August 10, 2020 @ 9:44 by Richard Dawson
A new forecast has predicted that bank lending to businesses will rise by 14.4 per cent this year – the highest level in 13 years – as many firms look to secure their financial future in the wake of the coronavirus pandemic.
According to the EY ITEM Club, companies will only be able to start to reduce their borrowing from 2022, with many UK corporates and SMEs relying heavily on debt financing to continue trading.
Conversely, the pandemic has caused a significant reduction in bank lending to households, with EY predicting consumer credit to fall by 15.9 per cent in 2020 – the biggest annual decline since records began in 1993.
It is also thought that mortgage lending will rise by just 2.6 per cent this year – the weakest growth since 2015.
Mike Scoular, managing partner for EY in Newcastle, said: “COVID-19 has caused significant challenges for the UK economy, putting financial strain on many businesses and households, and has resulted in an unprecedented amount of money being lent to firms over a short period of time.
“With a weakened economy, banks face increasing write-offs on all types of lending and, with slow growth for consumer credit forecast, this is likely to add pressure to their profitability and ultimately their ability to lend more to businesses to help kick start growth.”
In contrast to the 2008/9 financial crisis, COVID-19 has seen bank lending to the corporate sector accelerate dramatically, with loans to non-financial companies coming in at just over £30 billion in March alone.
This is around 100 times the average monthly lending over the 12 months to February.
The action taken by banks in the form of payment holidays on mortgage and consumer debt has also helped cushion the impact of the pandemic on business and personal finances, creating breathing space for borrowers in the initial recovery phase.
However, it is though that the economic impact of COVID-19 will lead to a rise in overall loan-losses, particularly once the furlough scheme ends and if unemployment subsequently rises.
Dan Cooper, UK Head of Banking at EY, concluded: “Even assuming the economy bounces back in the short term, we’re likely to see very weak growth in loans to home buyers and consumers for some time to come.
“However, the banks went into this crisis well capitalised and, despite the level of contraction in GDP this year, which the Office for Budget Responsibility (OBR) says is likely to be the biggest decline for 300 years, they have extended significant levels of support to businesses and consumers and are continuing to help drive the economic recovery.”