"Covid-19 has caused unprecedented challenges for the UK economy... and has resulted in a staggering amount of money being lent to firms over a short period of time."
In contrast to the 2008 financial crisis, Covid-19 has seen bank lending to the corporate sector accelerate with many businesses seeking loans to help cover their costs as revenues stalled. Banks lent (net of repayments) non-financial companies just over £30bn in March – around 100 times the average of net lending over the twelve months to February. Aided by government-backed loan schemes, lending has continued at historically high levels resulting in annual growth rising from 0.6% in February to 11.1% in May.
The business lending growth forecast of 14.4% this year compares to 2% in 2019 and an average of -1.4% from 2010 to 2019. As the Government’s furlough support tapers off, business costs will rise and businesses are likely to be more constrained in taking on additional debt. Lending growth is forecast to slow to 7.1% in 2021. Firms as a whole are forecast to only start repaying debt in net terms, and reduce their borrowing, from 2022, reflecting the EY ITEM Club’s expectation that the economy’s return to normality will be relatively slow-paced.
The action taken by banks in the form of payment holidays on mortgage and consumer debt has helped cushion the impact of the pandemic on business and personal finances, and has created breathing space for borrowers, especially in the initial recovery phase. However, the economic impact of Covid-19 will likely lead to a rise in overall loan-losses, particularly once the furlough scheme ends and if unemployment subsequently rises.
Write-off rates on consumer credit are forecast to rise from 1.5% this year to 2.5% in 2021; a near-decade high. Mortgage write-off rates are expected to rise to 0.03% this year, which is three times 2019’s 0.01%, before doubling to 0.06% in 2021 – a rate last seen towards the end of the financial crisis. Banks are also likely to face losses in the coming months as some businesses struggle to meet their loan repayments. Business loan losses are forecast to rise from 0.3% in 2019 to 0.6% and 0.7% this year and the next respectively.
Omar Ali, UK financial services managing partner at EY, commented: “Covid-19 has caused unprecedented challenges for the UK economy, putting financial strain on both businesses and households, and has resulted in a staggering 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 will add pressure to their profitability and ultimately their ability to lend more to businesses to help kick start growth.”
Dan Cooper, UK head of banking at EY, added: “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 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.”
