 December 2009 £15,150m (2008: £24,101m) of residential mortgage loans had been so secured.

Collateral is also provided in the normal course of derivative business to counterparties. At 31 December 2009 £2,035m (2008: £1,842m) of such collateral in the form of cash had been provided.

As part of structured transactions entered into by subsidiaries of the Company, assets are pledged or received as collateral. At 31 December 2009 £253m (2008: £844m) of assets had been received (2008: pledged) in relation to these transactions.

Subsidiaries of the Company enter into sale and repurchase agreements and similar transactions of equity and debt securities, which are accounted for as secured borrowings. Upon entering into such transactions, the subsidiaries provide collateral equal to 100%-131% of the borrowed amount. The carrying amount of assets that were so provided at 31 December 2009 was £42,389m (2008: £51,267m).

Subsidiaries of the Company also enter into purchase and resale agreements and similar transactions of equity and debt securities, which are accounted for as collateralised loans. Upon entering into such transactions, the subsidiaries receive collateral equal to 100%-105% of the loan amount. The level of collateral held is monitored daily and if required, further calls are made to ensure the market values of collateral remains equal to the loan balance. The subsidiaries are permitted to sell or repledge the collateral held. At 31 December 2009, the fair value of such collateral was £42,039m (2008: £29,782m) of which £42,039m (2008: £29,782m) was sold or repledged. The subsidiaries have an obligation to return the collateral that it has sold or pledged with a fair value of £42,039m (2008: £29,782m).

43. Share-based compensation

Santander UK schemes

The Group granted share options to executive officers and employees under the Executive Share Option scheme, Sharesave scheme and the Employee Share Option scheme prior to being acquired by Banco Santander, S.A. on 12 November 2004. Options granted under the Executive Share Option scheme are generally exercisable between the third and tenth anniversaries of the grant date, provided that certain performance criteria are met. Under the Sharesave scheme, eligible employees can elect to exercise their options either three, five or seven years after the grant date. All of the share options prior to 12 November 2004 relate to shares in the Company. After 12 November 2004, all share options relate to shares in Banco Santander, S.A.. On 12 November 2004 all holders of options in ordinary shares of the Company were given the option to exercise their options, to cancel their options in return for a cash payment or to transfer their options to options in shares of Banco Santander, S.A.. The options over Banco Santander, S.A. shares are accounted for as cash settled share-based transactions. On acquisition of the Company by Banco Santander, S.A. there was no fair value adjustment of options modified to rights over Banco Santander, S.A. shares. From 12 November 2004 the Group has purchased Banco Santander, S.A. shares on the open market in order to settle these share based compensation obligations.

The Group introduced its second Sharesave Scheme under Banco Santander, S.A. ownership. The HM Revenue & Customs approved Sharesave Scheme was launched in September 2009. Employees were given the option of saving between £5 and £250 per month for a three or five year savings period. The option price was set at a 20% discount on the average middle market quotation of Banco Santander, S.A. shares over the first three dealing days in September 2009.

The total carrying amount at the end of the period for liabilities arising from share-based payment transactions was £7m (2008: £3m, 2007: £68m), none of which had vested as at 31 December 2009 (2008: nil). Cash received from the exercise of share options and the actual tax benefits realised from tax deductions were £1m (2008: £14m, 2007: £6m) and £nil (2008: £4m, 2007: £2m), respectively.

The fair value of each option for 2009, 2008 and 2007 has been estimated at the date of acquisition or grant using a partial differential equation model with the following assumptions:

	2009	2008	2007
Risk free interest rate	2.5%-3.5%	2.9%-6.5%	5.0%-5.8%
Dividend growth, based solely upon average growth since 1989	10%	10%	10%
Volatility of underlying shares based upon historical volatility over five years	29.0%-34.4%	20.2%-29.6%	19.80%-26.90%
Expected lives of options granted under:
- Employee Sharesave 3, 5 & 7 year schemes	3, 5 & 7 years	3, 5 & 7 years	3, 5 & 7 years
- Executive Share Option scheme	10 years	10 years	10 years
- Medium term incentive plan	-	-	3 years
- Long term incentive plans	3 years	3 years	3 years

With the exception of those that include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of the employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market related vesting conditions are met, provided that the non-market vesting conditions are met. Share price volatility has been based upon the range of implied volatility for the Banco Santander, S.A. shares at the strikes and tenors in which the majority of the sensitivities lie.

The following table summarises the movement in the number of share options between those outstanding at the beginning and end of the year, together with the changes in weighted average exercise price over the same period.

	Executive Share Option scheme		Employee Sharesave scheme
	Number of options '000s	Weighted average exercise price £	Number of options '000s	Weighted average exercise price £
2009
Options outstanding at the start of the year	12	4.54	6,142	7.00
Options granted during the year	-	-	4,528	7.26
Options exercised during the year	-	-	(679)	3.85
Options forfeited during the year	-	-	(1,278)	7.48
Options outstanding at the end of the year	12	4.54	8,713	7.24
Options exercisable at the end of the year	12	4.54	8,713	7.24
2008
Options outstanding at the start of the year	144	4.15	5,684	3.18
Options granted during the year	-	-	5,197	7.69
Options exercised during the year	(11)	4.14	(4,507)	3.07
Options forfeited during the year	(121)	4.11	(231)	5.91
Options expired during the year	-	-	(1)	8.07
Options outstanding at the end of the year	12	4.54	6,142	7.00
Options exercisable at the end of the year	12	4.54	-	-

	Executive Share Option scheme		Employee Sharesave scheme
	Number of options '000s	Weighted average exercise price £	Number of options '000s	Weighted average exercise price £
2007
Options outstanding at the start of the year	178	4.11	7,638	3.32
Options exercised during the year	(34)	3.96	(1,501)	3.81
Options forfeited during the year	-	-	(419)	3.25
Options expired during the year	-	-	(34)	5.92
Options outstanding at the end of the year	144	4.15	5,684	3.18
Options exercisable at the end of the year	144	4.15	-	-

The intrinsic value of the options exercised and the fair value of the options vested during the year were £3m (2008: £31m, 2007: £3m) and £5m (2008: £6m, 2007: £3m), respectively.

Executive Share Option scheme

The following table summarises information about the options outstanding at 31 December 2009.

	Options outstanding			Options exercisable
Range of exercise prices	Number '000s	Weighted average remaining contractual life years	Weighted average exercise price £		Number '000s	Weighted average exercise price £
Between £4 and £5	12	4	4.54		12	4.54

The following table summarises information about the options outstanding at 31 December 2008.

	Options outstanding			Options exercisable
Range of exercise prices	Number '000s	Weighted average remaining contractual life years	Weighted average exercise price £		Number '000s	Weighted average exercise price £
Between £4 and £5	12	5	4.54		12	4.54

Employee Sharesave scheme

Under the Employee Sharesave scheme, the weighted-average exercise prices of options are less than the market prices of the shares on the relevant grant dates.

Medium Term Incentive Plan

See Note 45 for details of conditional share grants awarded to certain Executive Directors, Other Key Management Personnel and other nominated individuals under the Medium Term Incentive Plan.

2008	Number of awards granted 000s
Conditional awards outstanding at the beginning of the year	2,220
Conditional awards forfeited during the year	(29)
Conditional awards vested during the year	(2,191)
Conditional awards outstanding at the end of the year	-

2007	Number of awards granted 000s
Conditional awards outstanding at the beginning of the year	2,537
Conditional awards forfeited during the year	(317)
Conditional awards outstanding at the end of the year	2,220

Awards with a value of £nil vested during the year (2008: £19m, 2007: £nil), as the scheme matured in 2008.

Long Term Incentive Plan

See Note 45 for details of conditional share grants awarded to certain Executive Directors, Other Key Management Personnel and other nominated individuals under the Long Term Incentive Plan.

2009	Number of awards granted 000s
Conditional awards outstanding at the beginning of the year	4,680
Conditional awards granted during the year	2,274
Conditional awards exercised during the year	(1,243)
Conditional awards outstanding at the end of the year	5,711

2008	Number of awards granted 000s
Conditional awards outstanding at the beginning of the year	3,092
Conditional awards granted during the year	1,803
Conditional awards forfeited during the year	(215)
Conditional awards outstanding at the end of the year	4,680

The weighted average grant-date fair value of conditional awards granted during the year was £3.85 (2008: £4.24). At 31 December 2009, the weighted average remaining contractual life was two years (2008: two years).

Alliance & Leicester schemes

During the year ended 31 December 2009, the Alliance & Leicester group had four share-based payment arrangements, including Share Incentive Plan (SIP) partnership shares. The Share Incentive Plan (SIP) was available to all employees. Prior to Alliance & Leicester plc's acquisition by Banco Santander, S.A., participants could elect to invest up to £125 per month from pre-tax salary to purchase shares at the prevailing market price. Shares can be released from Trust after five years free of income tax and national insurance contributions. On the acquisition of Alliance & Leicester plc by Banco Santander, S.A., Alliance & Leicester plc shares held in the SIP were converted to Banco Santander shares on the same three for one basis as was applicable to all other shareholders upon acquisition by Banco Santander S.A. These will remain in the SIP Trust under the terms of the SIP rules. 195,454 SIP partnership shares were issued during 2008 prior to acquisition, at the then prevailing market rate of Alliance & Leicester plc shares, at a weighted average price of 428p per share. All were converted to Banco Santander, S.A. shares on acquisition. No Banco Santander SIP shares have been issued since acquisition.

Options held under the ShareSave Plan, share option plan and senior manager deferred bonus scheme became exercisable on 7 October 2008 and lapsed, if unexercised, on 7 April 2009.

Restricted share plan shares vested and were converted to Banco Santander, S.A. shares on acquisition in accordance with the scheme rules. Under the senior manager deferred bonus scheme, new Alliance & Leicester plc shares were issued to satisfy deferred bonus scheme options that remained unexercised prior to 7 April 2009, after which all options lapsed.

The following table summarises the movement in the number of options between those outstanding at the beginning and end of the year, together with the changes in weighted average exercise price over the same period:

2009	ShareSave No. of shares	Share option plan No. of shares	Senior manager deferred bonus(1) No. of shares
Outstanding at 1 January	564,675	2,232,426	64,726
Lapsed	(564,675)	(2,232,426)	-
Exercised	-	-	(64,726)
Outstanding at 31 December 2009	-	-	-
Weighted average exercise price in 2009	-	-	285.5p

2008	ShareSave No. of shares	Share option plan No. of shares	Senior manager deferred bonus(1) No. of shares
Outstanding and exercisable at 31 December 2008	564,675	2,232,426	64,726
Weighted average exercise price in 2008	630.2p	n/a	285.5p
Range of exercise prices for options	632p - 815p	544p - 1,093p	n/a
Weighted average fair value options	n/a	84p	1,553p(2)

1. The figures in the table relate to the level of bonus deferred, i.e. excluding the matching element.

2. The option value includes the deferred share and the fair value of the matched element less the cash bonus foregone.

For these schemes, the estimated fair value is calculated as the value of the share price option plus the present value of any deferred dividends.

The assumptions used in the model are as follows:

Input	Assumption
Share price	Price at date of grant
Exercise price	Per scheme rules
Expected volatility	Estimated by calculating the annualised, exponential weighted monthly volatility of share price over prior two years
Option life	Per scheme rules
Risk free rate	Generated from LIBOR swap curve

44. Directors' emoluments and interests

Ex gratia pensions paid to former Directors of the Company in 2009, which have been provided for previously, amounted to £22,341 (2008: £22,341, 2007: £21,524). In 1992, the Board decided not to award any new such ex gratia pensions.

There were no loans, quasi loans and credit transactions entered into or agreed by the Company or its subsidiaries with persons who are or were Directors, Other Key Management Personnel and each of their connected persons during the year except as described below:

Other Key Management Personnel* - Loans

Number of

persons

Aggregate amount

outstanding

£000

2009

835

2008

647

* Other Key Management Personnel are defined as the Executive Committee of the Company and the Board and Executive Committee of its parent company, Banco Santander, S.A. who served during the year. The above excludes any overdraft facilities provided to Directors, Other Key Management Personnel and their connected persons in the ordinary course of business.

Secured and unsecured loans are made to Directors, Other Key Management Personnel and their connected persons in the ordinary course of business, with terms prevailing for comparable transactions and on the same terms and conditions as applicable to other employees within the Group. Such loans do not involve more than the normal risk of collectability or present any unfavourable features.

45. Related party disclosures

Transactions with Directors, Other Key Management Personnel and each of their connected persons

Directors, Other Key Management Personnel and their connected persons have undertaken the following transactions with the Group in the course of normal banking and life assurance business.

2009	Number of directors and Other Key Management Personnel(1)	Amounts in respect of directors, Other Key Management Personnel(1) and their connected persons £000
Secured loans, unsecured loans and overdrafts
Loans outstanding at 1 January	5	647
Net movements in the year	(1)	191
Loans outstanding at 31 December	4	838
Deposit, bank and instant access accounts and investments
Deposits, bank instant access accounts and investments at 1 January	16	4,463
Net movements in the year	(1)	2,916
Deposit, bank and instant access accounts and investments at 31 December	15	7,379
Life assurance policies
Life assurance policies at 1 January	1	1,026
Net movements in the year	2	862
Life assurance policies at 31 December	3	1,888

2008	Number of directors and Other Key Management Personnel(1)	Amounts in respect of directors, Other Key Management Personnel(1) and their connected persons £000
Secured loans, unsecured loans and overdrafts
Loans outstanding at 1 January	1	806
Net movements in the year	4	(159)
Loans outstanding at 31 December	5	647
Deposit, bank and instant access accounts and investments
Deposits, bank instant access accounts and investments at 1 January	12	5,565
Net movements in the year	4	(1,102)
Deposit, bank and instant access accounts and investments at 31 December	16	4,463
Life assurance policies
Life assurance policies at 1 January	2	1,600
Net movements in the year	(1)	(574)
Life assurance policies at 31 December	1	1,026

(1) Other Key Management Personnel are defined as the Executive Committee of the Company and the Board and Executive Committee of its parent company, Banco Santander, S.A., who served during the year.

In 2009, one Director undertook sharedealing transactions through the Group's execution only stockbroker (2008: two Directors) with an aggregate net value of £269,561 (2008: £680,096). Any transactions were on normal business terms and standard commission rates were payable.

Secured and unsecured loans are made to Directors, Other Key Management Personnel and their connected persons, in the ordinary course of business, with terms prevailing for comparable transactions and on the same terms and conditions as applicable to other employees within the Group. Such loans do not involve more than the normal risk of collectability or present any unfavourable features. Amounts deposited by Directors, Other Key Management Personnel and their connected persons earn interest at the same rates as those offered to the market or on the same terms and conditions applicable to other employees within the Group.

Life assurance policies and investments are entered into by Directors, Other Key Management Personnel and their connected persons on normal market terms and conditions, or on the same terms and conditions as applicable to other employees within the Group.

Remuneration of Key Management Personnel

The remuneration of the Directors, and Other Key Management Personnel of the Group, is set out in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the aggregate remuneration of the Directors is provided in the 'Directors' Remuneration' table in the Directors' Report on page 92.

Key management compensation	2009 £	2008 £	2007 £
Short-term employee benefits	12,172,113	13,016,060	11,602,405
Post employment benefits	319,319	306,902	77,814
Other long term benefits	-	-	-
Termination benefits	1,162,500	-	-
Share-based payments	2,192,509	1,572,973	1,101,786
	15,846,441	14,895,935	12,782,005

Medium-Term Incentive Plan

Under the Medium-Term Incentive Plan granted on 20 October 2005, certain Executive Directors, Other Key Management Personnel and other nominated individuals were granted a conditional award of shares in Banco Santander, S.A.. The amount of shares participants would receive at the end of the three-year period depended on the performance of the Group in this period. The performance conditions were linked to the Group's three-year plan. Performance was measured in two ways, half of the award depended on the Group achieving an attributable profit target for the 2007 financial year, and the remainder depended on the achievement of a revenue target for the 2007 financial year. Both performance conditions were achieved, resulting in a full award of shares to participants in March 2008.

Long-Term Incentive Plan

In 2009, four Executive Directors (2008: two) and six Other Key Management Personnel (2008: six) were granted conditional awards of shares in Banco Santander, S.A. under the Santander Long-Term Incentive Plan for a total fair value of £1,605,268 (2008: £1,325,592) based on a price of euro 8.14 (2008: euro 11.96). The value attributable to the current year of these conditional awards is included in share based payments above. Under the Santander Long-Term Incentive Plans granted on 1 July 2009, 21 June 2008 and 31 December 2007, certain Executive Directors, Key Management Personnel (as defined in Note 44 to the Consolidated Financial Statements) and other nominated individuals were granted conditional awards of shares in Banco Santander, S.A.. The amount of shares participants will receive depends on the performance of Banco Santander, S.A. during this period. All awards under the Santander Long-Term Incentive Plan will depend on Santander's Total Shareholder Return performance against a competitor benchmark group. Awards made prior to 2009 also depend on Santander's Earnings Per Share performance against a competitor benchmark group. 90.79% of the 40% of the 2007 conditional award of shares vested in July 2009. Subject to performance conditions being met, the remaining 60% of the 2007 conditional award will vest in July 2010, 100% of the 2008 conditional award will vest in July 2011 and 100% of the 2009 conditional award will vest in July 2012.

Parent undertaking and controlling party

The Company's immediate and ultimate parent and controlling party is Banco Santander, S.A.. The smallest and largest group into which the Group's results are included is the group accounts of Banco Santander, S.A., copies of which may be obtained from Santander Shareholder Department, 2 Triton Square, Regent's Place, London NW1 3AN.

Transactions with related parties

Transactions with related parties during the year and balances outstanding at the year end:

									Group
	Interest, fees and other income received			Interest, fees and other expenses paid			Amounts owed by related parties		Amounts owed to related parties
	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2009 £m	2008 £m
Parent company	(99)	(537)	(293)	47	509	327	7,809	11,021	(2,965)	(2,337)
Fellow subsidiaries	(563)	(383)	(171)	412	377	24	7,113	6,214	(4,567)	(1,767)
Associates	(26)	(23)	(19)	1	2	5	2,092	632	(13)	(150)
	(688)	(943)	(483)	460	888	356	17,014	17,867	(7,545)	(4,254)

									Company
	Interest, fees and other income received			Interest, fees and other expenses paid			Amounts owed by related parties		Amounts owed to related parties
	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2007 £m	2009 £m	2008 £m	2009 £m	2008 £m
Parent company	(32)	(55)	(91)	5	-	-	1	1,004	(632)	(230)
Subsidiaries	(4,229)	(6,654)	(2,072)	6,399	8,312	4,532	149,175	165,557	(184,460)	(198,369)
Fellow subsidiaries	(224)	(261)	(106)	307	253	17	71	352	(1,839)	(320)
Associates	-	(2)	-	-	-	-	1	334	-	(2)
	(4,485)	(6,972)	(2,269)	6,711	8,565	4,549	149,248	167,247	(186,931)	(198,921)

The balances above include debt securities in issue and non-controlling interests held by related parties. In addition, transactions with pension schemes operated by the Group are described in Note 36.

During the year, euro 315m of the Group's holdings of AAA rated prime mortgage backed securities were sold to the issuer, Banco Santander Totta, S.A.. Although Banco Santander Totta, S.A. is a related party of the Group, the transactions are considered to be commercial deals, with a normal sharing of profits.

The above transactions were made in the ordinary course of business and substantially on the same terms as for comparable transactions with third party counterparties.

