Businesses expected to have borrowed £61bn through the pandemic

Figures from EY ITEM Club show British businesses took on debt at more than twice the normal average growth rate since the coronavirus crisis began and are on course to have borrowed £ 61 billion by the end of 2021.

EY forecasts a £26 billion rise in borrowing from banks this year – as much as £17 billion more than in 2019  with the scale of debt raising fears of weaker investment and a hamstrung economic recovery.

The research shows that businesses borrowed £35.5 billion (in net terms) last year, with a further £26 billion forecast by the end of 2021,  Last year’s figure was £25 billion more than was borrowed on average over the previous five years, before the onset of the pandemic. While bank lending (including Covid-19 related government-backed loans) has been vital to businesses of all sizes during the pandemic, for SMEs it has been particularly critical. Following the UK’s third national lockdown, it is predicted that many businesses are unlikely to start making inroads into repaying their debt until 2024.

Covid-19, and the subsequent lockdowns, has also had a considerable impact on bank lending to households. Net lending via credit cards and personal loans turned 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 small pick-up this year (a 2.1% rise). As for mortgage lending, this remains subdued; it is predicted to grow by 2.3% this year, down from the 3% in 2020. These forecast figures are modelled on the assumption that the current lockdown lasts over Q1 and then restrictions are steadily relaxed as the vaccination programme is rolled out, allowing the country and economy to reopen again.

Anna Anthony, UK Financial Services Managing Partner at EY, said “Financial services firms entered the pandemic in a position of capital strength and have continued to support the economy and business through one of the most testing periods we have ever faced. That being said, there are a significant number of current challenges, and more that lie ahead. By the end of this year, businesses will have borrowed in the region of £60bn net since the start of the pandemic, which is a colossal amount, especially as for many it is just about survival, not expansion or growth. And the prospect of some, if not many firms, not being able make the required repayments is concerning for all involved.’

“As well as rising loan losses, banks are contending with another year of squeezed interest margins and subdued consumer lending. Insurers too are facing a tricky year, with ongoing COVID-19 related pay-outs, persistent low interest rates and the impact of the FCA pricing review. However, it’s not bleak across the entire sector, and the outlook is a little more positive for UK asset managers in 2021 and beyond, with assets under management (AUM) set to rise in 2021 and 2022 as global markets recover.”

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 £35.5 billion last year – £34.7billion of which was lent since the start of the pandemic in March. This is four times the amount it lent during the whole of 2019 (£8.8 billion).

In terms of percentage growth figures, 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. To set this in context, the average growth rate between 2015-2019 was 2.8%. The 5.4% forecast growth figure equates to an additional £26 billion net being lent to firms, which means that by the end of 2021, a projected £61bn will have been lent to firms since the start of the pandemic in March last year. 2021’s forecast rise is £17 billion more than was lent in 2019.

The rise in business lending has been particularly marked for small and medium-sized enterprises (SMEs). Net lending to SMEs in 2020 was more than 30 times higher than in 2019, according to the Bank of England.

As restrictions on activity are lifted and the economy starts to re-open, however, companies’ need to borrow to support their cashflow needs should reduce, with their focus shifting to repairing their balance sheets. 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.

While some firms took out loans as a precautionary measure last year and have since repaid these, for the vast majority the loans appear to have been crucial. It is forecast that many won’t start to make repayments until 2024, particularly during this period of continued low interest rates.

Net lending via credit cards and personal loans turned negative in 2020, falling by 9.9% – the largest drop since records began in 1994. This was due to a mix of low demand for finance and higher than normal repayments during the lockdowns. With the current national lockdown further restricting opportunities to spend, consumers are likely to continue making net repayments of credit card debt and personal loans throughout early 2021.

As for future big-ticket purchases, which in part drive consumer borrowing, it is predicted that some households will finance these using lockdown savings, rather than credit this year, suggesting that any rebound in consumer lending will remain subdued. The EY ITEM Club for Financial Services report expects that the stock of consumer credit will grow marginally this year by 2.1% and close 2021 at £206bn (compared to £202bn in 2020), reflecting the prospect of heightened unemployment and continued consumer caution.

With the housing market set to face a number of headwinds, mortgage lending isn’t expected to be quite as resilient to the economic challenges as predicted at the end of last year. Mortgage lending grew 3% in 2020 (a stock of home loans of £1.49tr), with predicted growth of 2.3% this year and 2.6% in 2022.

Housing activity remained strong towards the end of 2020 due to the release of pent-up demand, the temporary cut in Stamp Duty 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. In Q1 this year, mortgage lending could also see a renewed surge as buyers and sellers rush to beat the stamp duty deadline in March. However, the waning of pent-up demand, the end of the Stamp Duty Holiday on 1 April 2021 and a tightening of lending conditions for high loan-to-value (LTV) mortgages, partly reflecting a reduced appetite for risk from lenders, could all cool demand.

The economic impact of Covi-19, which has resulted in increased job losses and reduced income for some, is expected to lead to a further rise in loan-losses. The EY ITEM Club predicts write-off rates on consumer credit to rise from 1.2% in 2020 to 1.8% in 2021; a near-decade high (they were 1.9% in 2013). 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. Business loan losses are forecast to rise from 0.3% in 2020 to 0.5% this year, compared to 0.3 in 2018 and in 2019, before the onset of the pandemic.

Dan Cooper, UK Head of Banking at EY, said “Lending to businesses remains high, but a quick look behind the numbers reminds us that this is not a story of a boom in innovation, growth and expansion, rather it is about survival as the banks continue to facilitate the government-backed loan schemes. Consumer lending is subdued and the mortgage market is now showing signs of cooling off, which will squeeze overall net interest margins. Added to that, banks now have to ensure they’re ready to implement negative interest rates in six months’ time, following the Bank of England’s recent announcement – another significant ask which will place even more pressure on the industry.”

“The full impact on profitability levels of course remains to be seen and the industry will have to work through the challenges around rising credit losses when government-backed loan schemes come to an end. But for now, the banks are providing much-needed confidence and vital lines of finance for households and businesses up and down the country. And it is hoped, with the savings accumulated during lockdown, that this will fuel a rise in consumer spending once restrictions ease.”