Consumer credit boosted by economy reopening

New analysis by EY ITEM Club’s Interim Bank Lending Forecast expects consumer credit to grow 10.5% in 2021 and 9.1% in 2022 as consumer spending rebounds post-lockdown.

Net lending via credit cards and personal loans turned negative in 2020 and remained in negative territory in the first three months of this year. Annual growth in February fell to -10%, the lowest level since records began in 1993, due to both low demand for credit and high levels of repayments, before recovering only marginally to -8.6% in March. From March 2020 to March 2021, the British public repaid a total of £23bn of credit card debt and personal loans – the biggest repayment over an equivalent period on record.

As restrictions are eased, a return to more normal spending patterns should cause consumer credit lending to turn positive, further supported by very low-interest rates on personal loans and credit cards. However, there are risks to the forecast: savings accumulated during the pandemic may fund some spending that would normally have been financed using credit, which could dampen the expected rebound in consumer lending.

Last year, housing market activity was far stronger than would be expected given the impact of COVID-19. The stock of mortgage lending grew by 3%, largely due to a release of pent-up demand following the lifting of lockdowns, the stamp duty holiday, record-low mortgage rates and fiscal support bolstering household incomes. With these factors still in play for much of this year, growth should continue at a similar pace (3% growth) in 2021, but is forecast to fall to 2.4% in 2022 as the end of the stamp duty holiday, higher unemployment and stretched affordability affect demand.

Over the next few months, the extension of the stamp duty holiday and the new mortgage guarantee scheme, introduced in March’s Budget to encourage banks to offer high loan-to-value mortgages, is expected to support transactions and mortgage demand. However, some macro developments such as the end of the furlough scheme in September – which may lead to an increase in unemployment – could weigh heavily on demand towards the end of this year and into next. Continued high property prices are also likely to be a drag on housing and mortgage demand, with the average UK house price now 7.8-times the average annual salary (£29,500).

Write-off rates on consumer and business lending fell last year due to government support offered during the pandemic. While banks are likely to face a rise in losses in the coming months as some consumers and businesses struggle to meet the required loan repayments, it is expected the increase will be relatively small this year and far lower than experienced after the financial crisis in 2008.

Write-off rates on consumer credit are forecast to rise from 1.2% in 2020 to 1.5% this year and 1.8% in 2022. In comparison, 2019’s rate was 1.46%. Mortgage write-off rates are expected to rise to 0.02% this year and 0.03% in 2022, three times higher than in 2019 (0.01%). Business loan losses are forecast to rise from 0.23% in 2021 to 0.36% next year, compared to 0.33% in 2019. To give further context, after the 2008 financial crisis, loan losses peaked at 0.08% for mortgages in 2009, 5.0% for consumer credit in 2010 and 1.6% for business loans in 2011.

Dan Cooper, UK Head of Banking said “Since the beginning of the pandemic, the banking sector has been focused on ensuring businesses and consumers have access to crucial lines of finance. The banks have facilitated record levels of emergency loans and managed their risk well, having learned valuable lessons from the 2008 financial crisis. While the economic shock from COVID-19 has not followed standard economics in many cases, and some of what was initially forecast has been revised due to how the pandemic has unfolded, at each turn the banks have prioritised their customers and maintained healthy capital buffers.

“Over a year on, the banks continue to face squeezed interest margins which will certainly affect profitability, but the level of loan defaults which initially appeared a possibility do not seem to be materialising. Results have been better than expected, with amendments to provisions being made accordingly. In addition, the savings built up during the lockdowns over the past year should help fuel a rise in consumer spending as the economy opens up.”