Member Article

Bank lending grows for first time since 2008

Business lending is still expected to grow in 2015 for the first time since the financial crisis, according the latest industry figures.

The EY ITEM Club forecast for financial services shows after five months of growth, net lending figures dropped in June as large corporates paid off debt.

However, the professional services company noted that, despite June’s figures, business lending will rise overall in 2015.

To show overall growth this year, net business lending in H2 2015 needs to be just 3% higher than H2 2014, EY reports.

The report states 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%, EY expects the figure 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.”

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.”

This was posted in Bdaily's Members' News section by Ellen Forster .