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UK businesses borrowed £35.5bn in net terms last year, with a further £26bn forecast by the end of 2021, according to EY.

The professional services firm’s latest ITEM Club forecast noted that this is £25bn more than was borrowed on average over the previous five years, before the onset of the pandemic.

While bank lending – including Covid-related government-backed loans – has been vital to businesses of all sizes, for small and medium-sized enterprises (SMEs) it has been particularly critical.

Following continued lockdown restrictions, it is predicted that many businesses are unlikely to start making inroads into repaying their debt until 2024.

Government mandated restrictions have also had a considerable impact on bank lending to households, with net lending via credit cards and personal loans turning negative in 2020, falling by 9.9% – the largest drop since records began in 1994.

In addition, while demand for consumer credit is expected to enter positive territory in 2021, it is only set for a 2.1% rise, according to EY.

As for mortgage lending, it is also predicted to only grow by 2.3% this year, down from the 3% in 2020.

These forecasts are modelled on the assumption that the current lockdown lasts the duration of the first quarter and then restrictions are steadily relaxed as the vaccination programme is rolled out.

“By the end of this year, it is predicted that UK businesses, including many across Scotland, will have borrowed in the region of £60bn net since the start of the pandemic, and the prospect of some, if not many firms not being able make the required repayments, is concerning for all involved,” said Sue Dawe, head of financial services at EY Scotland.

“Through the market obstacles and headwinds to growth and profitability, compounded by ongoing Brexit uncertainty, financial services will continue to support consumers, businesses, communities and the wider economy through the pandemic and beyond – that we know for certain.”

Oliver Henderson, financial services associate partner for EY Scotland, added: “Scotland’s hospitality, leisure and retail sectors have been hit hardest during the pandemic, but despite challenges, many have shown a strong and resilient approach, demonstrating a keen ability to pivot to new ways of working, through innovation, new collaborations and new markets.”

Covid-19 has seen bank lending to the corporate sector surge, as many UK firms have relied on government-backed lending schemes to help them survive the crisis.

Banks lent – net of repayments – non-financial companies £35.5bn last year – £34.7bn of which was lent since the start of the pandemic in March.

Bank to business lending rose 8% in 2020 and is set to grow by a further 5.4% this year as firms seek to compensate for lost revenue, stated the EY report. To set this in context, the average growth rate between 2015-2019 was 2.8%.

The rise in business lending has been particularly marked for SMEs – more than 30 times higher in 2020 than in 2019, according to the Bank of England.

As firms look to start repaying loans, lending growth is forecast to slow to 1.8% in 2022 and 1.6% in both 2023 and 2024.

With lockdown restrictions still in force, mortgage lending isn’t expected to be quite as resilient to the economic challenges as predicted at the end of last year.

Housing activity remained strong towards the end of 2020 due to the release of pent-up demand, the temporary cut in Stamp Duty south of the border and record low mortgage rates.

Bank of England data showed that mortgage approvals – having fallen to a record low of 9,348 in May last year – closed 2020 at 818,500, the largest number in one year since 2007.

The report predicts write-off rates on consumer credit to rise from 1.2% in 2020 to 1.8% in 2021; a near-decade high, while mortgage write-off rates are expected to rise to 0.04% this year – four times 2020’s 0.01% – and stay at 0.04% in 2022.

Banks are also likely to face losses in the coming months as some businesses struggle to meet their loan repayments, noted EY.

Pandemic related insurance pay-outs, including claims for event and travel cancellations, business interruption and losses to investment portfolios, will present ongoing challenges for growth in the insurance industry.

The Financial Conduct Authority’s insurance price review is also expected to impact profitability this year, as insurers will have to offer existing customers the same prices as new customers.

However, for motor insurers particularly, the lockdowns have in many cases reduced accidents and subsequently lowered the number of claims.

The rise in the state pension age to 66 in October 2020, along with the increase in the UK population aged 65 or older projected by the Office for National Statistics – from 16.4m in 2020 to 18.1m by 2025 – may mean more money flowing into pension products.

At the same time, the sector continues to benefit from pensions auto-enrolment; although the latest official figures does show an 11% drop in employee contributions, possibly related to furlough.

Overall, EY forecasts life premiums to grow by 3.8% this year, after a projected fall of almost 10% in 2020.



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Post Author: EDONS