As described in Note 47, on 9 January 2009, in order to optimise the capital, liquidity funding and overall financial efficiency of the Santander group, Banco Santander, S.A. transferred all of its Alliance & Leicester plc shares to the Company in exchange for newly issued ordinary shares of the Company. Accordingly, the Company is now the immediate parent company of Alliance & Leicester plc.

46. Events after the balance sheet date

On 25 February 2010 it was announced that Alliance & Leicester plc intends to transfer its business into the Company later this year under a scheme allowed by Part VII of the Financial Services and Markets Act 2000. This transfer is subject to UK Financial Services Authority support and the Court approval. The transfer will provide benefits for Alliance & Leicester plc customers and for the Company. For Alliance & Leicester plc customers this includes access to Santander UK's full product range plus use of over 1,300 branches, four times as many branches currently available for Alliance & Leicester plc customers. By rationalising systems and improving the sales and risk management processes through having a single view of customers' dealings, the Company will also benefit from the significant synergies that were announced to the market at the time of the acquisition of Alliance & Leicester plc by Banco Santander, S.A. in 2008.

On 26 February 2010 it was announced that as the Alliance & Leicester plc preference shares will not transfer to the Company under the proposed Part VII Transfer, Alliance & Leicester plc and Santander UK plc have agreed that the holders of the Alliance & Leicester plc preference shares should be given the opportunity to exchange their Alliance & Leicester plc preference shares for new preference shares to be issued by the Company. It is intended that the exchange will be carried out by a scheme of arrangement under Part 26 of the Companies Act 2006, which, if approved by the Court as well as holders of the Alliance & Leicester plc preference shares and the Company (as holder of the ordinary shares of Alliance & Leicester plc), the Alliance & Leicester plc preference shares would be substituted with a new issue of preference shares by Santander UK plc on substantially similar terms.

In March 2010 the Group issued through the Fosse Master Trust the first publicly-placed mortgage-backed securitisation transaction from a UK bank since 2007. The transaction was denominated in both pounds sterling and euro and raised approximately £1.4bn.

47. Transfer of Alliance & Leicester plc

The consolidated financial statements and related notes of the Group for the year ended 31 December 2008 have been updated to reflect this treatment, as follows.

Updated consolidated income statement for the year ended 31 December 2008

The effect of the acquisition of Alliance & Leicester plc on the Group's consolidated income statement for the period from 10 October 2008 to 31 December 2008 is both quantitatively and qualitatively immaterial. The inclusion of Alliance & Leicester plc for the period from 10 October 2008 to 31 December 2008 would have resulted in: (a) a decrease in the profit before tax and profit after tax of the Group by 1% and 2% respectively; (b) no change in compliance with regulatory measures and loan covenants; and; (c) an immaterial impact on key financial trends and performance indicators. Consequently, the Group has concluded that it will not recast the consolidated income statement, or the consolidated statement of comprehensive income for the year ended 31 December 2008, to reflect the application of group reconstruction relief.

Updated consolidated balance sheet at 31 December 2008

The updated consolidated balance sheet of the Group set out below is based on the original audited consolidated balance sheet of the Group at 31 December 2008 and the audited consolidated balance sheet of the Alliance & Leicester group at 31 December 2008 which have been prepared in accordance with IFRS as issued by the IASB in addition to being consistent with IFRS as adopted for use in the European Union. Inter-company balances between Group companies and Alliance & Leicester group companies have been eliminated. Finally, the acquisition adjustments originally recognised by Banco Santander, S.A. have been applied.

As at 31 December 2008

	Santander UK Group(1) £m	Alliance & Leicester Group £m	Inter-company eliminations £m	Acquisition adjustments £m	Total £m
Assets
Cash and balances at central banks	2,464	1,553	-	-	4,017
Trading assets	26,264	-	-	-	26,264
Derivative financial instruments	32,281	2,876	(32)	-	35,125
Financial assets designated at fair value	11,314	63	-	-	11,377
Loans and advances to banks	24,226	1,239	(9,464)	-	16,001
Loans and advances to customers	129,023	51,402	-	(249)	180,176
Available-for-sale securities	1,005	1,658	-	-	2,663
Loans and receivables securities	-	14,250	(146)	3	14,107
Macro hedge of interest rate risk	1,475	713	-	-	2,188
Investments in associated undertakings	735	-	-	(700)	35
Intangible assets	556	17	-	774	1,347
Property, plant and equipment	581	223	-	50	854
Operating lease assets	-	348	-	-	348
Current tax assets	195	17	-	-	212
Deferred tax assets	560	626	-	88	1,274
Other assets	1,063	259	-	-	1,322
Total assets	231,742	75,244	(9,642)	(34)	297,310
Liabilities
Deposits by banks	3,337	11,516	(365)	-	14,488
Deposits by customers	99,246	39,765	(8,766)	-	130,245
Derivative financial instruments	26,309	1,533	(32)	-	27,810
Trading liabilities	40,738	-	-	-	40,738
Financial liabilities designated at fair value	4,945	728	-	-	5,673
Debt securities in issue	41,178	17,477	(144)	-	58,511
Other borrowed funds	2,076	-	-	-	2,076
Subordinated liabilities	5,826	1,436	(335)	(140)	6,787
Other liabilities	1,770	631	-	(59)	2,342
Provisions	107	34	-	66	207
Current tax liabilities	517	1	-	-	518
Deferred tax liabilities	86	278	-	41	405
Retirement benefit obligations	796	17	-	-	813
Total liabilities	226,931	73,416	(9,642)	(92)	290,613
Equity
Share capital	1,148	328	-	(328)	1,148
Share premium account	1,857	724	-	540	3,121
Preference shares and innovative Tier 1	-	605	-	(605)	-
Retained earnings	1,678	210	-	(210)	1,678
Other reserves	22	(39)	-	56	39
	4,705	1,828	-	(547)	5,986
Non-controlling interest	106	-	-	605	711
Total shareholders equity	4,811	1,828	-	58	6,697
Total liabilities and equity	231,742	75,244	(9,642)	(34)	297,310

(1) The Santander UK Group figures include final acquisition adjustments for Bradford & Bingley savings business as described in Note 48.

Updated consolidated cash flow statement for the year ended 31 December 2008

The updated consolidated cash flow statement of the Group set out below is based on the original audited consolidated cash flow statement of the Group for the year ended 31 December 2008 and the post-acquisition consolidated cash flows of the Alliance & Leicester group for the period from 10 October to 31 December 2008 which have been prepared in accordance with IFRS as issued by the IASB in addition to being consistent with IFRS as adopted for use in the European Union. Inter-company transactions between Group companies and Alliance & Leicester group companies have been eliminated.

For the year ended 31 December 2008

	Santander UK Group £m	Alliance & Leicester Group £m	Inter-company eliminations £m	Acquisition adjustments £m	Total £m
Net cash flow (used in)/from operating activities
Profit for the year	819	-	-	-	819
Adjustments for:
Non cash items included in net profit	1,297	-	-	-	1,297
Change in operating assets	(40,978)	1,463	9,134	-	(30,381)
Change in operating liabilities	8,135	1,539	(9,465)	-	209
Income taxes received/(paid)	43	-	-	-	43
Effects of exchange rate differences	8,569	(2,000)	-	-	6,569
Net cash flow (used in)/from operating activities	(22,115)	1,002	(331)	-	(21,444)
Net cash flows from/(used in) investing activities
Acquisition of businesses, net of cash acquired	18,001	-	-	666	18,667
Dividends received from associates	2	-	-	-	2
Investment in associates	(708)	-	700	-	(8)
Disposal of subsidiaries, net of cash disposed	1,605	-	-	-	1,605
Purchase of tangible and intangible fixed assets	(278)	-	-	-	(278)
Proceeds from sale of tangible and intangible fixed assets	15	-	-	-	15
Purchase of non-trading securities	(1,222)	-	331	-	(891)
Proceeds from sale of non-trading securities	290	-	-	-	290
Net cash flow from/(used in) investing activities	17,705	-	1,031	666	19,402
Net cash flow (used in)/from financing activities
Issue of ordinary share capital	1,000	701	(700)	-	1,001
Repayment of loan capital	(7,787)	-	-	-	(7,787)
Dividends paid	(595)	-	-	-	(595)
Net cash flow (used in)/from financing activities	(7,382)	701	(700)	-	(7,381)
Net (decrease)/increase in cash and cash equivalents	(11,792)	1,703	-	666	(9,423)
Cash and cash equivalents at beginning of the year	34,056	666	-	(666)	34,056
Effects of exchange rates on cash and cash equivalents	3,042	-	-	-	3,042
Cash and cash equivalents at the end of the year	25,306	2,369	-	-	27,675

Acquisition adjustments

The initial computation of the purchase price, the allocation of the purchase price to the net assets of Alliance & Leicester plc based on fair values estimated by Banco Santander, S.A. at 10 October 2008, and the resulting amount of goodwill were:

	£m	£m	£m
Purchase price:
Fair value of shares issued by Banco Santander, S.A. in exchange for Alliance & Leicester plc			1,281
Less:
Alliance & Leicester's shareholders' funds at 10 October 2008		523
Fair value adjustments:
- Loans and advances to customers	(249)
- Loans and receivables securities	3
- Property, plant and equipment	50
- Subordinated liabilities	140
- Other liabilities	59
- Provisions	(66)
- Deferred tax (tax effect of the above adjustments)	47
		(16)
			507
Goodwill			774

The acquisition of Alliance & Leicester plc strengthened the Group's market position and critical mass. Intangible assets in respect of brands, customer relationships (known as core deposit intangibles) and customer lists were identified. The values of these intangible assets were determined to be immaterial; accordingly, no separate intangible assets for these items were recognised. No other intangible assets were identified, including any relating to key employees, patents or intellectual property rights.

The computation of the purchase price was based on the fair value (i.e. the published price) of 140,950,944 new Banco Santander, S.A. shares of euro 0.50 par value each, with a share premium of euro 10.73 per share that were issued in exchange for Alliance & Leicester plc common shares on 10 October 2008. The share capital, share premium and pre-acquisition reserves (retained earnings and other reserves) of Alliance & Leicester plc have also been eliminated on acquisition. The Company's existing holding of 35.6% of Alliance & Leicester plc's equity voting interests at 31 December 2008 was also eliminated.

Financial effect of the Transfer

The amounts of total operating income and profit before tax of Alliance & Leicester included in the Group's income statement for the year ended 31 December 2009 were £1,253m and £420m, respectively.

48. Acquisition of the Bradford & Bingley savings business, and transfer of Alliance & Leicester plc - initial accounting

Bradford & Bingley savings business

The Consolidated Balance Sheet as at 31 December 2008 reflected the acquisition of the Bradford & Bingley savings business with effect from September 2008, under the purchase method of accounting. The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. The preliminary allocation resulted in an excess of fair value of acquired net assets over cost. The estimated purchase price allocation was preliminary and has now been completed.

The following table presents the preliminary and final allocations of the aggregate purchase price at the acquisition date:

Net assets acquired:	Revised allocation £m	Initial allocation £m	Change £m
Assets
Cash and balances at central banks	18,613	18,613	-
Loans and advances to banks	1,549	1,624	(75)
Available-for-sale securities	3	3	-
Intangible assets	4	4	-
Property, plant and equipment	44	44	-
Other assets, tax assets and lease assets	449	428	21
Liabilities
Deposits by customers	(20,434)	(20,434)	-
Other liabilities, tax liabilities and lease obligations	(11)	(11)	-
Net identified assets and liabilities	217	271	(54)
Goodwill	395	341	54
Consideration	612	612	-

The adjustment since the initial allocation wrote off the value of the £75m investment in Bradford & Bingley plc subordinated debt held by Bradford & Bingley International Limited to reflect its impairment as a result of the outcome of discussions between the Company and HM Treasury. The tax effect of the adjustment was £21m.

Alliance & Leicester plc

The Consolidated Balance Sheet as at 31 December 2008 did not originally reflect the transfer of Alliance & Leicester plc to the Company. As described in Note 47, the transfer has now been reflected with effect from 10 October 2008. The amended Consolidated Balance Sheet as at 31 December 2008 reflecting the transfer with effect from 10 October 2008 was included in the Group's 2009 Half Yearly Financial Report published on 28 August 2009. In that Financial Report, the total cost of the acquisition was allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the effective date of the transfer. The preliminary allocation resulted in an excess of fair value of acquired net assets over cost. The estimated purchase price allocation was preliminary and has now been completed by Banco Santander, S.A.. Banco Santander S.A.'s final acquisition accounting has been reflected by the Group, in accordance with group reconstruction relief.

The following table presents the preliminary and final allocations of the aggregate purchase price at 10 October 2008:

Net assets acquired:	Revised allocation £m	Initial allocation £m	Change £m
Assets
Cash and balances at central banks	666	666	-
Derivative financial instruments	2,111	2,111	-
Financial assets designated at fair value	492	492	-
Loans and advances to banks	423	423	-
Loans and advances to customers	50,349	50,598	(249)
Available-for-sale securities	1,658	1,658	-
Loans and receivables securities	14,253	14,253	-
Intangible assets	17	17	-
Property, plant and equipment	273	273	-
Other assets, tax assets and lease assets	2,051	1,963	88
Liabilities
Deposits by banks	(10,216)	(10,216)	-
Deposits by customers	(39,765)	(39,765)	-
Derivative financial instruments	(933)	(933)	-
Financial liabilities designated at fair value	(1,421)	(1,421)	-
Debt securities in issue	(17,146)	(17,146)	-
Subordinated liabilities	(1,296)	(1,296)	-
Other liabilities, tax liabilities, provisions and retirement benefit obligations	(1,009)	(956)	(53)
Net identified assets and liabilities	507	721	(214)
Goodwill	774	560	214
Consideration	1,281	1,281	-

The adjustment to reduce Loans and advances to customers by £249m reflected the final assessment of the losses in the Retail and Corporate Banking portfolios, which were higher than originally estimated.

The adjustment to increase Other liabilities by £53m represents the updated view of the cost of settling misselling claims with respect to products sold by Alliance & Leicester prior to its acquisition. The adjustment to increase Other assets by £88m represents the deferred tax effect of the above adjustments.

49. Financial instruments

Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The Accounting Policies Note describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following tables analyse the Group's financial instruments into those measured at fair value and those measured at amortised cost in the balance sheet:

							Group
	Held at fair value				Held at amortised cost		Non-	Total
31 December 2009	Trading	Derivatives held for hedging	Designated at fair value through P&L	Available-for-sale	Loans and receivables	Financial liabilities at amortised cost	financial assets / liabilities	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash & balances at central banks	-	-	-	-	4,163	-	-	4,163
Trading assets	33,290	-	-	-	-	-	-	33,290
Derivative financial instruments	21,472	1,355	-	-	-	-	-	22,827
Financial assets designated at FV	-	-	12,358	-	-	-	-	12,358
Loans and advances to banks	-	-	-	-	9,151	-	-	9,151
Loans and advances to cust.s	-	-	-	-	186,804	-	-	186,804
Available-for-sale securities	-	-	-	797	-	-	-	797
Loans and receivables securities	-	-	-	-	9,898	-	-	9,898
Macro hedge of interest rate risk	-	-	-	-	1,127	-	-	1,127
Investment in associates	-	-	-	-	-	-	75	75
Intangible assets	-	-	-	-	-	-	1,446	1,446
Property, plant and equipment	-	-	-	-	-	-	938	938
Operating lease assets	-	-	-	-	-	-	312	312
Current tax assets	-	-	-	-	-	-	85	85
Deferred tax assets	-	-	-	-	-	-	946	946
Other assets	-	-	-	-	999	-	75	1,074
	54,762	1,355	12,358	797	212,142	-	3,877	285,291
Liabilities
Deposits by banks	-	-	-	-	-	5,811	-	5,811
Deposits by customers	-	-	-	-	-	143,893	-	143,893
Derivative financial liabilities	16,775	2,188	-	-	-	-	-	18,963
Trading liabilities	46,152	-	-	-	-	-	-	46,152
Financial liabilities at FVTPL	-	-	4,423	-	-	-	-	4,423
Debt securities in issue	-	-	-	-	-	47,758	-	47,758
Other borrowed funds	-	-	-	-	-	1,352	-	1,352
Subordinated liabilities	-	-	-	-	-	5,597	-	5,597
Other liabilities	-	-	-	-	-	2,263	60	2,323
Provisions	-	-	-	-	-	-	91	91
Current tax liabilities	-	-	-	-	-	-	300	300
Deferred tax liabilities	-	-	-	-	-	-	336	336
Retirement benefit obligations	-	-	-	-	-	-	1,070	1,070
	62,927	2,188	4,423	-	-	206,674	1,857	278,069

							Company
	Held at fair value				Held at amortised cost		Non-	Total
31 December 2009	Trading	Derivatives held for hedging	Designated at fair value through P&L	Available-for-sale	Loans and receivables	Financial liabilities at amortised cost	financial assets / liabilities
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash & balances at central banks	-	-	-	-	3,266	-	-	3,266
Derivative financial instruments	1,256	1,283	-	-	-	-	-	2,539
Financial assets designated at FV	-	-	37,145	-	-	-	-	37,145
Loans and advances to banks	-	-	-	-	109,658	-	-	109,658
Loans and advances to cust.s	-	-	-	-	131,749	-	-	131,749
Available-for-sale securities	-	-	-	30	-	-	-	30
Loans and receivables securities	-	-	-	-	2	-	-	2
Investment in associates	-	-	-	-	-	-	76	76
Investment in subsidiaries	-	-	-	-	-	-	7,038	7,038
Intangible assets	-	-	-	-	-	-	552	552
Property, plant and equipment	-	-	-	-	-	-	561	561
Deferred tax assets	-	-	-	-	-	-	428	428
Other assets	-	-	-	-	513	-	138	651
	1,256	1,283	37,145	30	245,188	-	8,793	293,695

							Company
	Held at fair value				Held at amortised cost		Non-	Total
31 December 2009	Trading	Derivatives held for hedging	Designated at fair value through P&L	Available-for-sale	Loans and receivables	Financial liabilities at amortised cost	financial assets / liabilities
	£m	£m	£m	£m	£m	£m	£m	£m
Liabilities
Deposits by banks	-	-	-	-	-	116,414	-	116,414
Deposits by customers	-	-	-	-	-	159,187	-	159,187
Derivative financial liabilities	3,001	352	-	-	-	-	-	3,353
Other borrowed funds	-	-	-	-	-	539	-	539
Subordinated liabilities	-	-	-	-	-	5,580	-	5,580
Other liabilities	-	-	-	-	-	1,611	-	1,611
Provisions	-	-	-	-	-	-	74	74
Current tax liabilities	-	-	-	-	-	-	92	92
Retirement benefit obligations	-	-	-	-	-	-	922	922
	3,001	352	-	-	-	283,331	1,088	287,772

