The Covid-19 pandemic will cause firms to borrow over five times the amount in 2020 than in 2019, with many unlikely to start repaying until 2022 with total stock of bank lending to businesses forecast to close 2020 at £493bn, an 11% year on year increase, due to firms borrowing heavily through the pandemic.

EY ITEM Club for Financial Services Forecast report indicates that bank lending (including government-backed loans) has been critical to businesses of all sizes during the pandemic, and it is predicted that most firms will only start repaying this debt and reducing their borrowing from 2022, provided pre-crisis economic conditions have returned.

Bank lending to households has also been significantly affected by the pandemic. Demand for consumer credit is predicted to fall by 5.6% across 2020, the biggest decrease since 2011, and consumer confidence is likely to be affected further as new restrictions and lockdowns are announced.

However, whilst mortgage approvals fell by almost 90% between February and May, mortgage lending picked-up as lockdown restrictions relaxed over the summer and is expected to end the year with reasonable annual growth of 3.2%.

Omar Ali, UK Financial Services Managing Partner at EY, said “Financial Services Firms entered the pandemic in a position of capital strength and have supported the economy and business to unprecedented levels since March. However, rising unemployment and the ongoing challenges faced by small businesses mean the outlook for the sector is testing. Insurers are facing multiple challenges this year, asset managers are contending with a fall in assets under management and banks are facing squeezed interest margins, slow growth in consumer credit, and increased write-offs on loans.”

Covid-19 has seen bank lending to the corporate sector increase rapidly, with many businesses looking for loans to help them through the crisis as revenues stalled. Banks lent (net of repayments) non-financial companies £43.2bn between January and August 2020 – a fivefold increase on the net amount they lent over the whole of 2019 (£8.8bn). Supported by government-backed loan schemes, lending volumes peaked in March (£34bn) and continued at historically high levels over April and May, resulting in year-on-year growth in corporate loans rising from 0.6% in February to 11.1% in May.

Net business lending fell over June, July and August, indicating early repayment by firms that took out loans as a precautionary measure rather than for pressing cash flow needs.

However, for the vast majority of firms, the loans appear to have been critical, and it is forecast they won’t start to repay debt, and reduce their borrowing, until 2022 or even later if new lockdowns materially affect the projected timeline to return to more normal economic conditions.

Given the scale of growth in H1 2020, the EY ITEM Club expects the UK to close out the year with the stock of business loans rising 11% on the previous year (a 12-year high), compared to only 2% in 2019 and an average of -1.4% from 2010 to 2019. Business lending growth is then forecast to slow to 5.2% in 2021, before turning negative in 2022 (- 0.8%), assuming the economy has returned to pre-COVID-19 conditions. Recently announced lockdown restrictions could cause borrowing to rise further, although this depends in part on what form new the new Government lending schemes take.