Bank lending to firms expected to hit 13-year high

The COVID-19 pandemic is expected to see business lending grow by 14.4% this year – the highest level in 13 years – according to an EY ITEM Club Interim Bank Lending Forecast.

Additional bank finance (including government-backed loans) has been crucial to UK corporates and SMEs during the pandemic, and it is predicted that firms as a whole will only start repaying this additional debt in net terms, and reduce their borrowing, from 2022.

In contrast to the 2008 financial crisis, COVID-19 has seen bank lending to the corporate sector accelerate with many businesses seeking loans to help cover their costs as revenues stalled. Banks lent (net of repayments) non-financial companies just over £30bn in March – around 100 times the average of net lending over the twelve months to February. Aided by government-backed loan schemes, lending has continued at historically high levels resulting in annual growth rising from 0.6% in February to 11.1% in May.

The business lending growth forecast of 14.4% this year compares to 2% in 2019 and an average of -1.4% from 2010 to 2019. As the Government’s furlough support tapers off, business costs will rise and businesses are likely to be more constrained in taking on additional debt. Lending growth is forecast to slow to 7.1% in 2021. Firms as a whole are forecast to only start repaying debt in net terms, and reduce their borrowing, from 2022, reflecting the EY ITEM Club’s expectation that the economy’s return to normality will be relatively slow-paced.

Dan Cooper, UK Head of Banking at EY, said “Even assuming the economy bounces back in the short term, we’re likely to see very weak growth in loans to home buyers and consumers for some time to come. However, the banks went into this crisis well capitalised and, despite the level of contraction in GDP this year, which the OBR says is likely to be the biggest decline for 300 years, they have extended significant levels of support to businesses and consumers and are continuing to help drive the economic recovery.”