								Group
	Held at fair value				Held at amortised cost		Non-financial assets / liabilities	Total
31 December 2008	Trading	Derivatives held for hedging	Designated at fair value through P&L	Available-for-sale	Loans and receivables	Financial liabilities at amortised cost	Non-financial assets / liabilities	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash & balances at central banks	-	-	-	-	4,017	-	-	4,017
Trading assets	26,264	-	-	-	-	-	-	26,264
Derivative financial instruments	31,713	3,412	-	-	-	-	-	35,125
Financial assets designated at FV	-	-	11,377	-	-	-	-	11,377
Loans and advances to banks	-	-	-	-	16,001	-	-	16,001
Loans and advances to customers	-	-	-	-	180,176	-	-	180,176
Available-for-sale securities	-	-	-	2,663		-	-	2,663
Loans and receivables securities	-	-	-	-	14,107	-	-	14,107
Macro hedge of interest rate risk	-	-	-	-	2,188	-	-	2,188
Investment in associates	-	-	-	-	-	-	35	35
Intangible assets	-	-	-	-	-	-	1,347	1,347
Property, plant and equipment	-	-	-	-	-	-	854	854
Operating lease assets	-	-	-	-	-	-	348	348
Current tax assets	-	-	-	-	-	-	212	212
Deferred tax assets	-	-	-	-	-	-	1,274	1,274
Other assets	-	-	-	-	1,200	-	122	1,322
	57,977	3,412	11,377	2,663	217,689	-	4,192	297,310
Liabilities
Deposits by banks	-	-	-	-	-	14,488	-	14,488
Deposits by customers	-	-	-	-	-	130,245	-	130,245
Derivative financial liabilities	25,420	2,390	-	-	-	-	-	27,810
Trading liabilities	40,738	-	-	-	-	-	-	40,738
Financial liabilities at FVTPL	-	-	5,673	-	-	-	-	5,673
Debt securities in issue	-	-	-	-	-	58,511	-	58,511
Other borrowed funds	-	-	-	-	-	2,076	-	2,076
Subordinated liabilities	-	-	-	-	-	6,787	-	6,787
Other liabilities	-	-	-	-	-	2,303	39	2,342
Provisions	-	-	-	-	-	-	207	207
Current tax liabilities	-	-	-	-	-	-	518	518
Deferred tax liabilities	-	-	-	-	-	-	405	405
Retirement benefit obligations	-	-	-	-	-	-	813	813
	66,158	2,390	5,673	-	-	214,410	1,982	290,613

								Company
	Held at fair value				Held at amortised cost		Non-	Total
31 December 2008	Trading	Derivatives held for hedging	Designated at fair value through P&L	Available-for-sale	Loans and receivables	Financial liabilities at amortised cost	financial assets / liabilities	Total
	£m	£m	£m	£m	£m	£m	£m	£m
Assets
Cash & balances at central banks	-	-	-	-	2,456	-	-	2,456
Derivative financial instruments	2,112	623	-	-	-	-	-	2,735
Financial assets designated at FV	-	-	47,525	-	-	-	-	47,525
Loans and advances to banks	-	-	-	-	116,486	-	-	116,486
Loans and advances to cust.s	-	-	-	-	123,319	-	-	123,319
Available-for-sale securities	-	-	-	25	-	-	-	25
Investment in associates	-	-	-	-	-	-	741	741
Investment in subsidiaries	-	-	-	-	-	-	5,147	5,147
Intangible assets	-	-	-	-	-	-	484	484
Property, plant and equipment	-	-	-	-	-	-	569	569
Current tax assets	-	-	-	-	-	-	194	194
Deferred tax assets	-	-	-	-	-	-	458	458
Other assets	-	-	-	-	940	-	47	987
	2,112	623	47,525	25	243,201	-	7,640	301,126
Liabilities
Deposits by banks	-	-	-	-	-	124,846	-	124,846
Deposits by customers	-	-	-	-	-	155,466	-	155,466
Derivative financial liabilities	3,672	1,721	-	-	-	-	-	5,393
Trading liabilities	739	-	-	-	-	-	-	739
Other borrowed funds	-	-	-	-	-	905	-	905
Subordinated liabilities	-	-	-	-	-	7,030	-	7,030
Other liabilities	-	-	-	-	-	1,283	-	1,283
Provisions	-	-	-	-	-	-	99	99
Current tax liabilities	-	-	-	-	-	-	128	128
Deferred tax liabilities	-	-	-	-	-	-	6	6
Retirement benefit obligations	-	-	-	-	-	-	797	797
	4,411	1,721	-	-	-	289,530	1,030	296,692

The following tables analyse the fair value of financial instruments not measured at fair value in the balance sheet:

	Group
2009	Carrying value £m	Fair value £m	Surplus/(deficit) £m
Assets
Cash and balances at central banks	4,163	4,163	-
Loans and advances to banks	9,151	9,151	-
Loans and advances to customers	186,804	192,164	5,360
Loans and receivables securities	9,898	9,447	(451)
Liabilities
Deposits by banks	5,811	5,811	-
Deposits by customers	143,893	144,608	(715)
Debt securities in issue	47,758	47,483	275
Other borrowed funds	1,352	1,729	(377)
Subordinated liabilities	5,597	6,173	(576)

	Company
2009	Carrying value £m	Fair value £m	Surplus/(deficit) £m
Assets
Cash and balances at central banks	3,266	3,266	-
Loans and advances to banks	109,658	111,131	1,473
Loans and advances to customers	131,749	136,518	4,769
Liabilities
Deposits by banks	116,414	119,341	(2,927)
Deposits by customers	159,187	159,814	(627)
Other borrowed funds	539	565	(26)
Subordinated liabilities	5,580	6,494	(914)

	Group
2008	Carrying value £m	Fair value £m	Surplus/(deficit) £m
Assets
Cash and balances at central banks	4,017	4,017	-
Loans and advances to banks	16,001	16,202	201
Loans and advances to customers	180,176	186,233	6,057
Loans and receivables securities	14,107	13,010	(1,097)
Liabilities
Deposits by banks	14,488	14,473	15
Deposits by customers	130,245	130,818	(573)
Debt securities in issue	58,511	57,530	981
Other borrowed funds	2,076	926	1,150
Subordinated liabilities	6,787	5,137	1,650

	Company
2008	Carrying value £m	Fair value £m	Surplus/(deficit) £m
Assets
Cash and balances at central banks	2,456	2,456	-
Loans and advances to banks	116,411	116,777	366
Loans and advances to customers	123,319	128,148	4,829
Liabilities
Deposits by banks	124,846	126,612	(1,766)
Deposits by customers	155,466	156,016	(550)
Other borrowed funds	905	485	420
Subordinated liabilities	7,030	4,708	2,322

The surplus/(deficit) in the table above represents the surplus/(deficit) of fair value compared to the carrying amount of those financial instruments for which fair values have been estimated. The carrying value above of any financial assets and liabilities that are designated as hedged items in a portfolio (or macro) fair value hedge relationship excludes gains and losses attributable to the hedged risk, as this is presented as a single separate line item on the balance sheet.

Fair value measurement

The fair value of financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value is calculated based on the market price. Where quoted market prices are not available, fair value is determined using pricing models which use a mathematical methodology based on accepted financial theories, depending on the product type and its components. Further information on fair value measurement can be found in the Group's Accounting Policies from pages 109 to 123 and the Valuation techniques section below on page 179 to the Consolidated Financial Statements.

Fair value management

The fair value exposures, as tabled above, are managed by using a combination of hedging derivatives and offsetting on balance sheet positions. The approach to specific categories of financial instruments is described below.

Assets:

Cash and balances at central banks

The carrying amount of cash and balances at central banks is deemed a reasonable approximation of the fair value.

Loans and advances to banks

The fair value of loans and advances to banks has been estimated using the same valuation technique for financial instruments accounted for at fair value as described in the Valuation techniques section below on page 179 to the Consolidated Financial Statements.

Loans and advances to customers

Loans and advances to personal customers are made both at variable and at fixed rates. As there is no active secondary market in the UK for such loans and advances, there is no reliable market value available for such a significant portfolio.

a) Variable rate

The Directors believe that the carrying value of the variable rate loans may be assumed to be their fair value.

b) Fixed rate

Certain of the loans secured on residential properties are at a fixed rate for a limited period, typically two to five years from their commencement. At the end of this period these loans revert to the relevant variable rate. The excess of fair value over carrying value of each of these loans has been estimated by reference to the market rates available at the balance sheet date for similar loans of maturity equal to the remaining fixed period.

Loan and receivable securities

These debt securities are valued with the assistance of valuations prepared by an independent, specialist valuation firm.

Liabilities:

Deposits by banks

The carrying amount is deemed a reasonable approximation of the fair value, because they are short term in nature.

Deposits by customers

The majority of deposit liabilities are payable on demand and therefore can be deemed short term in nature with the fair value equal to the carrying value. However, given the long-term and continuing nature of the relationships with the Group's customers, the Directors believe there is significant value to the Group in this source of funds. Certain of the deposit liabilities are at a fixed rate until maturity. The deficit of fair value over carrying value of these liabilities has been estimated by reference to the market rates available at the balance sheet date for similar deposit liabilities of similar maturities.

The fair value of such deposits liabilities has been estimated using the same valuation technique for financial instruments accounted for at fair value as described in the Valuation techniques section below on page 179 to the Consolidated Financial Statements.

Debt securities in issue and subordinated liabilities

Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Other market values have been determined using the same valuation technique for financial instruments accounted for at fair value as described in the Valuation techniques section below on page 179 to the Consolidated Financial Statements.

Intra Group balances

Included in the asset and liability categories on the Company balance sheet are outstanding intra group balances. The fair value of these balances has been determined using the same valuation technique for financial instruments accounted for at fair value as described in the Valuation techniques section below on page 179 to the Consolidated Financial Statements.

Fair value valuation bases

The following tables summarise the fair values at 31 December 2009 and 2008 of the financial asset and liability classes accounted for at fair value, analysed by the valuation methodology used by the Group to determine their fair value. The tables also disclose the percentages that the recorded fair values of financial assets and liabilities represent of the total assets and liabilities, respectively, that are recorded at fair value in the balance sheet:

At 31 December 2009				Internal models based on
Balance sheet category		Quoted prices in active markets		Market observable data		Significant unobservable data		Total		Valuation technique
		£m	%	£m	%	£m	%	£m	%
Assets
Trading assets	Loans and advances to banks	-	-	5,252	8	-	-	5,252	8	A
	Loans and advances to customers	-	-	10,628	15	-	-	10,628	15	A
	Debt securities	15,932	23	-	-	-	-	15,932	23	-
	Equity securities	1,471	2	-	-	7	-	1,478	2	B

Derivative assets	Exchange rate contracts	-	-	4,088	6	37	-	4,125	6	A
	Interest rate contracts	4	-	17,223	25	-	-	17,227	25	A & C
	Equity & credit contracts	258	-	1,060	2	157	-	1,475	2	B

Financial assets at FVTPL	Loans and advances to customers	-	-	6,116	9	263	-	6,379	9	A
	Debt securities	-	-	4,498	7	1,481	2	5,979	9	A

Available-for-sale financial	Debt securities	747	1	-	-	-	-	747	1	-
assets	Equity securities	20	-	30	-	-	-	50	-	B
Total assets at fair value		18,432	26	48,895	72	1,945	2	69,272	100

Liabilities
Trading liabilities	Deposits by banks	-	-	40,824	59	-	-	40,824	59	A
	Deposits by customers	-	-	4,115	6	-	-	4,115	6	A
	Short positions	1,071	2	-	-	-	-	1,071	2	-
	Debt securities in issue	-	-	142	-	-	-	142	-	A

Derivative liabilities	Exchange rate contracts	-	-	521	1	-	-	521	1	A
	Interest rate contracts	-	-	16,208	23	-	-	16,208	23	A & C
	Equity & credit contracts	29	-	1,945	3	260	-	2,234	3	B

Financial liabilities at FVTPL	Deposits by banks	-	-	45	-	-	-	45	-	A
	Deposits by customers	-	-	12	-	-	-	12	-	A
	Debt securities in issue	-	-	4,257	6	109	-	4,366	6	A
Total liabilities at fair value		1,100	2	68,069	98	369	-	69,538	100

At 31 December 2008(1)				Internal models based on
Balance sheet category		Quoted prices in active markets		Market observable data		Significant unobservable data		Total		Valuation technique
		£m	%	£m	%	£m	%	£m	%
Assets
Trading assets	Loans and advances to banks	-	-	4,947	7	-	-	4,947	7	A
	Loans and advances to customers	-	-	1,310	2	-	-	1,310	2	A
	Debt securities	16,801	23	-	-	-	-	16,801	23	-
	Equity securities	671	1	-	-	37	-	708	1	B

Derivative assets	Exchange rate contracts	-	-	10,788	15	5	-	10,793	15	A
	Interest rate contracts	232	-	21,549	29	-	-	21,781	29	A & C
	Equity & credit contracts	843	1	1,559	2	149	-	2,551	3	B

Financial assets at FVTPL	Loans and advances to customers	-	-	6,405	9	282	-	6,687	9	A
	Debt securities	-	-	343	-	4,347	7	4,690	7	A

Available-for-sale financial	Debt securities	2,618	4	-	-	-	-	2,618	4	-
assets	Equity securities	10	-	35	-	-	-	45	-	B
Total assets at fair value		21,175	29	46,936	64	4,820	7	72,931	100

Liabilities
Trading liabilities	Deposits by banks	-	-	34,341	47	-	-	34,341	47	A
	Deposits by customers	-	-	4,622	6	-	-	4,622	6	A
	Short positions	751	1	-	-	-	-	751	1	-
	Debt securities in issue	-	-	1,024	1	-	-	1,024	1	A

Derivative liabilities	Exchange rate contracts	-	-	1,680	2	-	-	1,680	2	A
	Interest rate contracts	-	-	21,489	30	-	-	21,489	30	A & C
	Equity & credit contracts	803	1	3,669	5	169	-	4,641	6	B

Financial liabilities at FVTPL	Deposits by banks	-	-	153	-	-	-	153	-	A
	Deposits by customers	-	-	252	-	-	-	252	-	A
	Debt securities in issue	-	-	5,021	7	247	-	5,268	7	A
Total liabilities at fair value		1,554	2	72,251	98	416	-	74,221	100

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

The following tables presents the fair values at 31 December 2009 and 2008 of the above financial assets and liabilities by product, analysed by the valuation methodology used by the Group to determine their fair value. The tables also disclose the percentages that the recorded fair values of products represent of the total assets and liabilities, respectively, that are recorded at fair value in the balance sheet:

At 31 December 2009

					Internal models based on
Product		Quoted prices in active markets		Market observable data			Significant unobservable data			Total
		£m	%	£m	%	£m		%	£m		%
Assets
Government and government-guaranteed debt securities		3,061	5	-	-	-		-	3,061		5
Asset-backed securities		-	-	4,498	7	1,481		2	5,979		9
Floating rate notes		11,128	16	-	-	-		-	11,128		16
Other debt securities		2,490	4	-	-	263		-	2,753		4
UK Social housing association loans		-	-	6,116	9	-		-	6,116		9
Term deposits and money market instruments		-	-	15,881	23	-		-	15,881		23
Exchange rate derivatives		-	-	4,088	6	37		-	4,125		6
Interest rate derivatives		4	-	17,223	25	-		-	17,227		25
Equity & credit derivatives		258	-	1,060	1	157		-	1,475		1
Ordinary shares and similar securities		1,491	2	30	-	7		-	1,528		2
		18,432	27	48,896	71	1,945		2	69,273		100
Liabilities
Exchange rate derivatives		-	-	521	1	-		-	521		1
Interest rate derivatives		-	-	16,208	23	-		-	16,208		23
Equity & credit derivatives		29	-	1,945	3	260		-	2,234		3
Ordinary shares and similar securities		-	-	-	-	-		-	-		-
Deposits and debt securities in issue		1,071	2	49,395	71	-		-	50,466		73
Debt securities in issue		-	-	-	-	109		-	109		-
	1,100		2	68,069	98	369		-	69,538		100

At 31 December 2008(1)

				Internal models based on
Product	Quoted prices in active markets		Market observable data		Significant unobservable data		Total
	£m	%	£m	%	£m	%	£m	%
Assets
Government and government-guaranteed debt securities	9,804	14	-	-	-	-	9,804	14
Asset-backed securities	-	-	343	-	4,347	6	4,690	6
Floating rate notes	5,101	7	-	-	-	-	5,101	7
Other debt securities	4,514	7	-	-	282	-	4,796	7
UK Social housing association loans	-	-	6,405	8	-	-	6,405	8
Term deposits and money market instruments	-	-	6,257	9	-	-	6,257	9
Exchange rate derivatives	-	-	10,788	15	5	-	10,793	15
Interest rate derivatives	232	-	21,549	30	-	-	21,781	30
Equity & credit derivatives	843	1	1,559	2	149	-	2,551	3
Ordinary shares and similar securities	681	1	35	-	37	-	753	1
	21,175	30	46,936	64	4,820	6	72,931	100
Liabilities
Exchange rate derivatives	-	-	1,680	3	-	-	1,680	3
Interest rate derivatives	-	-	21,489	29	-	-	21,489	29
Equity & credit derivatives	803	1	3,669	5	169	-	4,641	6
Ordinary shares and similar securities	751	1	-	-	-	-	751	1
Deposits and debt securities in issue	-	-	45,413	61	247	-	45,660	61
Debt securities in issue	-	-	-	-	-	-	-	-
	1,554	2	72,251	98	416	-	74,221	100

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

Valuation techniques

The main valuation techniques employed in the Group's internal models to measure the fair value of the financial instruments disclosed above at 31 December 2009 and 2008 are set out below. In substantially all cases, the principal inputs into these models are derived from observable market data. The Group did not make any material changes to the valuation techniques and internal models it used during the years ended 31 December 2009, 2008 and 2007, except for the technique applied in 2009 to the holdings of Portuguese mortgage-backed securities classified as FVTPL - Debt securities, described on page 182 for Instrument 7.

A	In the valuation of financial instruments requiring static hedging (for example interest rate and currency derivatives) and in the valuation of loans and advances and deposits, the 'present value' method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data and reference yield curves derived from quoted interest rates in appropriate time bandings, which match the timings of the cashflows and maturities of the instruments.
B	In the valuation of equity financial instruments requiring dynamic hedging (principally equity securities, options and other structured instruments), proprietary stochastic volatility models are used. These types of models are widely accepted in the financial services industry. Observable market inputs are used in these models to generate variables such as the bid-offer spread, foreign currency exchange rates, credit risk, volatility, correlation between indices and market liquidity as appropriate. In limited circumstances, other inputs may be used in these models that are based on data other than observable market data, such as the Halifax's UK House Price Index ('HPI') volatility, HPI forward growth, HPI spot rate, and mortality.
C	In the valuation of financial instruments exposed to interest rate risk that require either static or dynamic hedging (such as interest rate futures, caps and floors, and options), the present value method (futures), Black's model (caps/floors) and the Hull/White and Markov functional models (Bermudan options) are used. These types of models are widely accepted in the financial services industry. The significant inputs used in these models are observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates. In limited circumstances, other inputs may be used in these models that are based on data other than observable market data, such as the Halifax's UK House Price Index ('HPI') volatility, HPI forward growth, HPI spot rate, mortality, and the specific credit spread for that instrument.

In determining fair value, the Group also considers the credit risk of its counterparties, as well as its own creditworthiness, on all over-the-counter (OTC) derivatives in the trading book. The Group attempts to mitigate credit risk to third parties by entering into netting and collateral arrangements. Net counterparty exposure (counterparty positions netted by offsetting transactions and both cash and securities collateral) is then valued for counterparty creditworthiness and this resultant value is incorporated into the fair value of the respective instruments.

The credit risk adjustment is measured as a lifetime expected loss for each counterparty based on the probability of default, the loss given default and the expected exposure of the OTC derivative position with the counterparty.

The probability of default is calculated at the counterparty level through the use of internal rating models. The loss given default ("LGD") is calculated at the facility level and takes into account the counterparty characteristics as well as the instrument traded. Credit ratings and LGD are updated by the credit team as new relevant information becomes available and at periodic reviews performed at least annually.

The expected exposure is calculated on a portfolio level and is based on the underlying risks of the portfolio. The main drivers of the expected exposure are the size of the risk position with the counterparty along with the prevailing market environment. The total credit risk adjustment on the Group's counterparties was £7m (2008: £6m).

