ANÁLISIS DE LA DEMANDA

Member deposits

Member deposits have increased by £6.3 billion to £138.7 billion (2015: £132.4 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. The Group has continued to attract inflows from both new and existing members through the introduction of successful products such as our Help to Buy ISA and our range of loyalty regular

saver products. We estimate our share of the balance growth in the UK deposit market for the year to be 8.7% (2015: 3.4%). Of this balance growth, £2.2 billion relates to inflows into our current account products as we have increased our market share of main standard and packaged accounts from 6.8% to 7.1%, with in-credit balances on those accounts amounting to £14.8 billion (2015: £12.6 billion).

Note:

i. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on the Group’s balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings totalling £8.5 billion are unchanged from the prior year.

Debt securities in issue

Debt securities in issue of £36.1 billion (2015: £28.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the year to support increased liquidity.

The wholesale funding ratio has increased to 24.8% (2015: 23.3%), as a result of the wholesale issuance activity. Further details on the Group’s wholesale funding mix and liquidity holdings are included in the ‘Liquidity and funding risk’ section of the Business and Risk Report.

Other financial liabilities

Other financial liabilities include customer and bank deposits of £15.9 billion (2015: £17.2 billion), permanent interest bearing shares (PIBS) of £0.4 billion (2015: £0.4 billion), subordinated debt of £1.8 billion (2015: £2.1 billion) and derivatives and fair value adjustments of £3.5 billion (2015: £4.0 billion). Derivatives and fair value adjustments largely comprise interest rate and other derivatives with negative fair values, taken out to hedge financial risks inherent in our core lending and funding activities.

CET1 capital resources have increased over the period by approximately £0.7 billion mainly as a result of a strong operating performance with £985 million of profit after tax for the period.

Risk weighted assets (RWAs) reduced over the period by approximately £2.3 billion due to reduced commercial RWAs, lower retail unsecured RWAs (resulting from model development) and lower residential lending RWAs as a result of house price inflation, which more than offset portfolio growth. The movements described above have resulted in an increase in the CET1 ratio to 23.2% (2015: 19.8%). The leverage ratio has increased to 4.2% (2015: 4.1%) as growth in Tier 1 capital has outstripped the balance sheet growth, which has been driven by increases in residential mortgage and liquidity balances. The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements

are yet to be finalised, regulatory announcements during the financial year mean that we have better visibility of expectations for future capital requirements. The Group will remain engaged in the development of the regulatory approach to ensure we are prepared for any change. We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and countercyclical leverage ratio buffer of 0.4%. The Financial Policy Committee could set a countercyclical leverage buffer up to 0.9%, but has so far set the buffer at 0.2%, which is expected to apply from March 2017. The Group’s strategic leverage ratio target of 4.5% reflects its desire to maintain strong levels of capital relative to maximum regulatory expectations (4.25%).

Further details of the capital position are included in the ‘Solvency risk’ section of the Business and Risk Report.

4 April 2016 4 April 2015

£m £m

Capital resources (note i)

Common Equity Tier 1 (CET1) capital 8,013 7,279 Total Tier 1 capital 9,005 8,271 Total regulatory capital 10,654 9,950

Risk weighted assets (RWAs) 34,475 36,804

Leverage exposure 213,181 200,665

CRD IV capital ratios % %

CET1 ratio 23.2 19.8

Leverage ratio (note ii) 4.2 4.1

Capital structure

23.2%

CET1 ratio

4.2%

leverage ratio

i. Data in the table is reported under CRD IV on an end point basis.

ii. The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

Capital structure

Str

at

egic R

eport

Taxation

The Group has adopted the Code of Practice on Taxation for Banks and has established appropriate processes and oversight to ensure it meets its obligations under the Code. As a result the Group manages its tax obligations to ensure full compliance with all statutory requirements and does not structure transactions to give a result which is contrary to the intentions of Parliament. This includes working with HMRC in real-time to agree the tax treatment of transactions where the law is uncertain. Tax planning is undertaken where it supports genuine commercial activity in order to maximise member value. The Group maintains an open and transparent relationship with HMRC and has been granted a low risk status. An in-house team of tax specialists is responsible for managing the Group’s tax affairs in accordance with an Audit Committee endorsed tax policy. This provides a framework for the operation, planning and oversight of tax and tax risk to

ensure the Group complies with all relevant tax legislation and minimises reputational risk. Regular updates are provided to the Audit Committee on tax matters.

The Group maintains a branch presence in the Isle of Man and Republic of Ireland as part of normal business operations.

Total tax contribution

A measure of the contribution the Group makes to our wider society is through the amount of taxes it pays on its activities. During the year ended 4 April 2016 the Group paid £542 million (2015: £427 million) in taxes. This includes irrecoverable VAT, bank levy, employment and property taxes in addition to corporation tax and the banking surcharge. A further £342 million (2015: £358 million) was collected and remitted on behalf of customers and employees. An analysis of the taxes paid and collected by the Group is detailed below.

Taxes withheld at source (on savings accounts) Payroll tax Net VAT

Additional taxes collected and remitted 2015/16 Additional taxes collected and remitted 2014/15

£203m £187m £149m £154m £6m £1m Total £342m £358mTotal Notes:

i. The banking surcharge at 8% of profits chargeable to corporation tax on banking business applied from 1 January 2016. ii. Bank levy includes £2 million (2015: £2 million) paid in Ireland for the Irish bank levy.

Corporate tax and banking surcharge (notei) Irrecoverable VAT

Employment taxes Taxes on property Bank levy (noteii)

Taxes paid in the year 2015/16

£23m£33m £25m£22m £254m £165m £177m £163m £55m _£52m Total £542m £427mTotal

To manage Policies and practices are in place to ensure that

Lending

risk •• the Group lends responsibly, only taking risks that are well understood the Group builds prudent loan portfolios, primarily focused on residential mortgages, without creating undue risk concentrations and controls exposure to higher risk portfolios

• the Group only participates in non-member business where it has existing capabilities and earns a premium return on capital or provides valuable services to members.

Financial

risk •• the Group maintains a strong balance sheet with prudent levels of liquidity and diverse sources of funding the Group maintains a strong capital base above regulatory requirements

• the Group can withstand a severe stress event without any significant disruption to products and services.

Operational

risk • the Group operates its business to ensure a minimum level of serious disruption to customers, brand andreputation with systems and services designed to achieve defined levels of availability and performance.

Conduct and compliance risk

• the Group never knowingly creates unfair outcomes for customers

• the Group’s products, services and distribution channels are designed, monitored and managed to provide value over time, accessibility, and meet the needs and experience expectations of our customers

• the Group has a strong, focused conduct culture, where conduct risk is embedded in governance

frameworks, to ensure adequate consideration, identification, management and mitigation of conduct risks

• the Group puts customers at the heart of everything it does, and this is reflected in its conduct outcomes.

Strategic

risk • the Group is committed to a mutual business model, and ensures this model remains sustainable withinlegal and regulatory requirements

• the Group focuses strategic decisions on achieving the best long term outcome for its members.

Risk overview