Bank lending to businesses set to grow by 2.6%

New research by EY ITEM Club has found that total bank lending grew by 2.6% this year (up from – 2.2% in 2023), 3.7% in 2025 and 4.3% in 2026.

The research forecasts that business lending is set. to grow 3.1% this year (up from – 2.1% in 2023), 5.6% in 2025 and 6.2% in 2026, as interest rates and inflation continue to fall following August and November’s Bank of England rate cuts – and despite the immediate market response to the Autumn Budget – borrowing appetite is expected to increase as the cost of capital lowers. .

The UK economy is set for steady growth over the next two years, with GDP forecast to rise 0.9% in 2024, 1.5% in 2025 and 1.6% in 2026. This economic recovery is expected to feed through to the banking sector as interest rates fall and appetite to borrow strengthens over time.

Anna Anthony, UK Financial Services Managing Partner at EY, said “The UK’s macroeconomic environment has been extremely challenging in recent years, but it appears we are now turning a corner. Although we are yet to see the full economic response to the Autumn Budget and the US election, deepening signs of economic recovery are giving firms and households increasing reason for optimism. Falling inflation and interest rate cuts should boost borrowing appetite over time, and the outlook for bank lending in the UK is more positive than it has been in a number of years.

“While this outlook is promising, optimism should remain measured. If recent history has taught us anything, it is that economic shocks can come at any time. The UK financial services industry must continue to shore up its capital strength while investing in key strategic areas to ensure it capitalises on growth opportunities and maintains its position on the international stage.”

Lower borrowing costs as a result of falling inflation and interest rates are boosting the borrowing appetite of UK businesses, and the EY ITEM Club forecasts UK bank-to-business lending to return to growth this year (3.1% net, up from -2.1% net). This growth is expected to be driven by large businesses, with loans to corporates increasing 1.5% (net) year-on-year in the twelve months to September 2024, according to the Bank of England. In contrast, loans to SMEs have fallen by -3.7% (net) year-on-year, as smaller firms continue to focus on repaying loans taken through Covi-19 support schemes.

Looking ahead, business borrowing appetite is set to strengthen further as political uncertainty eases following the UK general election, provided interest rates continue to gradually fall and as deal-making picks up as expected. As a result, the EY ITEM Club forecasts bank-to-business lending to rise to 5.6% (net) in 2025 and 6.2% (net) in 2026 – the highest growth since 2020 when the Government announced loan support during Covi-19.

Write-off rates on loans to UK businesses are expected to remain low at 0.17% in 2024, 2025 and 2026, as borrowing costs lower and corporate balance sheets stabilise.

Dan Cooper, UK Head of Banking and Capital Markets at EY said “Accelerating growth in lending is welcome news to UK banks, which have recently reported better-than-expected third quarter results. The expectation that loan defaults will stabilise is also positive, and will provide a further boost to banks’ balance sheets.

“The positive sentiment around economic recovery and a resultant forecast rise in lending means firms can take the opportunity to strengthen their capital reserves and re-focus on longer-term strategic transformation initiatives.”