Residential property derivative contracts, where the underlying is a specific property, are referenced to regional property indices for valuation. The indexing of the contracts is appropriate due to the number and wide geographical dispersion of the portfolio. In these circumstances, an adjustment to fair value is made to take account of specific risk against the index. Illiquid commercial property assets are written down with reference to actual and anticipated declines in the commercial property index to reflect a realistic estimate of realisable value.

Broker quotes and external consensus market data are used for validating the fair values of some items in the trading portfolio, or designated at fair value through profit or loss. All derivatives pricing models are validated independently by the Quantitative Risk Group ('QRG'). A validation report is produced for each model-derived payment that assesses the mathematical assumptions behind the model and the implementation of the model and its integration within the trading system. Where there is observable market data the models calibrate to market. Where pricing data is unobservable then the input parameters are regularly reviewed by QRG. The source of pricing data is considered as part of the process that determines the classification of the level of a financial instrument.

The Group also considers its own creditworthiness when determining the fair value of an instrument, including over-the-counter ('OTC') derivative instruments and financial liabilities held at fair value through profit or loss if the Group believes market participants would take that into account when transacting the respective instrument. The approach to measuring the impact of the Group's credit risk on an instrument is done in the same manner as for third party credit risk. The impact of the Group's credit risk is considered when calculating the fair value of an instrument, even when credit risk is not readily observable such as in OTC derivatives contracts. The Group has not realised any profit or loss on revaluing fair values of derivatives to reflect its own creditworthiness. If the Group had reflected such adjustments it would not have had a material impact on the valuations.

The fair values of the financial instruments arising from the Group's internal models take into account, among other things, contract terms and observable market data, which include such factors as bid-offer spread, interest rates, credit risk, exchange rates, the quoted market price of raw materials and equity securities, volatility and prepayments. The main assumptions taken into account when internal models use information other than market data can be found in the table below. In all cases, when it is not possible to derive a valuation for a particular feature of an instrument, management uses judgement to determine the fair value of the particular feature. In exercising this judgement, a variety of tools are used including proxy observable data, historical data and extrapolation techniques. Extrapolation techniques take into account behavioural characteristics of equity markets that have been observed over time, and for which there is a strong case to support an expectation of a continuing trend in the future. Estimates are calibrated to observable market prices when they become available.

The estimates thus obtained could vary if other valuation methods or assumptions were used. The Group believes its valuation methods are appropriate and consistent with other market participants. Nevertheless, the use of different valuation methods or assumptions, including imprecision in estimating unobservable market inputs, to determine the fair value of certain financial instruments could result in different estimates of fair value at the reporting date and the amount of gain or loss recorded for a particular instrument. Most of the valuation models are not significantly subjective, because they can be tested and, if necessary, recalibrated by the internal calculation of and subsequent comparison to market prices of actively traded securities, where available.

Internal models based on observable market data

During 2008 and 2009, there were no transfers between Level 1 and Level 2 financial instruments.

Internal models based on information other than market data

The table below provides an analysis of financial instruments valued using internal models based on information other than market data together with the subsequent valuation technique used for each type of instrument. Each instrument is initially valued at transaction price:

			Balance sheet value		Amount recognised in income/(expense)
			2009	2008(1)	2009	2008	2007
Balance sheet line item	Category	Financial instrument product type	£m	£m	£m	£m	£m
1. Trading assets	Equity securities	Property unit trusts	7	37	(1)	16	-
2. Derivative assets	Exchange rate contracts	Cross-currency swaps	37	5	14	5	4
3. Derivative assets	Equity and credit contracts	Reversionary property interests	73	77	(4)	3	17
4. Derivative assets	Equity contracts	Options and forwards	84	72	(5)	91	11
5. FVTPL	Loans and advances to customers	Roll-up mortgage portfolio	262	282	(36)	58	12
6. FVTPL	Debt securities	Reversionary property securities	263	265	(4)	1	33
7. FVTPL	Debt securities	Portuguese mortgage-backed securities	-	2,474	-	(144)	(62)
		Other asset-backed securities	1,169	1,608	62	(184)	(10)
8. FVTPL	Debt securities	Collateralised synthetic obligations (CSOs)	50	-	-	-	-
9. Derivative liabilities	Equity contracts	Options and forwards	(260)	(169)	(82)	(94)	(14)
10. FVTPL	Debt securities in issue	Non-vanilla debt securities	(109)	(247)	(23)	(5)	(4)
Total net assets			1,576	4,404	-	-	-
Total income/(expense)			-	-	(79)	(253)	(13)

(1) Amended for the transfer of Alliance & Leicester plc to the Company as described in Note 47.

Valuation technique

1. Trading assets - Equity securities

These unit trusts are valued using Net Asset Values, which are regular third party asset valuations, with an adjustment for the estimated discount to asset value inherent in current similar market prices, reflecting the specific asset characteristics and degree of leverage in each unit trust.

2. Derivative assets - Exchange rate contracts

These derivatives are valued using a valuation model with interest rates, foreign exchange rates and long-dated foreign exchange volatility as inputs to derive valuations. Long-dated foreign exchange volatility is extrapolated from the shorter-dated foreign exchange volatilities which are directly observable in the market.

3. Derivative assets - Equity and credit contracts

These reversionary property derivatives are valued using a probability weighted set of the Halifax's UK House Price Index ('HPI') forward prices. These are determined using HPI Spot Rates adjusted to reflect estimated forward growth. Launched in 1984, the Halifax House Price Index is based on the lending of the UK's largest mortgage lender and provides the longest unbroken monthly data series of any UK housing index. The indices calculated are standardised and represent the price of a typically transacted house. Regional and national HPI indices are published, which are similar except that the former reflects the national HPI indices disaggregated into 12 UK regions and is published quarterly. The national indices are published monthly.

The inputs used to determine the value of the reversionary property derivatives are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth.

HPI Spot Rate

The regional HPI spot rate (which is observable market data) is only published on specific quarterly dates. In between these dates, its value is estimated by applying the changes in the national HPI spot rate (which is also observable market data and published monthly) to the most recently available regional HPI spot rate. An adjustment is made to reflect the specific property risk i.e. the difference in the actual regional composition of the property underlying the Group's reversionary interest portfolio and the composition of the published regional indices. This adjustment is based on the average historical deviation of price changes of the Group's actual property portfolio from that of the published indices.

HPI Forward Growth Rate

Long-dated HPI forward growth rate is not directly observable in the market but is estimated from broker quotes and traded forward contracts. A specific spread is applied to the long-dated forward growth rate to reflect the uncertainty surrounding long-dated data. This spread is calculated by analysing the historical volatility of the HPI, whilst incorporating mean reversion. An adjustment is made to reflect the specific property risk as for the HPI spot rate above.

Mortality Rate

Mortality rates are obtained from the PNMA00 and PNFA00 Continuous Mortality Investigation Tables published by the UK Institute and Faculty of Actuaries. These mortality rates are adjusted by acceleration rates to reflect the mortality profile of the holders of Group's reversionary property products underlying the derivatives.

4. Derivative assets - Equity contracts

There are three types of derivatives within this category:

European derivatives (vanilla call and put options)

These derivatives are valued using a modified Black-Scholes model where the HPI index is log-normally distributed with the forward rates determined from the HPI forward growth.

Asian options

Asian (or average value) options are valued using a modified Black-Scholes model, with an amended strike price and volatility assumption to account for the average exercise period, through a closed form adjustment that reflects the strike price relative to the distribution of stock prices at each relevant date. This is also known as the Curran model.

Forward contracts

Forward contracts are valued using a standard forward pricing model.

The inputs used to determine the value of the above instruments are HPI spot rate, HPI forward growth rate and HPI volatility. The principal pricing parameter is HPI forward growth rate. Discussion of the HPI spot and HPI forward growth rates for these financial instruments is the same as for Instrument 3 above.

HPI Volatility

Long-dated HPI volatility is not directly observable in the market but is estimated from the most recent traded values. An adjustment is applied to the long-dated HPI volatility rate to reflect the uncertainty surrounding long-dated data. This adjustment is based on the empirical standard deviation of historical volatility over a range of time horizons.

5. FVTPL - Loans and advances to customers

Roll-up mortgages are an equity release scheme, where the property owner takes out a loan secured against their home. The loan is repaid upon the owner's vacation of the property. The value of the loan is only repaid from the value of the property. This is known as a "no negative pledge". The Group suffers a loss if the sale proceeds from the property are insufficient to repay loan. These roll-up mortgages are valued using a probability-weighted set of European option prices (puts) determined using the Black-Scholes model, where the put represents the values of the no negative pledges.

The inputs used to determine the value of these instruments are HPI spot, HPI forward growth, HPI volatility, mortality rates and repayment rates. The principal pricing parameter is HPI forward growth. Discussion of the HPI spot rate, HPI forward growth rate, and mortality rates for this financial instrument is the same as for Instrument 3 above. Discussion of the HPI volatility rate is the same as for Instrument 4 above.

Repayment rates

The costs to the Group arising from early repayment by customers (inherent specifically to this financial instrument) are estimated from prices of swaptions which reflect the costs associated with unwinding the swap hedges held by the Group against these roll-up mortgages in the event of early repayment. Early repayment most typically occurs following a fall in market interest rates. Prepayment rates were taken from the academic paper 'Pricing and Risk Capital in the Equity Release Market', presented to the Institute and Faculty of Actuaries in 2007.

6. FVTPL - Debt securities

Reversionary property securities are an equity release scheme, where the property owner receives an upfront lump sum in return for paying a fixed percentage of the sales proceeds of the property when the owner vacates the property. These reversionary property securities are valued using a probability-weighted set of HPI forward prices.

The inputs used to determine the value of these instruments are HPI spot, HPI forward growth and mortality rates. The principal pricing parameter is HPI forward growth. The valuation methodology for these securities is similar to Instrument 3 above.

7. FVTPL - Debt securities

There are three types of debt securities within this category:

Portuguese mortgage-backed securities

In December 2009, Euro 190m of the Group's holdings of these securities were purchased by the issuer. As a result, the Group's remaining positions in these securities have been transferred to Level 2. Prior to 2009, these securities were valued using a valuation model with reference to the most relevant generic curve (in this case, Portuguese residential mortgage-backed securities) from a consensus pricing service and an assumption with respect to the specific credit spread for that instrument as inputs to derive valuations.

Other asset-backed securities

These other asset-backed securities consist of residential mortgage backed securities, securities backed by small business and automotive loans and other collateralised debt obligations almost all of which are AAA rated, and issued by Santander entities. Each instrument was valued with reference to the price from a consensus pricing service. This is then corroborated against the price from another consensus pricing service due to the lack of depth in the number of available market quotes. An average price is used where there is a more than an insignificant difference between the two sources.

8. FVTPL - Debt securities

These debt securities are valued using valuations prepared by an independent, specialist valuation firm.

9. Derivative liabilities - Equity and credit contracts

These derivatives are the same as Instrument 4 with the exception that they have a negative fair value.

10. FVTPL - Debt securities in issue

These debt securities in issue are valued using a three-factor Gaussian Model. The three factors used in the valuation are domestic interest rates, foreign interest rates and foreign exchange rates. The correlations between the factors are assumed to be zero within the valuation.

The Hull-White approach is used for estimating the future distribution of domestic and foreign zero-coupon rates, constructed from the relevant yield curves. A Geometric Brownian Motion model is used for estimating the future distribution of spot foreign exchange rates. The foreign exchange and interest rate volatilities are the most crucial pricing parameters; the model calibrates to the relevant swaption volatility surface.

Unrecognised gains as a result of the use of valuation models using unobservable inputs ("Day One profits")

The table below shows the amount that has yet to be recognised in the income statement that relates to the difference between the transaction price (i.e. the fair value at initial recognition) and the amount that would have arisen had valuation models using unobservable inputs been used on initial recognition, less amounts subsequently recognised. This is calculated and reported on a portfolio basis:

	2009 £m	2008 £m	2007 £m
At 1 January	55	45	18
New transactions	42	12	27
Amounts recognised in profit or loss during the year	(5)	(2)	-
At 31 December	92	55	45

Internal valuation review

In all instances, risk control teams review positions to assess a realistic realisable value for the position and develop a methodology for any adjustment to fair value which marks the position to that value using information relevant to that asset. Consideration is given to the quality of the information available that provides the current mark-to-model valuation and estimates of how different these valuations could be on an actual trade, taking into consideration how active the market is. For spot assets that cannot be sold due to illiquidity, forward estimates are discounted to provide an estimate of a realisable value over time. All adjustments for illiquid positions are regularly reviewed to reflect changing market conditions.

Reconciliation of fair value measurements in Level 3 of the fair value hierarchy

The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:

	Assets				Liabilities
	Trading Assets	Derivatives	Fair value through profit or loss	Total	Derivatives	Fair value through profit or loss	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2009	37	154	4,629	4,820	(169)	(247)	(416)
Total gains/(losses) recognised in profit/(loss):
- Fair value movements	(1)	5	22	26	(82)	(23)	(105)
- Foreign exchange and other movements	(3)	43	(106)	(66)	(18)	5	(13)
Purchases/issues	-	-	30	30	-	-	-
Sales	(26)	-	(121)	(147)	-	-	-
Settlements	-	(8)	(499)	(507)	9	156	165
Transfers in	-	-	50	50	-	-	-
Transfers out	-	-	(2,261)	(2,261)	-	-	-
At 31 December 2009	7	194	1,744	1,945	(260)	(109)	(369)

Total gains/(losses) recognised in profit/(loss) relating to those assets and liabilities held at the end of the year	(4)	48	(84)	(40)	(100)	(18)	(118)

	Assets				Liabilities
	Trading Assets	Derivatives	Fair value through profit or loss	Total	Derivatives	Fair value through profit or loss	Total
	£m	£m	£m	£m	£m	£m	£m
At 1 January 2008	-	118	4,515	4,633	(148)	(276)	(424)
Total gains/(losses) recognised in profit/(loss):
- Fair value movements	16	99	(269)	(154)	(94)	(5)	(99)
- Foreign exchange and other movements	-	(88)	286	198	73	17	90
Purchases	21	49	139	209	-	-	-
Settlements	-	(24)	(42)	(66)	-	17	17
At 31 December 2008	37	154	4,629	4,820	(169)	(247)	(416)

Total gains/(losses) recognised in profit/(loss) relating to those assets and liabilities held at the end of the year	16	11	17	44	(21)	12	(9)

Financial instrument assets and liabilities at 31 December 2009

Financial instrument assets valued using internal models based on information other than market data were 2% (2008: 7%) of total assets measured at fair value and 0.7% (2008: 2%) of total assets at 31 December 2009.

Trading assets valued using internal models based on information other than market data decreased in 2009 principally due to assets being sold.

Derivatives valued using internal models based on information other than market data increased in 2009 principally due to gains reflecting changes in foreign exchange rates.

Assets designated at fair value through profit or loss valued using internal models based on information other than market data decreased in 2009 principally due to settlements and transfers to Level 2. During December 2009, euro 190m of the Group's holdings of AAA-rated prime mortgage-backed securities were sold to the issuer. As a result, the Group's remaining positions in these securities of £2,261m were transferred to Level 2. During 2009, there were acquisitions of £30m of financial instrument assets valued using internal models based on information other than market data.

Financial instrument liabilities valued using internal models based on information other than market data were 0.5% (2008: 0.6%) of total liabilities measured at fair value and 0.1% (2008: 0.1%) of total liabilities at 31 December 2009.

Derivative liabilities valued using internal models based on information other than market data increased in 2009 principally due to losses reflecting changes in credit spreads, the HPI index and foreign exchange rates.

Liabilities designated at fair value through profit or loss valued using internal models based on information other than market data decreased in 2009 principally due to maturities of debt securities in issue.

Financial instrument assets and liabilities at 31 December 2008

Financial instrument assets valued using internal models based on information other than market data were 7% (2007: 6%) of total assets measured at fair value and 2% (2007: 2%) of total assets at 31 December 2008.

Financial instrument assets valued using internal models based on information other than market data increased in 2008 principally due to exchange rate movements on euro-denominated investments. During 2008, there were no sales of financial instrument assets valued using internal models based on information other than market data.

Financial instrument liabilities valued using internal models based on information other than market data were 0.6% (2007: 1%) of total liabilities measured at fair value and 0.1% (2007: 0.2%) of total liabilities at 31 December 2008.

Liabilities designated at fair value through profit or loss valued using internal models based on information other than market data decreased in 2008 principally due to maturities of debt securities in issue and changes in foreign exchange rates.

Gains and losses for the year ended 31 December 2009

Losses of £4m in respect of trading assets valued using internal models based on information other than market data principally reflected the lack of market liquidity during the year.

Gains of £48m in respect of derivatives assets valued using internal models based on information other than market data principally reflected movements in foreign exchange rates.

Losses of £84m in respect of assets designated at fair value through profit or loss valued using internal models based on information other than market data principally reflected changes in foreign exchange rates partly offset by an increase in the value of the prime securities due to tightening of credit spreads of asset-backed and mortgage-backed securities.

Losses of £100m in respect of derivatives liabilities valued using internal models based on information other than market data principally reflected changes in credit spreads, the HPI index and foreign exchange rates.

Losses of £18m in respect of liabilities designated at fair value through profit or loss valued using internal models based on information other than market data principally reflected changes in foreign exchange and interest rates. They are fully matched with derivatives.

Gains and losses on assets and liabilities classified as held for trading are presented in the income statement under "Net trading and other income". Fair value changes on long-term debt designated at fair value and related derivatives are presented in the income statement under 'Changes in fair value of long-term debt issued and related derivatives'. The income statement line item 'Net income/(expense) from other financial instruments designated at fair value' captures fair value movements on all other financial instruments designated at fair value and related derivatives.

Gains and losses for the year ended 31 December 2008

The value of the prime securities classified as FVTPL - Debt securities (Instrument 7) decreased due to an increase in credit spreads reflecting a general lack of demand for asset-backed and mortgage-backed securities, exacerbated by the collapse of wholesale funding activity which led to a significant decline in wider asset demand. The Group believes that the fair values of these instruments have diverged materially from the amounts it currently anticipates realising on maturity, because the mortgages underlying these securities continue to perform adequately.

The values of the HPI-related loans and advances to customers, debt securities and associated derivatives declined due to a further lack of market liquidity.

The terms of the instruments presented as FVTPL - debt securities in issue (instrument 9) and related exchange rate derivatives (instrument 2) are fully matched. The movement in these financial instruments reflects changes in foreign exchange rates and interest rates.

The Group risk manages the unit trusts using derivative positions valued using quoted prices in active markets, or internal models based on observable market data. The effects of these risk management activities are not reflected in the gains and losses included in the table above.

Gains and losses for the year ended 31 December 2007

The value of the prime securities classified as FVTPL - Debt securities (Instrument 7) decreased due to an increase in credit spreads reflecting reduced demand for asset-backed and mortgage-backed securities.

The values of the HPI-related loans and advances to customers, debt securities and associated derivatives increased/(decreased) due to a lack of market liquidity.

Effect of changes in significant unobservable assumptions to reasonably possible alternatives

As discussed above, the fair value of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data and, as such require the application of a degree of judgement. Changing one or more of the inputs to the valuation models to reasonably possible alternative assumptions would change the fair values significantly. The following table shows the sensitivity of these fair values to reasonably possible alternative assumptions.

Favourable and unfavourable changes are determined on the basis of changes in the value of the instrument as a result of varying the levels of the unobservable input as described in the table below. The potential effects do not take into effect any offsetting or hedged positions.

