Covid pushes business borrowing up five-fold

UK businesses are set to borrow more than five times as much this year compared with the previous twelve months as a result of Covid-19, according to analysis from EY

Banks lent (net of repayments) non-financial companies £43.2bn between January and August 2020, a fivefold increase on the net amount they lent over the whole of 2019 (£8.8bn).

Supported by government-backed loan schemes, lending volumes peaked in March (£34bn) and continued at historically high levels over April and May, resulting in year-on-year growth in corporate loans rising from 0.6% in February to 11.1% in May.

Net business lending fell over June, July and August, indicating early repayment by firms that took out loans as a precautionary measure rather than for pressing cashflow needs.

However, for the vast majority of businesses the loans appear to have been critical, and it is forecast they will not start to repay debt, and reduce their borrowing, until 2022 or even later if local lockdowns materially affect the projected timeline to the return to more normal economic conditions, EY says.

The EY ITEM Club for Financial Services Forecast shows bank lending to households has also been significantly affected by the pandemic.

Demand for consumer credit is predicted to fall by 5.6% across 2020, the biggest decrease since 2011, and consumer confidence is likely to be affected further as new restrictions and local lockdowns are announced.

Growth in consumer credit is forecast to be just 0.5% next year, reflecting the prospect of heightened unemployment and continued consumer caution, which could worsen under the new Covid-19 restrictions.

During the lockdown between March and June this year, net lending via credit cards and personal loans turned negative for the first time in nine years as a total of £15.4bn of consumer credit was repaid.

Since coming out of lockdown consumer credit turned net positive, but the average monthly rise over July and August of £0.7bn was still some way below the pre-pandemic norm and overall consumer spending appears to be falling short of the level reached at the start of the year.

However, whilst mortgage approvals fell by almost 90% between February and May, mortgage lending picked-up as lockdown restrictions relaxed over the summer and is expected to end the year with annual growth of 3.2%.

Omar Ali, UK financial services managing partner at EY, said: ‘Financial services firms entered the pandemic in a position of capital strength and have supported the economy and business to unprecedented levels since March. ‘However, rising unemployment and the ongoing challenges faced by small businesses mean the outlook for the sector is testing.

‘Insurers are facing multiple challenges this year, asset managers are contending with a fall in assets under management and banks are facing squeezed interest margins, slow growth in consumer credit, and increased write-offs on loans.’

The EY ITEM Club expects write-off rates on consumer credit to rise from 1.3% this year to 2.5% in 2021 – a near-decade high. Mortgage write-off rates are expected to rise to 0.02% this year, which is double 2019’s 0.01%, before increasing further to 0.05% in 2021 – a rate last seen just after the financial crisis.

Banks are also likely to face losses in the coming months as some businesses miss their loan repayments. Total business loan losses are forecast to rise from 0.3% in 2019 to 0.4% and 0.5% this year and the next respectively.

Dan Cooper, UK head of banking at EY, said: ‘Businesses are operating under increasing pressure, relying more heavily on bank lending than ever before, while on the flip side, consumers are sitting tight and borrowing far less than would normally be expected.

‘This will naturally have an adverse effect on banks, especially as the potential for loan losses rise.

‘The more positive news is that housing market activity has held up better than expected, with mortgage lending volumes set for reasonable growth despite the broader challenges facing the economy.

‘However, exactly what impact the new lockdown restrictions and potential future virus control measures will have remains to be seen.’

Covid-19 related insurance pay-outs, including claims for event and travel cancellations, business interruption, and losses to investment portfolios are presenting challenges for growth in the insurance sector, the research found.

Continued ultra-low interest rates, and the Financial Conduct Authority’s insurance price review will likely have an impact on profits in 2021, but the sector is expected to experience positive growth in 2021.

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