Forecasts for UK business borrowing have been slashed as the economy rebounds from the Covid-19 pandemic more quickly than anticipated.
Banks are set to lend £19bn to British companies this year, up four per cent year on year but down from the £26bn forecast in February.
Growth is set to slow further in 2022 to 1.6 per cent as reliance on emergency funding declines and firms focus on shoring up their balance sheets, according to forecasts by the EY Item club.
The predictions are based on the government’s roadmap for easing Covid-19 lockdown restrictions.
Banks lent businesses £35.5bn in net terms last year — an eight per cent year on year increase — mainly to provide support during the pandemic.
Net lending via credit cards and personal loans also turned negative in 2020, falling by almost 10 per cent in the first decline since 2012.
But demand for consumer credit is expected to pick up again this year and return to almost pre-pandemic levels, fuelled by a surge in spending as restrictions are eased.
By contrast, mortgage lending activity is expected to slow down next year as the end of the stamp duty holiday and higher unemployment weigh on demand.
“Given how difficult the last 15 months have been for millions of families and businesses up and down the country, it’s encouraging that the economic recovery will be quicker and stronger than initially forecast, boosting the fortunes of businesses and sparking a rise in consumer spending. That’s not to say though that there won’t continue to be challenges ahead,” said Anna Anthony, UK financial services managing partner at EY.
“The banks will continue to support businesses and households through the pandemic and beyond, but modest lending growth on some fronts combined with the ongoing very low interest rate environment means the pressures on profitability will remain front of mind for the sector for the foreseeable future.”
Loan losses on consumer and business lending fell last year due to government support offered during the pandemic.
While banks are likely to face a rise in losses in the coming months as some businesses and consumers struggle to meet loan repayments, the increase is expected to be relatively small and far lower than the write-offs experienced after the financial crisis in 2008.
“Over a year on, the banks continue to face squeezed interest margins which will certainly affect profitability, but the level of loan defaults which initially appeared a possibility do not seem to be materialising,” said Dan Cooper, UK head of banking at EY.
“Results have been better than expected, with amendments to provisions being made accordingly. In addition, the savings built up during the lockdowns over the past year should help fuel a rise in consumer spending as the economy opens up.”