At 31 December 2009

				Reflected in income statement
Balance sheet note line item and product	Fair value	Assumptions	Shift	Favourable changes	Unfavourable changes
	£m			£m	£m
1. Trading assets - Equity securities: - Property unit trusts	7	Estimated discount to asset value	10%	1	(1)
3. Derivative assets - Equity and credit contracts: - Reversionary property derivatives	73	HPI Forward growth rate HPI Spot rate Mortality rate	1% 10% 2 yrs	11 8 1	(11) (8) (1)
4. Derivative assets - Equity and credit contracts: - Options and forwards	84	HPI Forward growth rate HPI Spot rate HPI Volatility	1% 10% 1%	3 3 1	(3) (2) (1)
5. FVTPL - Loans and advances to customers: - Roll-up mortgage portfolio	263	HPI Forward growth rate HPI Spot rate HPI Volatility Mortality rate	1% 10% 1% 2 yrs	28 9 5 7	(28) (11) (5) (6)
6. FVTPL - Debt securities: - Reversionary property securities	263	HPI Forward growth rate HPI Spot rate Mortality rate	1% 10% 2 yrs	24 27 5	(24) (27) (5)
7. FVTPL - Debt securities:
- Other asset-backed securities	1,169	Credit spread	75 bps	15	(15)
9. Derivative liabilities - Equity and credit contracts: - Options and forwards	(260)	HPI Forward growth rate HPI Spot rate HPI Volatility	1% 10% 1%	14 32 2	(14) (37) (2)

No sensitivities are presented for the FVTPL - debt securities in issue (instrument 10) per page 182 and related exchange rate derivatives (instrument 2) per page 181, as the terms of these instruments are fully matched. As a result, any changes in the valuation of the debt securities in issue would be exactly offset by an equal and opposite change in the valuation of the exchange rate derivatives. In addition, no sensitivities are presented for the FVTPL - debt securities (instrument 8) as they have been valued by an independent, specialist valuation firm.

50. Capital management and resources

This note reflects the transactions and amounts reported on a basis consistent with the Group's regulatory filings, and therefore has not been amended to reflect the application of group reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company as reflected elsewhere in the financial statements.

Capital management and capital allocation

The Board is responsible for capital management strategy and policy and ensuring that capital resources are appropriately monitored and controlled within regulatory and internal limits. Authority for capital management flows to the Chief Executive and from him to specific individuals who are members of the Group's Asset and Liability Management Committee ('ALCO').

ALCO adopts a centralised capital management approach that is driven by the Group's corporate purpose and strategy. This approach takes into account the regulatory and commercial environment in which the Group operates, the Group's risk appetite, the management strategy for each of the Group's material risks (including whether or not capital provides an appropriate risk mitigant) and the impact of appropriate adverse scenarios and stresses on the Group's capital requirements. This approach is reviewed annually as part of the Group's Internal Capital Adequacy Assessment Process ('ICAAP').

The Group manages its capital requirements, debt funding and liquidity on the basis of policies and plans reviewed regularly at ALCO and as part of the ICAAP process. To support its capital and senior debt issuance programmes, the Group is rated on a stand alone basis.

On an ongoing basis, and in accordance with the latest ICAAP review, the Group forecasts its regulatory and internal capital requirements based on the approved capital volumes allocated to business units as part of the corporate planning process and the need to have access to a capital buffer. Capital allocation decisions are made as part of planning based on the relative returns on capital using both economic and regulatory capital measures. Capital allocations are reviewed in response to changes in risk appetite and risk management strategy, changes to the commercial environment, changes in key economic indicators or when additional capital requests are received.

This combination of regulatory and economic capital ratios and limits, internal buffers and restrictions, together with the relevant costs of differing capital instruments and a consideration of the various other capital management techniques are used to shape the most cost-effective structure to fulfil the Group's capital needs.

Capital adequacy

From 1 January 2008, the Group has managed its capital on a Basel II basis. Throughout 2009, the Group held capital over and above its regulatory requirements, and managed internal capital allocations and targets in accordance with its capital and risk management policies.

Group Capital

	31 December 2009 £m	31 December 2008 £m
Core Tier 1 capital	6,520	4,694
Deductions from Core Tier 1 capital	(1,941)	(792)
Total Core Tier 1 capital after deductions	4,579	3,902
Other Tier 1 capital	1,859	1,485
Total Tier 1 capital after deductions	6,438	5,387
Tier 2 capital	5,832	4,766
Deductions from Tier 2 capital	(400)	(284)
Total Tier 2 capital after deductions	5,432	4,482
Deductions from Tier 1 and Tier 2	-	(988)
Total Capital Resources	11,870	8,881

Tier 1 includes audited profits for the years ended 31 December 2009 and 31 December 2008 respectively after adjustment to comply with UK Financial Services Authority rules.

The Group and Banco Santander, S.A. recognise the additional security inherent in Tier 1 capital in the current commercial and regulatory environment. Consequently, on 12 October 2008, the Company issued ten billion ordinary shares of 10 pence each and these shares were issued at par to Banco Santander, S.A. on the same date.

These ordinary shares qualified as Tier 1 capital for the Group. This capital was, in turn, transferred to Alliance & Leicester plc in late December 2008 as planned. At 31 December 2008 Tier 1 includes the Tier 1 capital of Alliance & Leicester plc on a proportional consolidation basis.

Tier 1 deductions primarily relate to goodwill and expected losses. In addition, the Group has elected to deduct certain securitisation positions from capital rather than treat these exposures as a risk weighted asset.

The expected loss deduction represents the difference between expected loss calculated in accordance with the Group's IRB models, and the impairment provisions calculated in accordance with IFRS. Details of the Group's accounting policy for credit provisions are set out in the Accounting Policies Note on page 116. Expected losses are higher than the impairment provision as the expected loss amount includes all losses that are anticipated to arise over the twelve months following the balance sheet date, not just those incurred at the balance sheet date.

The increase in Tier 1 deductions primarily relate to additional goodwill following the transfer of Alliance & Leicester on 9 January 2009, and software capitalised during the year.

Increases in Tier 2 relate to interest rate and exchange rate fluctuations and the inclusion of the Tier 2 capital of Alliance & Leicester plc. Deductions from Tier 2 represent expected losses and securitisation positions described above.

At 31 December 2008, deductions from Tier 1 and Tier 2 represent lending which is capital in nature. This was repaid during 2009.

The overall changes in the fair value of assets and liabilities during 2008 did not have a significant impact on the capital position reported by the Group.

51. Consolidating financial information

Abbey National Treasury Services plc ('ANTS plc') is a wholly owned subsidiary of the Company and was able to offer and sell certain securities in the US from time to time pursuant to a registration statement on Form F-3 filed with the SEC (the 'Registration Statement'). The Registration Statement expired in December 2008. The possibility of filing a new registration statement is being kept under review. The Company has fully and unconditionally guaranteed the obligations of ANTS plc that have been, or will be incurred before 31 July 2012: this guarantee includes all securities issued by ANTS plc pursuant to the Registration Statement.

ANTS plc utilises an exception provided in Rule 3-10 of Regulation S-X, and therefore does not file its financial statements with the SEC. In accordance with the requirements to qualify for the exception, presented below is condensed consolidating financial information for (i) the Company on a stand-alone basis as guarantor; (ii) ANTS plc on a stand-alone basis; (iii) other subsidiaries of the Company on a combined basis ('Other'); (iv) consolidation adjustments ('Adjustments'); and (v) total consolidated amounts ('Consolidated').

Under IAS 27, the Company and ANTS plc account for investments in their subsidiaries at cost subject to impairment. Rule 3-10 of Regulation S-X requires a company to account for its investments in subsidiaries using the equity method, which would increase/(decrease) the results for the year of the Company and ANTS plc in the information below by £443m and £(178)m, respectively (2008: £517m and £127m, 2007: £334m and £218m).

The net assets of the Company and ANTS plc in the information below would also be increased by £584m and £316m, respectively (2008: £1,552m and £497m).

Income statements

For the year ended 31 December 2009	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net interest income	1,985	41	1,396	(10)	3,412
Fee, commission, net trading, and other income	963	721	138	(538)	1,284
Total operating income	2,948	762	1,534	(548)	4,696
Administration expenses	(1,136)	(144)	(547)	(21)	(1,848)
Depreciation and amortisation	(132)	(3)	(129)	4	(260)
Impairment and provisions	(645)	(30)	(650)	427	(898)
Profit/(loss) before tax	1,035	585	208	(138)	1,690
Taxation (charge)/credit	(288)	(29)	63	(191)	(445)
Profit/(loss) for the year	747	556	271	(329)	1,245

For the year ended 31 December 2008	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net interest income	1,185	198	391	(2)	1,772
Fee, commission, net trading, and other income	1,807	180	490	(1,245)	1,232
Total operating income	2,992	378	881	(1,247)	3,004
Administration expenses	(1,114)	(136)	(92)	(1)	(1,343)
Depreciation and amortisation	(81)	(3)	(118)	-	(202)
Impairment and provisions	(343)	(26)	27	(23)	(365)
Profit/(loss) before tax	1,454	213	698	(1,271)	1,094
Taxation charge	(126)	(10)	(204)	65	(275)
Profit/(loss) for the year	1,328	203	494	(1,206)	819

For the year ended 31 December 2007	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net interest income	1,101	241	162	(5)	1,499
Fee, commission, net trading, and other income	900	22	623	(262)	1,283
Total operating income	2,001	263	785	(267)	2,782
Administration expenses	(1,163)	(129)	(92)	15	(1,369)
Depreciation and amortisation	(72)	(2)	(131)	-	(205)
Impairment and provisions	(346)	4	24	(26)	(344)
Profit/(loss) before tax	420	136	586	(278)	864
Taxation charge	(69)	(29)	(89)	8	(179)
Profit/(loss) for the year	351	107	497	(270)	685

Balance sheets

At 31 December 2009	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Cash and balances at central banks	3,266	448	449	-	4,163
Trading assets	-	24,976	30,321	(22,007)	33,290
Derivative financial instruments	2,539	23,129	8,422	(11,263)	22,827
Financial assets designated at fair value	37,145	12,000	313	(37,100)	12,358
Loans and advances to banks	109,658	166,020	156,075	(422,602)	9,151
Loans and advances to customers	131,749	20,266	105,421	(70,632)	186,804
Available-for-sale securities	30	-	767	-	797
Loans and receivables securities	2	896	12,244	(3,244)	9,898
Macro hedge of interest rate risk	-	682	504	(59)	1,127
Investment in associated undertakings	76	-	-	(1)	75
Investment in subsidiary undertakings	7,038	2,185	2,291	(11,514)	-
Intangible assets	552	8	132	754	1,446
Property, plant and equipment	561	6	270	101	938
Operating lease assets	-	-	313	(1)	312
Current tax assets	-	3	82	-	85
Deferred tax assets	428	21	401	96	946
Other assets	651	67	548	(192)	1,074
Total assets	293,695	250,707	318,553	(577,664)	285,291
Deposits by banks	116,414	166,169	81,097	(357,869)	5,811
Deposits by customers	159,187	17,601	110,834	(143,729)	143,893
Derivative financial instruments	3,352	24,330	2,711	(11,430)	18,963
Trading liabilities	-	13,315	47,159	(14,322)	46,152
Financial liabilities designated at fair value	-	4,282	141	-	4,423
Debt securities in issue	1	21,631	63,888	(37,762)	47,758
Other borrowed funds	539	-	958	(145)	1,352
Subordinated liabilities	5,580	-	1,975	(1,958)	5,597
Other liabilities	1,611	135	762	(185)	2,323
Other provisions	74	-	17	-	91
Current tax liabilities	92	57	151	-	300
Deferred tax liabilities	-	-	272	64	336
Retirement benefit obligations	922	-	148	-	1,070
Total liabilities	287,772	247,520	310,113	(567,336)	278,069
Total shareholders' equity	5,923	3,187	8,440	(10,328)	7,222
Total liabilities and equity	293,695	250,707	318,553	(577,664)	285,291

At 31 December 2008	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Cash and balances at central banks	2,456	8	1,553	-	4,017
Trading assets	-	27,146	19,675	(20,557)	26,264
Derivative financial instruments	2,735	32,160	14,089	(13,859)	35,125
Financial assets designated at fair value	47,525	11,005	339	(47,492)	11,377
Loans and advances to banks	116,486	128,035	104,448	(332,968)	16,001
Loans and advances to customers	123,319	24,501	98,973	(66,617)	180,176
Available-for-sale securities	25	-	2,638	-	2,663
Loans and advances securities	-	526	14,250	(669)	14,107
Macro hedge of interest rate risk	-	1,475	713	-	2,188
Investment in associated undertakings	741	-	-	(706)	35
Investment in subsidiary undertakings	5,147	2,335	2,050	(9,532)	-
Intangible assets	484	6	375	482	1,347
Property, plant and equipment	569	9	226	50	854
Operating lease assets	-	-	348	-	348
Current tax assets	194	-	18	-	212
Deferred tax assets	458	75	744	(3)	1,274
Other assets	987	21	332	(18)	1,322
Total assets	301,126	227,302	260,771	(491,889)	297,310
Deposits by banks	124,846	123,366	32,728	(266,452)	14,488
Deposits by customers	155,466	9,743	97,185	(132,149)	130,245
Derivative financial instruments	5,393	33,511	2,926	(14,020)	27,810
Trading liabilities	739	22,996	36,672	(19,669)	40,738
Financial liabilities designated at fair value	-	4,898	775	-	5,673
Debt securities in issue	-	29,692	76,089	(47,270)	58,511
Other borrowed funds	905	-	1,028	143	2,076
Subordinated liabilities	7,030	-	2,558	(2,801)	6,787
Other liabilities	1,283	83	1,034	(58)	2,342
Other provisions	99	-	108	-	207
Current tax liabilities	128	236	154	-	518
Deferred tax liabilities	6	-	408	(9)	405
Retirement benefit obligations	797	-	16	-	813
Total liabilities	296,692	224,525	251,681	(482,285)	290,613
Total shareholders' equity	4,434	2,777	9,090	(9,604)	6,697
Total liabilities and equity	301,126	227,302	260,771	(491,889)	297,310

Cash flow statements

For the year ended 31 December 2009	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net cash flow from / (used in) operating activities	(4,770)	12,150	(4,532)	81	2,929
Net cash flow from / (used in) investing activities	(232)	126	1,539	-	1,433
Net cash flow from / (used in) financing activities	(803)	-	(3,737)	(81)	(4,621)
Net (decrease) in cash and cash equivalents	(5,805)	12,276	(6,730)	-	(259)
Cash and cash equivalents at beginning of the year	61,203	38,020	(71,548)	-	27,675
Effects of exchange rate changes on cash and cash equivalents	-	(969)	(83)	-	(1,052)
Cash and cash equivalents at end of the year	55,398	49,327	(78,361)	-	26,364

For the year ended 31 December 2008	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net cash flow from / (used in) operating activities	51,816	6,658	(79,918)	-	(21,444)
Net cash flow (used in) / from investing activities	(1,359)	38	20,723	-	19,402
Net cash flow from / (used in) financing activities	152	(161)	(7,372)	-	(7,381)
Net increase/ (decrease) in cash and cash equivalents	50,609	6,535	(66,567)	-	(9,423)
Cash and cash equivalents at beginning of the year	10,594	29,137	(5,675)	-	34,056
Effects of exchange rate changes on cash and cash equivalents	-	2,348	694	-	3,042
Cash and cash equivalents at end of the year	61,203	38,020	(71,548)	-	27,675

For the year ended 31 December 2007	The Company £m	ANTS plc £m	Other £m	Adjustments £m	Consolidated £m
Net cash flow from / (used in) operating activities	5,949	(1,874)	(13,407)	-	(9,332)
Net cash flow from / (used in) investing activities	14	(9)	(201)	-	(196)
Net cash flow (used in) / from financing activities	(576)	-	5,352	-	4,776
Net increase/ (decrease) in cash and cash equivalents	5,387	(1,883)	(8,256)	-	(4,752)
Cash and cash equivalents at beginning of the year	5,207	31,020	2,855	-	39,082
Effects of exchange rate changes on cash and cash equivalents	-	-	(274)	-	(274)
Cash and cash equivalents at end of the year	10,594	29,137	(5,675)	-	34,056

Selected Financial Data

The financial information set forth below for the years ended 31 December 2009, 2008 and 2007 and as at 31 December 2009 and 2008 has been derived from the audited Consolidated Financial Statements of Santander UK plc (formerly Abbey National plc) (the 'Company') and its subsidiaries (together, the 'Group') prepared in accordance with IFRS included elsewhere in this Annual Report and Accounts. The information should be read in connection with, and is qualified in its entirety by reference to, the Group's Consolidated Financial Statements and the notes thereto. Financial information set forth below for the years ended 31 December 2006 and 2005, and as at 31 December 2007, 2006 and 2005, has been derived from the audited Consolidated Financial Statements of the Group for 2007, 2006 and 2005 not included in this Annual Report and Accounts. The financial information in this selected consolidated financial and statistical data does not constitute statutory accounts within the meaning of the Companies Act 2006. The auditors' report on the Consolidated Financial Statements for each of the five years ended 31 December 2009 was unmodified and did not include a statement under sections 237(2) and 237(3) of the Companies Act 1985 or sections 498(2) and 498(3) of the Companies Act 2006, as applicable. The Consolidated Financial Statements of the Group for the years ended 31 December 2009, 2008, 2007, 2006 and 2005 were audited by Deloitte LLP, chartered accountants and registered auditors.

Balance sheets

	2009(1) $m	2009 £m	2008(2) (3) £m	2007 £m	2006(4) £m	2005 £m
Assets
Cash and balances at central banks	6,730	4,163	4,017	1,038	888	991
Trading assets	53,821	33,290	26,264	56,427	62,314	58,231
Derivative financial instruments	36,905	22,827	35,125	9,951	8,336	11,855
Financial assets designated at fair value	19,979	12,358	11,377	11,783	8,713	30,597
Loans and advances to banks	14,794	9,151	16,001	3,441	2,242	444
Loans and advances to customers	302,007	186,804	180,176	112,147	103,146	95,467
Available for sale securities	1,289	797	2,663	40	23	13
Loans and receivables securities	16,002	9,898	14,107	-	-	-
Macro hedge of interest rate risk	1,822	1,127	2,188	217	-	-
Investment in associated undertakings	121	75	35	29	22	24
Intangible assets	2,338	1,446	1,347	90	90	171
Value of in-force business	-	-	-	-	-	1,721
Property, plant and equipment	1,516	938	854	528	415	314
Operating lease assets	504	312	348	2,164	2,082	2,172
Current tax assets	137	85	212	197	223	235
Deferred tax assets	1,529	946	1,274	665	804	796
Other assets	1,736	1,074	1,322	906	2,507	4,003
Total assets	461,230	285,291	297,310	199,623	191,805	207,034
Liabilities
Deposits by banks	9,395	5,811	14,488	7,923	6,656	5,617
Deposits by customers	232,630	143,893	130,245	69,650	66,519	65,889
Derivative financial instruments	30,657	18,963	27,810	9,931	10,218	11,264
Trading liabilities	74,614	46,152	40,738	54,916	57,604	52,664
Financial liabilities designated at fair value	7,151	4,423	5,673	7,538	8,151	7,948
Debt securities in issue	77,210	47,758	58,511	35,712	28,998	21,276
Other borrowed funds	2,186	1,352	2,076	1,419	1,655	2,244
Subordinated liabilities	9,049	5,597	6,787	4,732	5,020	6,205
Insurance and reinsurance liabilities	-	-	-	-	-	21,501
Macro hedge of interest rate risk	-	-	-	-	174	13
Other liabilities	3,756	2,323	2,342	2,337	1,616	3,190
Investment contract liabilities	-	-	-	-	-	3,306
Provisions	147	91	207	131	180	253
Current tax liabilities	485	300	518	369	300	288
Deferred tax liabilities	543	336	405	544	564	886
Retirement benefit obligations	1,730	1,070	813	979	1,034	1,380
Total liabilities	449,553	278,069	290,613	196,181	188,689	203,924
Share capital	4,380	2,709	1,148	148	148	148
Share premium account	3,002	1,857	3,121	1,857	1,857	1,857
Retained earnings	3,090	1,911	1,678	1,333	1,116	1,102
Other reserves	47	29	39	6	(5)	3
	10,519	6,506	5,986	3,344	3,116	3,110
Non-controlling interest	1,158	716	711	98	-	-
Total shareholders equity	11,677	7,222	6,697	3,442	3,116	3,110
Total liabilities and equity	461,230	285,291	297,310	199,623	191,805	207,034

(1) Amounts stated in dollars have been translated from sterling at the rate of £1.00 - $1.6167, the noon buying rate on 31 December 2009.

