Business lending grew by eight per cent in 2020 and is forecast to grow by a further 5.4 per cent this year, as firms borrow to survive the Covid-19 crisis.
A report from the EY Item Club showed that banks lent £35.5bn to businesses last year. £34.7bn of this was lent since the start of the pandemic in March, with a further £26bn forecast by the end of 2021.
And according to the EY Item Club, many firms are unlikely to be able to start repayments until 2024 due to the prolonged economic effects of the crisis.
Meanwhile, consumer credit is forecast to rise by only 2.1 per cent in 2021, after turning negative in 2020 and falling by a record 9.9 per cent, as many people made repayments during lockdown.
During the fourth quarter of 2020, around £3.9bn of consumer credit was repaid, while households’ bank deposits increased by £141bn between March and December, up from £42.5bn in the same period in 2019.
“For financial services firms the outlook is also improved, but, as noted, the risks remain predominantly to the downside,” said Anna Anthony, UK financial services managing partner at EY.
“The sector is heavily supporting UK businesses through this challenging time, and business lending growth in particular is expected to remain historically high through 2021, although slowing from 2020’s rate of expansion.
“Looking at household borrowing, although consumer credit is expected to increase 2.1 per cent this year, this is a modest rise, reflecting continued consumer caution and the prospect of heightened unemployment as the Job Retention Scheme ends in April.”
EY Item Club also showed that mortgage lending is forecast to increase by 2.3 per cent this year and 2.6 per cent in 2022. This is down slightly from the three per cent growth in 2020, as demand is set to cool.
“A tightening of lending conditions for high loan-to-value mortgages and the stamp duty holiday ending in April means the mortgage market is showing signs of cooling off, despite ending 2020 on a strong note,” said Anthony.
“Slower growth in overall lending and pressure on net interest margins from low interest rates will both impact banks’ profitability.
“Profits will be even further challenged when government-backed business lending schemes draw to a close and credit losses rise, although with household savings at an all-time high, spending is expected to surge once lockdown restrictions appreciably ease.
“Whilst this is a difficult environment to operate in, banks entered the pandemic well capitalised, and are positioned to weather the storm.”