Banks to suffer from sluggish lending growth

Tim Wallace
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WEAK borrowing by businesses and households will dent banks’ finances in the coming years, analysts at the EY Item Club predicted today.

The strong economic recovery will not feed through to bank lending as much as it did in previous growth spurts, and could leave banks struggling to get back to sustainable levels of return on equity.

Banks’ shareholders have been looking forward to the recovery after years of pain following the financial crisis, with even strong banks struggling to pay out to their owners.

Instead, they have had to retain profits to build up capital buffers, tap up investors for more funds and have suffered from new regulations squeezing profitability.

Total household lending will grow by just 2.4 per cent this year, the Item Club predicts, a level which it sees as unusually weak for this period in the economic cycle – at the same point in the early 1990s, household credit growth stood at 5.6 per cent.

Business lending growth will be even worse at 1.5 per cent this year, a forecast revised down from the 2.5 per cent predicted over the winter.

By 2018 it predicts the stock of loans to businesses will still be 10 per cent below its 2008 level.

By contrast bond issuance is up 20 per cent since 2009, while more firms are relying on retained profits to expand.

“Low borrowing is good news for the sustainability of the recovery, but bad news for banks’ profitability,” said senior economic adviser at the EY Item Club, Martin Beck.

“Banks will need to continue exerting tight controls on costs and innovate further to close the gap with pre-crisis rates of profitability.”