(2) Amended for the Transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements.

(3) From 2008, issuances of commercial paper and certificates of deposit have been used to fund commercial banking operations. As a result, such issuances have been classified as debt securities in issue. In previous years, similar debt issuances were used to fund the Group's trading operations and therefore were classified as trading liabilities.

(4) In the third quarter of 2006 the Group sold its life insurance business.

Income statements

	2009(1) $m	2009 £m	2008 £m	2007 £m	2006(2) £m	2005 £m
Net interest income	5,516	3,412	1,772	1,499	1,228	1,172
Net fee and commission income	1,332	824	671	695	699	644
Dividend income	-	-	-	1	1	1
Net trading and other income	744	460	561	587	542	538
Total operating income	7,592	4,696	3,004	2,782	2,470	2,355
Administration expenses	(2,988)	(1,848)	(1,343)	(1,369)	(1,420)	(1,577)
Depreciation and amortisation	(420)	(260)	(202)	(205)	(215)	(195)
Total operating expenses, exc provisions and charges	(3,408)	(2,108)	(1,545)	(1,574)	(1,635)	(1,772)
Impairment losses on loans and advances	(1,361)	(842)	(348)	(344)	(344)	(218)
Provisions for other liabilities and charges	(91)	(56)	(17)	-	(63)	(3)
Total operating provisions and charges	(1,452)	(898)	(365)	(344)	(407)	(221)
Profit on continuing operations before tax	2,732	1,690	1,094	864	428	362
Tax on profit on continuing operations	(719)	(445)	(275)	(179)	(115)	(108)
Profit on continuing operations after tax	2,013	1,245	819	685	313	254
Profit/(loss) on discontinued operations after tax	-	-	-	-	(245)	166
Profit for the year	2,013	1,245	819	685	68	420

Attributable to:
Equity holders of the parent	1,924	1,190	811	685	68	420
Non-controlling interest	89	55	8	-	-	-

Selected statistical information

	2009 %	2008(2) %	2007 %	2006 (3) %	2005 %
Profitability ratios:
Return on average total assets (4)	0.43	0.37	0.34	0.03	0.21
Return on average ordinary shareholders' funds (5)	22.31	20.45	22.08	2.20	19.56
Net interest margin (6)	1.62	1.19	1.34	1.19	1.19
Santander UK trading cost:income ratio (7)	42	50	50	55	60
PFS trading cost:income ratio (8)	42	50	50	55	61
Dividend payout ratio(9)	40	55	54	304	-
Capital ratios:
Average ordinary shareholders' funds as percentage of ave total assets	1.95	1.83	1.52	1.54	1.07
Total capital(10)	17.6	14.0	11.4	12.6	12.5
Tier 1 capital(10)	9.5	8.5	7.3	8.0	10.0
Ratio of earnings to fixed charges: (11)
Excluding interest on retail deposits	202.42	136.61	132.74	122.57	121.45
Including interest on retail deposits	143.27	117.81	115.58	109.70	108.52

(1) Amounts stated in dollars have been translated from sterling at the rate of £1.00 - $1.6167, the noon buying rate on 31 December 2009.

(2) Amended for the Transfer of Alliance & Leicester plc to the Company as described in Note 47 to the Consolidated Financial Statements. The calculations of Group capital are prepared on a basis consistent with the Group's regulatory filings, and therefore the comparatives have not been amended to reflect application of group reconstruction relief to account for the transfer of Alliance & Leicester plc to the Company.

(3) In the third quarter of 2006 the Group sold its life insurance business.

(4) Profit after tax divided by average total assets.

(5) Profit after tax divided by average equity shareholders' funds.

(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(7) The Santander UK trading cost:income ratio is defined as trading expenses from continuing operations divided by trading income from continuing operations. The Company's board of directors reviews discrete financial information for each of its segments that includes measures of operating results and assets, which are measured on a "trading" basis. The trading basis differs from the statutory basis as a result of the application of various adjustments. See Note 1 to the Consolidated Financial Statements.

(8) The PFS trading cost:income ratio is defined as trading expenses divided by trading income of the Personal Financial Services businesses. The Personal Financial Services businesses represent the continuing operations of the Group, except for the businesses, assets and portfolios that were inconsistent with the Group's strategy to focus on Personal Financial Services and were sold during 2004 and 2005. The excluded businesses were known as the Portfolio Business Unit ('PBU'). As the PBU businesses were inconsistent with the Group's strategy, management believes that presentation of this financial measure provides useful information to investors regarding the Group's financial condition and results of operations. As there were no longer any businesses, assets or portfolios remaining in the PBU by the end of 2005, there is no difference between the PFS cost:income ratio and the Santander UK cost:income ratio from 2006 onwards. A reconciliation between the Santander UK trading cost:income ratio and the PFS trading cost:income ratio is as follows:

					2005 £m
PFS trading costs					1,431
PBU trading costs					2
Santander UK trading costs					1,433
PFS trading income					2,334
PBU trading income					70
Santander UK trading income					2,404
Santander UK trading cost:income ratio					60%
PFS trading cost:income ratio					61%

(9) Ordinary equity dividends proposed divided by profit after tax.

(10) From 1 January 2008, the Group has managed its capital requirements on a Basel II basis, as described in Note 50 to the Consolidated Financial Statements. Prior years have been presented on a Basel I basis.

(11) For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of profit on continuing operations before tax plus fixed charges. Fixed charges consist of interest payable, including the amortisation of discounts and premiums on debt securities in issue.

Exchange rates

The following tables set forth, for the periods indicated, certain information concerning the exchange rate for pounds sterling based on the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York, expressed in US dollars per £1.00. No representation is made that amounts in pounds sterling have been, could have been or could be converted into US dollars at the noon buying rate or at any other rate. The noon buying rate for US dollars on 23] April 2010 was US$1.54.

Calendar period	High US$ Rate	Low US$ Rate	Average (1) US$ Rate	Period end US$ Rate
Years ended 31 December:
2009	1.70	1.37	1.57	1.62
2008	2.03	1.44	1.85	1.46
2007	2.11	1.92	2.00	1.98
2006	1.98	1.73	1.84	1.96
2005	1.93	1.72	1.81	1.72
Months ended:
April 2010(2)	1.55	1.52	1.53	1.54
March 2010	1.53	1.49	1.51	1.52
February 2010	1.60	1.52	1.56	1.52
January 2010	1.64	1.59	1.62	1.60
December 2009	1.66	1.59	1.62	1.62
November 2009	1.68	1.64	1.66	1.64
October 2009	1.66	1.59	1.62	1.65
September 2009	1.67	1.59	1.63	1.60

(1) The average of the noon buying rates on the last business day of each month during the relevant period.

(2) With respect to April 2010 for the period from 1 April to 23 April.

An investment in Santander UK plc (formerly Abbey National plc) (the 'Company') and its subsidiaries (together, 'Santander UK' or the 'Group') involves a number of risks, the material ones of which are set forth below.

Santander UK's risk management measures may not be successful

The management of risk is an integral part of all Santander UK's activities. Risk constitutes Santander UK's exposure to uncertainty and the consequent variability of return. Specifically, risk equates to the adverse impacts on profitability arising from different sources of uncertainty including Credit Risk (Retail), Credit Risk (Wholesale), Credit Risk (Corporate and Commercial), Market Risk (Traded and non-Traded), Operational Risk, Asset Backed Funding Risk, Concentration Risk, Liquidity Risk, Reputational Risk, Business and Strategic Risk, Pension Obligation Risk, Residual Value Risk and Regulatory Risk. Santander UK seeks to monitor and manage its risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While Santander UK employs a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques, and the judgements that accompany their application, cannot anticipate every unfavourable event or the specifics and timing of every outcome. Accordingly, Santander UK's ability to successfully identify and balance risks and rewards, and to manage all material risks, is an important factor that can significantly affect results of operations.

Risks concerning borrower credit quality and general economic conditions are inherent in Santander UK's business

Risks arising from changes in credit quality and the recoverability of loans and amounts due from borrowers and counterparties are inherent in a wide range of Santander UK's businesses. Adverse changes in the credit quality of Santander UK's borrowers and counterparties or a general deterioration in UK or global economic conditions, or arising from systemic risks in the financial system, could reduce the recoverability and value of Santander UK's assets and require an increase in Santander UK's level of provisions for bad and doubtful debts. Likewise, a significant reduction in the demand for Santander UK's products and services could negatively impact Santander UK's business and financial condition. Since August 2007, the global financial system has experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, an increase in general fraud and money laundering activity (first and third party), and general widening of spreads.

In September 2008, global financial markets deteriorated sharply following the bankruptcy filing by Lehman Brothers Holdings Inc. Since then a number of other major financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, have experienced significant difficulties.

Governments and central banks took concerted action to make substantial funds and guarantees available to boost liquidity and confidence in their financial systems, stimulate lending and support important institutions at risk of failing, in addition to cutting taxes and lowering interest rates. As a consequence, conditions eased in 2009 and most leading developed economies, including the United Kingdom, began to emerge from recession, although the pace and depth of recovery was uneven across asset markets. However, the financial services industry continued to face an unusually high degree of uncertainty.

Despite the stabilisation in conditions experienced in 2009, dramatic declines in the previous two years in the housing markets in the UK combined with increasing unemployment continue to adversely affect the credit performance of real estate related exposures, resulting in significant write-downs of asset values by financial institutions, including Santander UK. These write-downs, initially of asset backed securities but spreading to other securities and loans, caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger competitors or, in some cases, to fail.

This market turmoil and reduction of available credit have contributed to decreasing consumer confidence, increased market volatility, reduced business activity and, consequently, increasing commercial and consumer loan delinquencies. These market developments may further affect consumer confidence levels and may cause adverse changes in payment patterns, causing further increases in delinquencies and default rates, which may impact Santander UK's write-offs/charge-offs and provision for credit losses. These market conditions could materially and adversely affect Santander UK's financial condition and results of operations.

In the United Kingdom, the contraction in economic output appears to have ceased with the country emerging slowly from recession in the last quarter of 2009. However, economic indicators remain weak and the risk of the country slipping back into recession in 2010, prolonging the recovery, remains. Government measures to tackle the record levels of national debt, including taxation rises and public spending cuts, are also likely to result in a slower recovery than other recent recessions. Political involvement in the regulatory environment and the major financial institutions in which the state has a direct financial interest will continue. Government demands for increased credit to support the economic recovery will increase competition for deposits, narrowing margins. The combination of slow economic recovery, government intervention and competition for deposits will maintain the pressure on Santander UK's retail business model. Credit quality should improve in some sectors as the economy returns to growth but could be adversely affected by any increase in unemployment into 2010.

The soundness of other financial institutions could materially and adversely affect Santander UK's business

Santander UK's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Santander UK has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual funds, and other institutional clients. As a result, defaults by, or even rumours or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by Santander UK or by other institutions. Many of these transactions expose Santander UK to credit risk in the event of default of Santander UK's counterparty or client. In addition, Santander UK's credit risk may be increased when the collateral held by Santander UK cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to Santander UK. There is no assurance that any such losses would not materially and adversely affect Santander UK's results of operations.

Risks associated with liquidity and funding are inherent in Santander UK's business

Liquidity risks are inherent in any retail and commercial bank. Whilst Santander UK has implemented liquidity management processes to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding the business and extreme liquidity constraints may impact Santander UK's current operations as well as limit growth possibilities. These events may also have a material adverse effect on the market value and liquidity of bonds issued by Santander UK in the secondary markets. From 2007 to date, the prime residential mortgage securitisation and covered bond markets have experienced severe disruption as a result of a material reduction in investor demand for these securities. These severe disruptions have resulted in extraordinary government intervention into the financial services sector as a whole. These markets, which are important sources of funding for Santander UK, were effectively closed to new external issuances of securities. Global investor confidence also remains low and credit remains relatively scarce.

Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on Santander UK's ability to access capital and liquidity on financial terms acceptable to it, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, Santander UK may be forced to raise the rates it pays on deposits to attract more customers. While central banks around the world have taken coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and significantly increasing temporary reciprocal currency arrangements (or 'swap lines'), it is not known how long these market conditions will continue, or whether they will worsen, or how long central bank schemes will continue or on what terms. The persistence of these adverse market conditions could have a material adverse effect on Santander UK's liquidity and funding.

Any reduction in Santander UK's credit rating could increase its cost of funding and adversely affect its interest margins

Credit ratings affect the cost and other terms upon which Santander UK is able to obtain funding. Rating agencies regularly evaluate Santander UK and their ratings of Santander UK's short-term and long-term debt are based on a number of factors, including Santander UK's financial strength as well as conditions affecting the financial services industry generally. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain Santander UK's current ratings or outlooks. Any reduction in those ratings and outlooks could increase the cost of Santander UK's funding, adversely affect Santander UK's interest margins and/or impact its liquidity position.

Market risks associated with fluctuations in interest rates, bond and equity prices and other market factors are inherent in Santander UK's business

The most significant market risks Santander UK faces are interest rates and bond and equity price risks. Changes in the general level of interest rates, as well as changes in the shape of yield curves and basis spreads may adversely affect the interest rate margin realised between lending rates and borrowing costs in Santander UK's banking operation. Significant declines in housing markets over the past two years have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by many financial institutions. These write-downs, initially of asset-backed securities but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions.

As a result of these market forces, volatility in interest rates and basis spreads has increased, which has increased Santander UK's borrowing costs, while decreasing values of global debt and equity markets have had an adverse effect on the value of Santander UK's investment portfolio. Any increase in capital markets funding costs or deposit rates could entail a re-pricing of loans, which would result in a reduction of volumes, and may also have an adverse effect on Santander UK's interest margins. Santander UK also sponsors a number of defined benefit staff pension schemes, and its obligations to those schemes may increase depending on the performance of financial markets. Although Santander UK is undertaking measures to mitigate and control the effects of these conditions, there can be no assurances that such controls will insulate Santander UK from deteriorating market conditions.

Risks associated with strategic decisions regarding organic growth, and potential acquisitions and disposals

Santander UK allocates management and planning resources to develop strategic plans for organic growth and to identify possible acquisitions and disposals and the potential restructuring of Santander UK's businesses. If the outcomes of these plans do not match expectations, Santander UK's earnings may not develop as forecast.

Santander UK may incur unanticipated losses related to its business combinations

The Company acquired the Bradford & Bingley savings business in September 2008. In January 2009, Banco Santander, S.A. transferred its shares in Alliance & Leicester plc to the Company. Santander UK's assessment of these business combinations is based on limited and potentially inexact information and on assumptions with respect to operations, profitability, asset quality and other matters that may prove to be incorrect. The aforementioned financial institutions have been adversely affected by the financial crisis and Alliance & Leicester plc has material portfolios of securities that have suffered losses and could decline meaningfully in value. There can be no assurance that these businesses will not incur substantial further losses or that Santander UK will not be exposed to currently unknown liabilities resulting from these business combinations. Any such losses or liabilities could have a material adverse effect on Santander UK's business, financial condition and results of operations.

Santander UK may fail to realise the anticipated benefits of its business combinations

The success of Santander UK's business combinations will depend, in part, on Santander UK's ability to realise the anticipated benefits from combining Santander UK's business with the businesses of Alliance & Leicester plc and the Bradford & Bingley savings business it has acquired. It is possible that the integration process could take longer or be more costly than anticipated or could result in the loss of key employees, the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the ability of each company to maintain relationships with clients, customers or employees. In addition, these businesses are currently run by management and employees who have not previously been exposed to Santander UK's business culture or philosophy. Santander UK's efforts to integrate these companies are also likely to divert management attention and resources. If Santander UK takes longer than anticipated or is not able to integrate the aforementioned businesses, the anticipated benefits of Santander UK's business combinations may not be realised fully or at all, or may take longer to realise than expected.

Santander UK's business is concentrated in the UK and on the offering of mortgage related products and services

Santander UK's business is principally concentrated in the UK and on the offering of mortgage related products and services. As a consequence, Santander UK's financial condition and results of operations are highly dependent on economic conditions in the UK, generally, and the UK property market, in particular. Beginning in the second half of 2008, UK and global economic conditions deteriorated significantly and global financial markets experienced acute turbulence. The UK economy contracted further in 2009 overall, though it returned to slight positive GDP growth in the last quarter. In 2008 and much of 2009, the UK property market suffered a significant correction as a consequence of housing demand being constrained by a combination of subdued earnings growth, greater pressure on housing finances, rising unemployment, changes in interest rates, a decline in the availability of mortgage finance and the continued effect of global market volatility.

UK and global economic conditions and uncertainties may have an adverse effect on the quality of Santander UK's loan portfolio and may result in a rise in delinquency and default rates and write-offs/charge-offs. There can be no assurance that Santander UK will not have to increase its provisions for loan losses in the future as a result of future increases in non-performing loans or for other reasons beyond its control. Any increases in Santander UK's provisions for loan losses could materially and adversely affect Santander UK's financial condition and results of operations.

Santander UK's business is conducted in a highly competitive environment

The market for UK financial services is highly competitive and the financial crisis has re-shaped the banking landscape in the United Kingdom, reinforcing both the importance of a retail deposit funding base and strong capitalisation. The financial industry's renewed focus on building retail deposit bases has resulted in greater pricing competition in terms of interest rates offered, and management expects such competition to intensify in response not only to regulatory actions but to other factors, including competitor behaviour, consumer demand, technological changes, the impact of consolidation. If financial markets remain unstable, financial institution consolidation may continue. Moreover, the UK government has effectively nationalised some of the country's largest banks and has implemented a preferred equity programme open to all financial institutions and another programme to guarantee short-term and certain medium-term debt of financial institutions, among other measures. These measures could lead to increased government ownership and control over financial institutions in the UK and further consolidation in the financial industry, all of which could adversely affect Santander UK's business, financial condition and results of operations. Santander UK's financial condition and results of operations may be materially and adversely affected by competition, including declining lending margins or competition for savings driving up funding costs that cannot be recovered from borrowers. If Santander UK is not successful in retaining and strengthening customer relationships, it may lose market share, incur losses on some or all of its activities or fail to attract new deposits and retain existing deposits, which could materially and adversely affect its financial position and results of operations.

Operational risks are inherent in Santander UK's business

Operational losses can result from fraud, criminal acts, errors by employees, failure to document transactions properly or to obtain proper authorisation, failure to comply with regulatory requirements and conduct of business rules, failure or breakdown of accounting, data processing and other record keeping systems, natural disasters, or failure or breakdown of external systems, including those of Santander UK's suppliers or counterparties.

Santander UK's business could be affected if its capital is not managed effectively

Effective management of Santander UK's capital position is important to its ability to operate its business, to continue to grow organically and to pursue its strategy. Any future change that limits Santander UK's ability to manage its balance sheet and capital resources effectively or to access funding on commercially acceptable terms could have a material adverse effect on Santander UK's financial condition and regulatory capital position.

