News Article

Bank Lending

Despite June blip, bank lending to businesses still set to grow in 2015

By CreditMan Tuesday, August 4, 2015

Business lending is still expected to grow in 2015 for the first time since the financial crisis, according to the latest EY ITEM Club forecast for financial services. After five months of growth, net lending figures plummeted in June as large corporates paid off debt, but June’s figures don’t dash hopes that business lending will rise overall in 2015. Net business lending in H2 2015 needs to be just 3% higher than H2 2014 for business lending figures to grow overall this year. And the outlook for gross lending is good; for H1 2015 gross lending is up 19% on 2014 figures, and is expected to pick up further.

Bank lending to businesses peaked in 2008 at £575bn, but has dropped year-on-year ever since. However, with the economy growing at a steady pace and business investment set to rise at an annual average of 6.5% over the next three years, the forecast suggests that the days of the lending squeeze are in the past. Banks are responding to the increased appetite for borrowing, and in the first six months of 2015, injected £103.4bn into UK businesses, compared to £88.6bn in the first half of 2014.

Although growth in 2015 will be marginal at just 0.25%, the figure is expected to continue rising over the next four years. By 2019 business lending is forecast to have grown by over 25% on 2014 levels. However, there remain concerns that lending to small businesses could be constricted by global regulation coming into force in 2019.

Omar Ali, UK Head of Banking and Capital Markets, says: “Consumer credit finally turned the corner in 2014, and now business lending will hopefully follow suit. The rising demand from businesses for new loans is good news for the banks, but the June drop in net lending shows how vulnerable they are to bigger businesses, with access to alternative sources of finance such as bonds, paying off overdrafts in preparation for rising interest rates.

“At this rate the rise in overall business lending this year will only be marginal. Add further fines on the horizon, the introduction of a banking tax surcharge, ongoing regulatory reform, and the pressure to create more competition to the mix, and you can see why banks won’t be pausing to celebrate yet. The sector needs to continue innovating and exerting tight controls on costs if it hopes to come even close to closing the gap with pre-crisis rates of profitability.”

Mortgage lending remains subdued but steady

Mortgage lending is forecast to rise modestly over the next four years, at an annual average rate of 3.8%. This is broadly in line with growth in household incomes and will be boosted by rising house prices and continued low interest rates.

Although double the average rate witnessed over the past four years (2010 - 2014), it remains weaker than the economic prospects the EY ITEM Club forecasts would typically imply, and significantly lower than the average annual 6% growth that followed the early 90s recession.

Andrew Goodwin, Senior Economic Advisor to the EY ITEM Club forecast for financial services, says: “With homeowners set for the 6th year running of historically-low borrowing costs, the demand for mortgages should continue to grow healthily, albeit at a far from spectacular pace. But whilst a low interest rate environment is good news for consumers, the prospect of a further year of squeezed interest margins is not what the banks were hoping for.

“A surge of cash buyers entering the property market is one reason we’re not expecting a boom in mortgage lending, alongside tighter regulations on lenders preventing things getting out of hand.”

The EY ITEM Club predicts that the BoE will not hike interest rates until autumn 2016. But even when rates do start to head up, the forecast of a return to more historically normal levels of lending spreads (around 1.5% compared to the current 2.1%) should cushion borrowers against the full impact of higher borrowing costs.

Record ‘big-ticket items’ sales is good news for insurers, but a plethora of new taxes will bite

The British public is expected to continue making large purchases in 2015, presenting market opportunities for general insurers. The forecast suggests that a record 2.57m new cars will be registered this year, while housing transactions are expected to rise by over 4% a year from 2015 to 2019.

Overall however, 2015 is not a year the UK insurance market will celebrate. After 2014 saw a doubling of profits, the EY ITEM Club forecast for financial services suggests that growth in profitability will take a hiatus in 2015 before gradually picking up to hit almost £10bn by 2019. This year, as the life insurance industry continues to grapple with the radical changes to the pensions market, general insurers were hit in the Chancellor’s Summer Budget with a 50% hike in insurance premium tax, which comes into force around the same time that insurers gear up for the Flood Re levy.

Mark Robertson, UK Head of Insurance at EY, says: “Despite improvement in the economic environment for insurance, large sweeping change has hit both the general and life sectors. While some insurers will use this to improve their market position, others will struggle to respond quickly to the changing environment.

“The pensions market continues in a state of flux, as the reforms are digested and implemented. The latest concern is that the level of change the British public has to contend with might cause them to lose faith in pension products, and become disengaged from long-term saving. The challenges to the general market lie with the various new tax rules. The unexpected rise in insurance premium tax, coupled with the imminent Flood Re levy, will mean costs are inevitably passed on to customers as insurers struggle to absorb such shocks to their business.”

Assets Under Management hit record high for fifth year running

The growth trajectory for UK asset managers is forecast to continue, with a fifth year of record-breaking assets under management (AUM). AUMs are expected to reach £920bn in 2015, 6.5% higher than in 2014, and are forecast to grow at an average of 7% each year until 2019, when they should hit £1.2tr.

Growth comes off the back of low interest rates, which is encouraging people to save more in investment products, as well as a general trend of rising household wealth. The pensions reforms are also stimulating growth within the sector, but it is slow, as asset managers play the long game to create products which will drive the best outcomes.

At a time of increasing market volatility and heightened uncertainty about the prospects for individual asset classes, multi-asset funds are expected to continue to outperform the broader market, rising to £183b by 2019 compared to £128b in 2014; a 44% increase.

Gill Lofts, UK Head of Wealth and Asset Management at EY, says: “The sector is currently enjoying the fruits of a strengthening economy and rising wealth, and prospects look bright. In particular, managers are focusing on bringing new long-term savings products to market, which will allow them to grab an ever larger slice of the household pensions and savings pie. Overnight solutions are not expected, but throughout the next five years we should see some really interesting developments in this space.

“It’s not all plain sailing however, and there are challenges ahead, not least the growing scrutiny of regulators. Changes in taxation are also looming, with the recent reforms to dividend taxation potentially a harbinger of things to come.”