Santander UK relies on recruiting, retaining and developing appropriate senior management and skilled personnel

Santander UK's continued success depends in part on the continued service of key members of its management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of Santander UK's strategy. The successful implementation of Santander UK's growth strategy depends on the availability of skilled management, both at its head office and at each of its business units. If Santander UK or one of its business units or other functions fails to staff their operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, its business, financial condition and results of operations, including control and operational risks, may be adversely affected. Likewise, if Santander UK fails to attract and appropriately train, motivate and retain qualified professionals, its business may also be affected.

Reputational risk could cause harm to Santander UK and its business prospects

Santander UK's ability to attract and retain customers and conduct business transactions with its counterparties could be adversely affected to the extent that its reputation, or the reputation of affiliates operating under the Santander brand, is damaged. Failure to address, or appearing to fail to address, various issues that could give rise to reputational risk could cause harm to Santander UK and its business prospects. Reputational issues include, but are not limited to appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; adequacy of anti-money laundering processes; privacy issues; record-keeping; sales and trading practices; proper identification of the legal, reputational, credit, liquidity and market risks inherent in products offered; and general company performance. The failure to address these issues appropriately could make customers unwilling to do business with Santander UK, which could adversely affect its results of operations.

Santander UK's businesses are subject to substantial legislation, regulatory and governmental oversight

Santander UK is subject to financial services laws, regulations, administrative actions and policies in each location in which it operates and, indirectly, in Spain, as a result of being part of Banco Santander, S.A.. During the recent market turmoil, there have been unprecedented levels of government and regulatory intervention and scrutiny, and changes to the regulations governing financial institutions. In addition, in light of the financial crisis, regulatory and governmental authorities are considering, or may consider, further enhanced or new legal or regulatory requirements intended to prevent future crises or otherwise ensure the stability of institutions under their supervision in addition to those measures that have already been announced. For instance, the UK Government published a White Paper on 8 July 2009 (HM Treasury paper "Reforming Financial Markets" (CM 7667)) which contained a number of proposals for reforming the UK financial system, including more stringent capital and liquidity requirements for systemically significant firms, requirements for banks to develop detailed plans for winding down their businesses and enhanced regulatory powers for the UK Financial Services Authority. A number of the proposals set out in the White Paper now form part of the Financial Services Bill that was published on 19 November 2009 and which is currently going through the UK Parliamentary approval process. In November 2009, the UK Financial Services Authority also released the Banking Conduct of Business sourcebook, a set of rules and guidance that regulate how authorised banks conduct business with their customers, including rules relating to communications, cancellation rights and information rights of customers.

Recent proposals and measures taken by governmental and regulatory authorities and future changes in supervision and regulation, in particular in the UK, which are beyond Santander UK's control, could materially affect Santander UK's business, the products and services offered or the value of assets as well as Santander UK's operations and result in significant increases in operational costs. Changes in UK legislation and regulation to address the stability of the financial sector may also affect the competitive position of the UK banks, including Santander UK, particularly if such changes are implemented before international consensus is reached on key issues affecting the industry, for instance in relation to the UK Financial Services Authority's proposals on liquidity risk management (see the risk factor "Santander UK is subject to regulatory capital and liquidity requirements that could limit its operations" below for further details). Certain proposed regulatory changes in the area of asset-backed securitisation, which has historically been a major source of funding for Santander UK, may impact the ability to use securitisation as a source of funding in the future. Although Santander UK works closely with its regulators and continually monitors the situation, future changes in regulation, fiscal or other policies can be unpredictable and are beyond the control of Santander UK. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have an adverse effect on Santander UK's business. The resolution of a number of issues, including regulatory investigations and reviews and court cases affecting the UK financial services industry, including Santander UK, could have a negative impact on Santander UK's results of operations or on its relations with some of its customers and potential customers.

Santander UK is subject to regulatory capital and liquidity requirements that could limit its operations

Santander UK is subject to capital adequacy requirements adopted by the UK Financial Services Authority for banks, which provide for a minimum ratio of total capital to risk-adjusted assets both on a consolidated basis and on a solo basis, expressed as a percentage. If Santander UK fails to maintain its ratios this may result in administrative actions or sanctions against it which may impact Santander UK's ability to fulfil its obligations.

However, in response to the recent financial crises, the UK Financial Services Authority will impose more stringent capital adequacy requirements, including increasing the minimum regulatory capital requirements imposed on Santander UK. For instance, the UK Financial Services Authority has adopted a supervisory approach in relation to certain UK banks, including Santander UK, under which those banks are expected to maintain tier 1 capital in excess of the minimum levels required by existing UK Financial Services Authority rules. The UK Financial Services Authority is also consulting on changes to the eligibility criteria for tier 1 capital as well as requirements that may result in banks increasing the level of regulatory capital held in respect of trading book risks, implementing the recent amendments to the EU-wide capital adequacy requirements (as set out in the amended Directive 2006/48/EC and Directive 2006/49/EC, collectively referred to as the "Capital Requirements Directive").

In December 2009, the Basel Committee on Banking Supervision also published and is currently consulting on a number of proposals to reform international capital adequacy and liquidity standards in order to increase resilience in the banking sector to financial and economic stresses. Proposals include phasing out innovative tier 1 instruments with incentives to redeem and implementing a leverage ratio on institutions in addition to current risk-based regulatory capital requirements. Measures are also proposed to promote the building of counter-cyclical capital buffers that may be drawn upon in stress scenarios, such as limiting the ability of institutions to distribute capital (dividend payments, discretionary bonus payments, share repurchases) in the event that the institution's capital (over and above minimum capital adequacy requirements) fall under prescribed thresholds, thereby conserving capital in stress scenarios.

On 5 October 2009, the UK Financial Services Authority published its new liquidity rules which significantly broaden the scope of the existing liquidity regime and are designed to enhance regulated firms' liquidity risk management practices. As part of these reforms, the UK Financial Services Authority is also expected to gradually implement requirements for financial institutions to hold prescribed levels of liquid assets and have in place other sources of liquidity to address the institution-specific and market-wide liquidity risks that institutions may face in short-term and prolonged stress scenarios.

These measures could have a material adverse effect on Santander UK's results of operations, financial condition and prospects. There is a risk that changes to the UK capital adequacy regime may result in increased minimum capital requirements, which could reduce available capital and thereby affect Santander UK's ability to pay dividends, continue organic growth or pursue acquisitions or other strategic opportunities. In addition, changes to the eligibility criteria for tier 1 capital may impact Santander UK's ability to raise tier 1 capital or the eligibility of existing tier 1 capital resources (although this risk may be mitigated if the UK Financial Services Authority adopt measures to grandfather the regulatory capital treatment of existing tier 1 resources that do not comply with any revised criteria).

There is also a risk that implementing and maintaining enhanced liquidity risk management systems may incur significant costs and more stringent requirements to hold liquid assets and liquidity facilities may materially impact Santander UK's lending business as more funds may be required to acquire or maintain liquidity resources.

In the United Kingdom Santander UK is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers

In the United Kingdom, the Financial Services Compensation Scheme (the "FSCS") was established under FSMA and is the UK's statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation to customers if a UK Financial Services Authority authorised firm is unable, or likely to be unable, to pay claims against it (for instance, an authorised bank is unable to pay claims by depositors). The FSCS is funded by levies on firms authorised by the UK Financial Services Authority, including Santander UK and other members of the Group.

In the event that the FSCS raises funds from authorised firms, raises those funds more frequently or significantly increases the levies to be paid by such firms, the associated costs to Santander UK may have a material impact on its results of operations or financial condition. The recent measures taken to protect the depositors of deposit-taking institutions involving the FSCS have resulted in a significant increase in the levies made by the FSCS on the industry and may do so in the future if similar measures are required to protect depositors of other institutions.

In addition, regulatory reform initiatives in the UK and internationally may result in further changes to the FSCS, which could result in additional costs and risks for Santander UK. For instance, the UK Government has proposed a consultation on pre-funding the FSCS, which may affect the profitability of Santander UK (and other members of the Group required to contribute to the FSCS), although it has made clear that pre-funding would not be introduced before 2012. Furthermore, the UK Financial Services Authority has proposed that UK deposit-taking institutions develop systems by 31 December 2010 to enable the institution to produce an aggregated view of each customer's eligibility for compensation in the event of a failure (a "Single Customer View"), which may require Santander UK to incur significant costs arising from the development and implementation of systems and controls that would enable Single Customer Views to be produced.

To the extent that other jurisdictions where Santander UK operates have introduced or plan to introduce similar compensation, contributory or reimbursement schemes, the Group may incur additional costs and liabilities which may negatively impact its results of operations or financial condition.

The UK Banking Act 2009 may adversely affect the Group's business

The UK Banking Act 2009 (the "Act") came into force on 21 February 2009. The Act creates a special resolution regime ("SRR") which provides the UK HM Treasury, the Bank of England and the UK Financial Services Authority (the 'Authorities') with a variety of tools for dealing with UK institutions which are authorised deposit takers (such as the Company) which are failing, and in certain circumstances, their holding companies. The Act replaced the emergency powers contained in the Banking (Special Provisions) Act 2008 (which powers ceased to be exercisable on 21 February 2009, when the Act came into force).

The Act enables the Authorities, in specified circumstances, to: (i) take a bank or a bank holding company into temporary public ownership ("TPO"); (ii) transfer all or part of the business of a bank to a private sector purchaser ('PSP'); or (iii) transfer all or part of the business of a bank to a bridge bank owned by the Bank of England ('Bridge Bank'). The SRR also comprises a new insolvency procedure and a new administration procedure, each of specific application to banks.

TPO and PSP transfers may be effected via a compulsory transfer of securities in the affected entity (which includes bonds). PSP and Bridge Bank transfers may be effected via a compulsory transfer of the affected entity's assets and liabilities.

SRR transfers are subject to the satisfaction of two general conditions. In summary, the UK Financial Services Authority must determine that (i) the bank is failing or likely to fail to meet its regulatory threshold conditions (within the meaning of section 41(1) of the UK Financial Services and Markets Act 2000); and (ii) having regard to timing and other relevant circumstances, it is not reasonably likely that (ignoring the stabilisation powers under the Act), action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions (ignoring for this purpose, UK HM Treasury or Bank of England financial assistance). There are additional trigger conditions which must be satisfied, the nature of which depends on the nature of the transfer and certain statutory objectives to which the Authorities must have regard in operating the SRR.

SRR transfers under the Act may impact the rights of transferors and third parties in relation to the affected institution. Legal or contractual rights which would operate to inhibit the transfer or which would otherwise be triggered by the transfer (and in certain other circumstances) can be disregarded and SRR transfers can take effect free from trusts, liabilities or other encumbrances. A PSP or Bridge Bank transfer may involve a partial transfer of the affected institution's property which could lead to the rights and obligations of counterparties of the affected institution being split between the transferor and transferee entity (although the Act and the Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009 do restrict partial property transfers to some extent including protection such that certain partial property transfers may not provide for the transfer of some, but not all, of the property, rights and liabilities which are, or form part of, a "capital market arrangement" (as that expression is currently defined in the UK Insolvency Act 1986) to which the relevant institution is a party).

The Act confers wide-ranging ancillary powers on the Authorities to enable SRR transfers and to ensure the continuity of the transferred business. In particular, the UK HM Treasury is given the power to change the law, either generally or specifically and with immediate or with retrospective effect, if the UK HM Treasury feels it is necessary or desirable in order to make a power under the SRR more effective. The Act includes provisions to effect the payment of compensation to transferors under an SRR transfer and third parties. In general, there is considerable uncertainty about the scope of the powers afforded to the Authorities under the Act and how the Authorities may choose to exercise them.

If an instrument or order were made under the Act in respect of Santander UK, such instrument or order (as the case may be) may (amongst other things) (i) result in a compulsory transfer of securities or property of Santander UK and/or (ii) impact on the rights of holders of securities and/or result in the nullification or modification of the terms and conditions of such securities and/or (iii) result in the de-listing of the securities.

At present, no instruments or orders have been made under the Act in respect of Santander UK and there has been no indication that any such order will be made, but there can be no assurance that this will not change and/or that holders of securities will not be adversely affected by any such order if made in the future.

Risks concerning enforcement of judgements made in the United States

Santander UK plc is a public limited company registered in England and Wales. All of the Company's Directors live outside the United States of America. As a result, it may not be possible to serve process on such persons in the United States of America or to enforce judgements obtained in US courts against them or Santander UK based on the civil liability provisions of the US federal securities laws or other laws of the United States of America or any state thereof. The Directors' Report on pages 88 to 98 has been prepared and presented in accordance with and in reliance upon English company law and the liabilities of the Directors in connection with that Report shall be subject to the limitations and restrictions provided by such law. Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Directors' Report on pages 88 to 98. Under this safe harbour, the Directors would be liable to the Company (but not to any third party) if the Directors' Report contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.

Taxation for US investors

The following is a summary, under current law, of the principal UK and US federal income tax considerations relating to the beneficial ownership by a US taxpayer of the 8.963% Non-Cumulative Perpetual Preferred Limited Partnership Interests and the 8.963% Non-Cumulative Trust Preferred Securities. The following summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the perpetual securities as capital assets. US residents should consult their local tax advisers, particularly in connection with any potential liability to pay US taxes on disposal, lifetime gift or bequest of their perpetual securities.

United Kingdom taxation on dividends

Under UK law, income tax is not withheld from dividends paid by UK companies. Shareholders, whether resident in the UK or not, receive the full amount of the dividend actually declared.

United Kingdom taxation on capital gains

Under UK law, when you sell shares you may be liable to pay either capital gains tax or corporation tax on chargeable gains. However if you are either:

>	an individual who is neither resident nor ordinarily resident in the UK; or
>	a company which is not resident in the UK.

you will not be liable to UK tax on any capital gains made on disposal of your shares. The exception is if the shares are held in connection with a trade or business that is conducted in the UK through a branch or agency (for capital gains tax purposes) or a permanent establishment (for corporation tax purposes).

United Kingdom inheritance tax

Under the current estate and gift tax convention between the US and the UK, shares held by an individual shareholder who is:

>	domiciled for the purposes of the convention in the US; and
>	is not for the purposes of the convention a national of the UK;
will not be subject to UK inheritance tax on:
>	the individual's death; or
>	on a gift of the shares during the individual's lifetime.

The exception is if the shares are part of the business property of a permanent establishment of the individual in the UK or, in the case of a shareholder who performs independent personal services, pertain to a fixed base situated in the UK.

Share Information

Sterling-denominated preference shares

At 31 December 2009, the Company had outstanding 325,000,000 sterling denominated preference shares, nominal value of £1.00 each. The sterling denominated preference shares were issued on 23 October 1995, 13 February 1996 and 9 June 1997. Currently, the only trading market for these sterling denominated preference shares is the London Stock Exchange.

Major shareholders

As at 31 December 2009, the Company was a wholly owned subsidiary of Banco Santander, S.A.. The acquisition was effected by means of a scheme of arrangement under Section 425 Companies Act 1985 on 12 November 2004. The ordinary shares in the Company were cancelled and holders of the Company's shares who were on the shareholders' register at 4.30pm on 12 November 2004 received one Banco Santander, S.A. share for each Company share.

Exchange controls

There are no UK laws, decrees or regulations that restrict Santander UK's export or import of capital, including the availability of cash and cash equivalents for use by Santander UK, or that affect the remittance of dividends or other shareholder payments to non-UK holders of Company shares, except as outlined in the section on Taxation for US investors above.

Contact Information

Santander UK plc registered office, principal office and investor relations department

2 Triton Square

Regent's Place

London

NW1 3AN

Registered Number 2294747

Registered in England and Wales

Santander shareholder department

Banco Santander, S.A.

2 Triton Square

Regent's Place

London

NW1 3AN

Phone numbers

Santander UK Switchboard

0870-607-6000

Santander Shareholder Services

0871-384-2000

+44 (0) 121-415-7188 (overseas)

Documents on display

The Company is subject to the information requirements of the US Securities Exchange Act of 1934. In accordance with these requirements, the Company files its Annual Report and Accounts and other related documents with the US Securities and Exchange Commission. These documents may be inspected by US investors at the US Securities and Exchange Commission's public reference rooms, which are located at 100 F Street, NE, Room 1580, Washington, DC 20549-0102. Information on the operation of the public reference rooms can be obtained by calling the US Securities and Exchange Commission on +1-202-551-8090 or by looking at the US Securities and Exchange Commission's website at www.sec.gov.

Articles of Association

Pursuant to the requirements of Item 10(B) of Form 20-F, the following is a summary of the Articles of Association of the Company.

Santander UK plc is a public company registered in England and Wales, registered number 2294747. The Articles of Association do not specifically state or limit the objects of the Company and they are therefore unrestricted.

A Director shall not vote on, or be counted in the quorum in relation to any resolution of the Directors in respect of any contract in which he has an interest, or any resolution of the Directors concerning his own appointment, or the settlement or variation of the terms or the termination of is appointment.

Preference shares entitle the holder to receive a preferential dividend payment at a fixed or variable rate, such dividend to be payable on a date determined by the Board prior to the allotment of the shares. The Board will also determine whether these dividend rights are cumulative or non-cumulative. If dividends are unclaimed for twelve years, the right to the dividend ceases. The holders of any series of preference shares will only be entitled to receive notice of and to attend any general meeting of the Company if the preference dividend on the preference shares of such series has not, at the date of the notice of the general meeting, been paid in full in respect of such dividend periods as the Board may prior to allotment determine, in which case the holders of the preference shares will be entitled to speak and/or vote upon any resolution proposed; or, if a resolution is proposed at the general meeting, for, or in relation to, the winding-up of the Company; or varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the preference shares of such series, in which case the holders of the preference shares of such series will be entitled to speak and/or vote only upon such resolution; or in such other circumstances, and upon and subject to such terms, as the Board may determine prior to allotment.

Unless the Board determines, prior to allotment, that the series of preference shares shall be non-redeemable, each series shall be redeemable at the option of the Company on any date as the Board may determine prior to the date of allotment. On redemption the Company shall pay the amount due. The formula for calculation of any relevant redemption premium is set out in the Articles of Association.

There are no sinking fund provisions. Where the preference shares are partly paid, the Board may make further calls upon the holders. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.

Dividends are payable to the holders of ordinary shares. These ordinary shares are transferable. If dividends are unclaimed for twelve years, the right to the dividend ceases.

Subject to any special terms as to voting upon which any ordinary shares may be issued or may for the time being be held or any suspension or any abrogation of voting rights as set out in the Articles of Association, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote and every proxy present who has been duly appointed by a member shall have one vote. On a poll every member who is present in person or by proxy shall have one vote for every share of which he is the holder.

Subject to the prior rights of holders of preference shares, the Company pays dividends on its ordinary shares only out of its distributable profits and not out of share capital. Dividends are determined by the Board.

The Company's Articles of Association authorise it to issue redeemable shares, but the Company's ordinary shares are not redeemable. There are no sinking fund provisions. The Board may from time to time make calls upon the members in respect of any monies unpaid on their shares. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of ordinary shares.

Subject to the provisions of the UK Companies Act 2006, all or any of the rights attached to any class of shares (whether or not the Company is being wound up) may be varied with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of those shares. Additional quorum and voting requirements apply to such meeting.

General meetings shall be called by at least 14 clear days' notice (that is, excluding the day of the General Meeting and the day on which the notice is given). A general meeting may be called by shorter notice if it is so agreed, in the case of an annual general meeting, by all the shareholders having a right to attend and vote, or in other cases, by a majority in number of the shareholders having a right to attend and vote, being a majority together holding not less than 95 per cent in nominal value of the shares giving the right. The notice shall specify the date, time and place of the meeting and the general nature of the business to be transacted.

There are no restrictions on the rights to own securities for either resident or non-resident shareholders, other than those to which they may be subject as a result of the laws and regulations in their home jurisdiction.

Glossary of Financial Services Industry Terms

Term used in the Annual Report	US equivalent or brief description of meaning
Accounts	Financial statements
Allotted	Issued
Attributable profit	Net income
Balance sheet	Statement of financial position
Bills	Notes
Called up share capital	Ordinary shares or common stock and preferred stock, issued and fully paid
Capital allowances	Tax depreciation allowances
Combined Code	UK-derived principles of good corporate governance and code of best practice
Creditors	Payables
Current account	Checking account
Dealing	Trading
Debtors	Receivables
Deferred tax	Deferred income tax
Depreciation	Write-down of tangible fixed assets over their estimated useful lives
Fees and commissions payable	Fees and commissions expense
Fees and commissions receivable	Fees and commissions income
Finance lease	Capital lease
Freehold	Ownership with absolute rights in perpetuity
Interest payable	Interest expense
Interest receivable	Interest income
Loans and advances	Lendings
Loan capital	Long-term debt
Long-term assurance fund	Long-term insurance fund
Members	Shareholders
Articles of Association	Bylaws
Net asset value	Book value
Nominal value	Par value
One-off	Non-recurring
Ordinary shares	Common stock
Preference shares	Preferred stock
Premises	Real estate
Profit	Income
Provisions	Allowances
Share capital	Ordinary shares, or common stock, and preferred stock
Shareholders' funds	Stockholders' equity
Share premium account	Additional paid-in capital
Shares in issue	Shares outstanding
Tangible fixed assets	Property, plant and equipment
Undistributable reserves	Restricted surplus
Write-offs	Charge-offs

Term used in the Annual Report	Definition
Alt-A	Loans regarded as lower risk than sub-prime, but with higher risk characteristics than lending under normal criteria.
Arrears	Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency. When a customer is in arrears, his entire outstanding balance is said to be delinquent, meaning that delinquent balances are the total outstanding loans on which payments are overdue. Corporate customers may also be considered non-performing prior to being behind in fulfilling their obligations. This can happen when a significant restructuring exercise begins.
Asset backed products	Asset backed products are debt and derivative products that are linked to the cash flow of a referenced asset. This category includes asset backed loans; collateralised debt obligations (CDOs); collateralised loan obligations (CLOs); asset backed credit derivatives (ABS CDS); asset backed and mortgage backed securities.
Asset Backed Securities (ABS)	Securities that represent an interest in an underlying pool of referenced assets. The referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools of residential or commercial mortgages and, in the case of Collateralised Debt Obligations (CDOs), the referenced pool may be ABS or other classes of assets.
Average balances	Average balances which make up the average balance sheet are based upon monthly averages.
Basis point	One hundredth of a per cent (0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities.
Collateralised Debt Obligation (CDO)	Securities issued by a third party which reference Asset Backed Securities (ABSs) (defined above) and/or certain other related assets purchased by the issuer.
Collateralised Loan Obligation (CLO)	A security backed by the repayments from a pool of commercial loans. The payments may be made to different classes of owners (in tranches).
Collateralised Synthetic Obligation (CSO)	A form of synthetic collateralised debt obligation (CDO) that does not hold assets like bonds or loans but invests in credit default swaps (CDSs) or other non-cash assets to gain exposure to a portfolio of fixed income assets.
Commercial Mortgage Backed Securities (CMBS)	Securities that represent interests in a pool of commercial mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
Commercial Real Estate	Includes office buildings, industrial property, medical centres, hotels, malls, retail stores, shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties. Commercial real estate loans are those backed by a package of commercial real estate assets.
Commercial Paper	An unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date.
Conduit	A financial vehicle that holds asset-backed debt such as mortgages, vehicle loans, and credit card receivables, all financed with short-term loans (generally commercial paper) that use the asset-backed debt as collateral. The profitability of a conduit depends on the ability to roll over maturing short-term debt at a cost that is lower than the returns earned from asset-backed securities held in the portfolio.
Core Tier 1 capital	Called-up share capital and eligible reserves plus equity non-controlling interests, less intangible assets and deductions relating to the excess of expected loss over regulatory impairment allowance and securitisation positions as specified by the UK Financial Services Authority.
Core Tier 1 capital ratio	Core Tier 1 capital as a percentage of risk weighted assets.
Cost:income ratio	Operating expenses compared to total income.
Coverage ratio	Impairment allowances as a percentage of total non-performing loans and advances.
Credit conversion factors (CCFs)	The portion of an off-balance sheet commitment drawn in the event of a future default. The conversion factor is expressed as a percentage. The conversion factor is used to calculate the exposure at default (EAD).
Credit Default Swaps (CDS)	A credit derivative is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. A credit default swap is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer in the event of a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
Credit market exposures	Relates to commercial real estate and leveraged finance businesses that have been significantly impacted by the continued deterioration in the global credit markets. The exposures include positions subject to fair value movements in the Income Statement, positions that are classified as loans and advances and available for sale.
Credit spread	The yield spread between securities with the same coupon rate and maturity structure but with different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over the benchmark or risk-free rate required by the market to accept a lower credit quality.
Customer deposits	Money deposited by all individuals and companies that are not credit institutions. Such funds are recorded as liabilities in the Group's balance sheet under Deposits by Customers, Trading Liabilities or Financial Liabilities designated at Fair Value.
Debt restructuring	This occurs when the terms and provisions of outstanding debt agreements are changed. This is often done in order to improve cash flow and the ability of the borrower to repay the debt. It can involve altering the repayment schedule as well as reducing the debt or interest charged on the loan.
Delinquency	See 'Arrears'.
Economic capital	An internal measure of the minimum equity and preference capital required for the Group to maintain its credit rating based upon its risk profile.
Equity products	These products are linked to equity markets. This category includes listed equities, exchange traded derivatives, equity derivatives, preference shares and contract for difference (CFD) products.
Equity structural hedge	An interest rate hedge which functions to reduce the impact of the volatility of short-term interest rate movements on equity positions on the balance sheet that do not reprice with market rates.
Expected loss	The Group measure of anticipated loss for exposures captured under an internal ratings based credit risk approach for capital adequacy calculations. It is measured as the Group-modelled view of anticipated loss based on Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD), with a one-year time horizon.
Exposure at default (EAD)	The estimation of the extent to which the Group may be exposed to a customer or counterparty in the event of, and at the time of, that counterparty's default. At default, the customer may not have drawn the loan fully or may already have repaid some of the principal, so that exposure is typically less than the approved loan limit.
First/Second Charge	First charge (also known as first lien): debt that places its holder first in line to collect compensation from the sale of the underlying collateral in the event of a default on the loan. Second charge (also known as second lien): debt that is issued against the same collateral as higher charge debt but that is subordinate to it. In the case of default, compensation for this debt will only be received after the first charge has been repaid and thus represents a riskier investment than the first charge.
Full time equivalent	Full time equivalent employee units are the on-job hours paid for employee services divided by the number of ordinary-time hours normally paid for a full-time staff member when on the job (or contract employee where applicable).
Funded/unfunded	Exposures where the notional amount of the transaction is either funded or unfunded. Represents exposures where a commitment to provide future funding has been made and the funds have been released/not released.
FX products	These products are derivatives linked to the foreign exchange market. This category includes FX spot and forward contracts; FX swaps; FX options.
Gain on acquisition	The amount by which the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities, recognised in a business combination, exceeds the cost of the combination.
Home Loans	A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan. The borrower gives the lender a lien against the property, and the lender can foreclose on the property if the borrower does not repay the loan per the agreed terms. Also known as a residential mortgage.
Impaired loans	Loans are reported as Credit Risk Loans (defined above) and comprise loans where individual identified impairment allowance has been raised and also include loans which are fully collateralised or where indebtedness has already been written down to the expected realisable value. The impaired loan category may include loans, which, while impaired, are still performing.
Impairment allowances	A provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss inherent in the lending book. An impairment allowance may either be identified or unidentified and individual or collective.
Individually/Collectively Assessed	Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available.
Interest rate products	Products with a payoff linked to interest rates. This category includes interest rate swaps, swaptions, caps and exotic interest rate derivatives.
Investment grade	A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of AAA to BBB.
Jaws	The difference between the growth in cost and the growth in income
Leveraged Finance	Loans or other financing agreements provided to companies whose overall level of debt is high in relation to their cash flow (net debt: EBITDA) typically arising from private equity sponsor led acquisitions of the businesses concerned.
Liquidity and Credit enhancements	Credit enhancement facilities are used to enhance the creditworthiness of financial obligations and cover losses due to asset default. Two general types of credit enhancement are third-party loan guarantees and self-enhancement through over collateralization. Liquidity enhancement makes funds available if required, for other reasons than asset default, e.g. to ensure timely repayment of maturing commercial paper.
Loan loss rate	Defined as total credit impairment charge (excluding available for sale assets and reverse repurchase agreements) divided by gross loans and advances to customers and banks (at amortised cost).
Loan to deposit ratio	The ratio of the book value of the Group's commercial assets (i.e. retail, corporate and private banking assets) divided by its commercial liabilities (i.e. retail, corporate and private banking deposits, and shareholders' funds).
Loan to value ratio (LTV)	The amount of a first mortgage charge as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the price of the loan to the borrower. LTV ratios may be expressed in a number of ways, including origination LTV and indexed LTV. Origination LTVs use the current outstanding loan balance and the value of the property at origination of the loan. Indexed LTVs use the current outstanding loan value and the current value of the property (which is estimated using one or more external house price indices).
Loans past due	Loans are past due when a counterparty has failed to make a payment when contractually due.
Loss Given Default (LGD)	The fraction of Exposure at Default (EAD) (defined above) that will not be recovered following default. LGD comprises the actual loss (the part that is not expected to be recovered), together with the economic costs associated with the recovery process.
Medium Term Notes (MTNs)	Corporate notes continuously offered by a company to investors through a dealer. Investors can choose from differing maturities, ranging from nine months to 30 years.
Monoline	An entity which specialises in providing credit protection to the holders of debt instruments in the event of default by a debt security counterparty. This protection is typically held in the form of derivatives such as credit default swaps (CDS) referencing the underlying exposures held.
Monoline Wrapped	Debt instruments for which credit enhancement or protection by a monoline insurer has been obtained. The wrap is credit protection against the notional and principal interest cash flows due to the holders of debt instruments in the event of default in payment of these by the underlying counterparty. Therefore, if a security is monoline wrapped its payments of principal and interest are guaranteed by a monoline insurer.
Mortgage Backed Securities (MBS)	Securities that represent interests in a group of mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
Mortgage vintage	The year the mortgage was issued.
Mortgage related securities	Securities which are referenced to underlying mortgages. See RMBS, CMBS and MBS.
Net Equity	The change in shareholders' equity between one period and another.
Net Interest Income	The difference between interest received on assets and interest paid on liabilities.
Non-asset backed debt instruments	These products are debt instruments. This category includes government bonds; US agency bonds; corporate bonds; commercial paper; certificates of deposit; convertible bonds; corporate bonds and issued notes.
Non-investment grade	A debt security, treasury bill or similar instrument with a credit rating measured by external agencies of BB+ or below.
Notional Collateral	Collateral based on the notional amount of a financial instrument.
Overdraft	A line of credit established through a customer's current account and contractually repayable on demand
Over the counter derivatives (OTC)	Contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. They offer flexibility because, unlike standardised exchange-traded products, they can be tailored to fit specific needs.
Own Credit	The effect of the Group's own credit standing on the fair value of financial liabilities.
Prime	Loans of a higher credit quality and would be expected to satisfy the criteria for inclusion into Government programmes.
Principal transactions	Principal transactions comprise net trading income and net investment income.
Private equity investments	Private equity is equity securities in operating companies not quoted on a public exchange. Investment in private equity often involves the investment of capital in private companies or the acquisition of a public company that results in the delisting of public equity. Capital for private equity investment is raised by retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Probability of default (PD)	The likelihood that a loan will not be repaid and will fall into default. PD may be calculated for each client who has a loan (normally applicable to wholesale customers/clients) or for a portfolio of clients with similar attributes (normally applicable to retail customers). To calculate PD, the Group assesses the credit quality of borrowers and other counterparties and assigns them an internal risk rating. Multiple rating methodologies may be used to inform the rating decision on individual large credits, such as internal and external models, rating agency ratings, and for wholesale assets market information such as credit spreads. For smaller credits, a single source may suffice such as the result from an internal rating model.
Renegotiated loans	Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. In the latter case renegotiation can result in an extension of the due date of payment or repayment plans under which the Group offers a concessionary rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will be individually impaired where the renegotiated payments of interest and principal will not recover the original carrying amount of the asset. In other cases, renegotiation will lead to a new agreement, which is treated as a new loan.
Repo/Reverse repo	A repurchase agreement that allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell a security to the lender subject to a commitment to repurchase the asset at a specified price on a given date. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement or reverse repo.
Residential Mortgage Backed Securities (RMBS)	Securities that represent interests in a group of residential mortgages. Investors in these securities have the right to cash received from future mortgage payments (interest and/or principal).
Restructured loans	Loans where, for economic or legal reasons related to the debtor's financial difficulties, a concession has been granted to the debtor that would not otherwise be considered. Where the concession results in the expected cash flows discounted at the original effective interest rate being less than the loan's carrying value, an impairment allowance will be raised.
Retail Loans	Loans to individuals rather than institutions. This includes both secured and unsecured loans such as mortgages and credit card balances.
Return on average shareholders' equity	Calculated as profit for the year attributable to equity holders of the Parent divided by the average shareholders' equity for the year, excluding non-controlling interests.
Risk asset ratio	A measure of the risk attached to the assets of a business using definitions of capital and risk weightings established in accordance with the Basel Capital Accord as implemented by the UK Financial Services Authority.
Risk weighted assets	A measure of a bank's assets adjusted for their associated risks. Risk weightings are established in accordance with the Basel Capital Accord as implemented by the UK Financial Services Authority.
Securitisation	A process by which debt instruments are aggregated into a pool, which is used to back new securities. A company sells assets to an SPV (special purpose vehicle) who then issues securities backed by the assets based on their value. This allows the credit quality of the assets to be separated from the credit rating of the original company and transfers risk to external investors.
Special Purpose Entities (SPEs) or Special Purpose Vehicles (SPVs)	Entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing activities. Transactions with SPEs/SPVs take a number of forms, including: - The provision of financing to fund asset purchases, or commitments to provide finance for future purchases. - Derivative transactions to provide investors in the SPE/SPV with a specified exposure. - The provision of liquidity or backstop facilities which may be drawn upon if the SPE/SPV experiences future funding difficulties. - Direct investment in the notes issued by SPEs/SPVs.
Structured Investment Vehicles (SIVs)	SPEs (Special Purpose Entities) which invest in diversified portfolios of interest earning assets to take advantage of the spread differentials between the assets in the SIV and the funding cost.
Structural liquidity	The liquidity available from current positions - principally unpledged marketable assets and holdings of term liabilities with long remaining lives.
Structured finance/notes	A structured note is an investment tool which pays a return linked to the value or level of a specified asset or index and sometimes offers capital protection if the value declines. Structured notes can be linked to equities, interest rates, funds, commodities and foreign currency.
Subordination	The state of prioritising repayments of principal and interest on debt to a creditor lower than repayments to other creditors by the same debtor. That is, claims of a security are settled by a debtor to a creditor only after the claims of securities held by other creditors of the same debtor have been settled.
Subordinated liabilities	Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer.
Sub-Prime	Defined as loans to borrowers typically having weakened credit histories that include payment delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, high debt-to-income ratios, or other criteria indicating heightened risk of default.
Tier 1 capital	A measure of a bank's financial strength defined by the UK Financial Services Authority. It captures Core Tier 1 capital plus other Tier 1 securities in issue, but is subject to a deduction in respect of material holdings in financial companies. 'Tier 1 capital ratio' The ratio expresses Tier 1 capital as a percentage of risk weighted assets.
Tier 2 capital	Defined by the UK Financial Services Authority. Broadly, it includes qualifying subordinated debt and other Tier 2 securities in issue, eligible collective impairment allowances, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss over regulatory impairment allowance, securitisation positions and material holdings in financial companies.
Total shareholder return	Defined as the value created for shareholders through share price appreciation, plus reinvested dividend payments.
Value at Risk (VaR)	An estimate of the potential loss which might arise from market movements under normal market conditions, if the current positions were to be held unchanged for one business day, measured to a confidence level.
Write-Down	After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded that there is no realistic prospect of further recovery. Write-downs will occur when, and to the extent that, the whole or part of a debt is considered irrecoverable.

Directors' Responsibility Statement

We confirm to the best of our knowledge:

1.	The financial statements, prepared in accordance with International Financial Reporting Standards, as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
2.	The management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.

By Order of the Board


António Horta-Osório	Antonio Lorenzo
Chief Executive	Chief Financial Officer
27 April 2010	27 April 2010

Cross-reference to Form 20-F

Part I
1	Identity of Directors, Senior Management and Advisers		*
2	Offer Statistics and Expected Timetable		*
3	Key Information	Selected Financial Data	189
		Capitalisation and Indebtedness	*
		Reasons for the Offer and use of Proceeds	*
		Risk Factors	192
4	Information on the Company	History and Development of the Company	6
		Business Overview	6
		Organisational Structure	7
		Property, Plant and Equipment	36
4A	Unresolved Staff Comments		N/a
5	Operating and Financial Review and Prospects	Operating Results	11
		Liquidity and Capital Resources	41
		Research and Development, Patents and Licenses, etc	N/a
		Trend Information	2
		Off-Balance Sheet Arrangements	40
		Contractual Obligations	40
6	Directors, Senior Management and Employees	Directors and senior management	86
		Compensation	92
		Board Practices	91
		Employees	93
		Share Ownership	93
7	Major Shareholders and Related Party Transactions	Major Shareholders	198
		Related Party Transactions	92, 166
		Interests of Experts and Counsel	*
8	Financial Information	Consolidated Statements and Other Financial Information	102
		Significant Changes	10, 88
9	The Offer and Listing	Offer Listing and Details	*
		Plan of Distribution	*
		Markets	N/a
		Selling shareholders	*
		Dilution	*
		Expenses of the Issue	*
10	Additional Information	Share Capital	*
		Articles of Association	200
		Material Contracts	28
		Exchange Controls	N/a
		Taxation	198
		Dividends and Paying Agents	*
		Statements by Experts	*
		Documents on Display	199
		Subsidiary Information	N/a
11	Quantitative and Qualitative Disclosures about Market Risk		49
12	Description of Securities Other Than Equity Securities	Debt Securities	*
		Warrants and Rights	*
		Other Securities	*
		American Depositary Shares	*
Part II
13	Defaults, Dividend Arrearages and Delinquencies		N/a
14	Material Modifications to the Rights of Security Holders and Use of Proceeds		N/a
15	Controls and Procedures	Disclosure Controls and Procedures	96
		Management's Annual Report on Internal Control over Financial Reporting	97
		Attestation Report of the Registered Public Accounting Firm	N/a
		Changes in Internal Control Over Financial Reporting	97
15T	Controls and Procedures		N/a
16A	Audit Committee Financial Expert		91
16B	Code of Ethics		94
16C	Principal Accountant Fees and Services		128
16D	Exemptions from the Listing Standards for Audit Committees		N/a
16E	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		N/a
16F	Change in Registrant's Certifying Accountant		N/a
16G	Corporate Governance		N/a
Part III
17	Financial Statements		N/a
18	Financial Statements		102
19	Exhibits		Filed with SEC

* Not required for an Annual Report.

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