Credit, Collections & Insolvency News
Net lending via credit cards and personal loans is also set to end the year in negative territory, falling 0.7% on top of 2020’s 9.8% decline according to the latest EY ITEM Club for Financial Services Forecast. The lrnfingfigures equates to a £1.4bn fall in the stock of consumer credit, as households have made more repayments than in pre-pandemic times and have used savings over loans at a greater rate.
In contrast, the housing market has seen strong activity this year, with mortgage lending forecast to rise 4% in 2021 – the fastest increase since 2007 – boosted by the stamp duty holiday.
Uncertainty surrounding the new Omicron COVID-19 variant, however, could affect the forecast going forward.
Anna Anthony, UK Financial Services Managing Partner at EY, said “Economic recovery over the spring and summer was thankfully faster and stronger than many anticipated. The housing market remained resilient, boosted by the stamp duty holiday, and consumers and businesses – especially larger corporates – were able to make bigger inroads than expected into paying off debt. From an industry perspective, the focus on repayment is a double-edged sword; while the debt burden for many has been reduced, the focus on loan repayment over investment will have a long-term impact on growth, and for the banks facilitating lines of credit, the fall in borrowing activity – combined with the low-interest rate environment – will have squeezed margins. As we look to 2022, welcome growth is expected across all lending fronts, albeit at fairly modest rates.”
“While uncertainty around the new Omicron Covid-19 variant, and how it might affect families and businesses around the world, is certainly not what anyone wanted as we head into Christmas and the New Year, the UK financial system remains resilient and well capitalised, making it well equipped to continue to support consumers and firms.”
The Forecast expects net lending via credit cards and personal loans to end the year in negative territory, falling 0.7% on top of 2020’s 9.8% decline. This is a material shift from the forecast in February when consumer credit was expected to grow by over 10% this year. This is largely due to consumers making more credit-related repayments than expected, using a higher percentage of savings than normal, accumulated during the lockdowns, to fund big-ticket purchases in place of credit, and weakness in new car sales as manufacturers have battled supply issues which emerged over the summer.
A return to growth of 6.6% (£13.3bn net) is currently predicted in 2022, helped by a recovery in car sales and a return to more normal spending patterns. This expected rise, however, would still leave the stock of unsecured debt almost 5% (£10.1bn) below 2019’s pre-pandemic level.
The report says that housing market has seen strong levels of activity this year, with mortgage lending forecast to rise 4% in 2021 (£60bn in net terms). This will be the fastest increase since 2007, boosted by the stamp duty holiday, record low-interest rates and an increase in demand for larger properties as more people have worked from home. Net mortgage lending averaged £6.9bn per month over the first nine months of 2021, compared to an average of £3.9bn during 2018 and 2019.
Growth is then predicted to ease back slightly to 3% (£46.7bn) in 2022, reflecting the end of the stamp duty holiday in September 2021 and household incomes experiencing growing pressure from higher inflation, tax hikes and rising mortgage rates as we move into 2022.
Despite initial fears of high write-off rates as a result of the pandemic, loan losses are forecast to be relatively small. Mortgage write-off rates are forecast to be 0.01% this year, unchanged from 2019 and 2020, rising marginally to 0.02% in 2022 and 2023. Write-off rates on consumer credit are forecast at 1.30% this year, slightly up from 1.22% in 2020, but still below 2019’s 1.46%. 2022 write off rates are forecast to be 1.22% and 1.21% in 2023. Business loan losses are forecast at 0.24% and 0.34% this year and next, compared to 0.33% and 0.20% in 2019 and 2020. 2023 is forecast at 0.26%.
Dan Cooper, UK Head of Banking and Capital Markets at EY, said “Despite the challenges of the past year, UK banks have performed well while ensuring businesses and consumers have access to the finance they need. The positive news is that the level of loan defaults initially feared have not materialised, avoiding a non-performing loan ‘cliff edge’. This is due in large part to strong and decisive government and central bank action, and both consumers and businesses have been able to make loan repayments a lot earlier than imagined. While, perhaps unsurprisingly, corporates have found this easier than smaller firms, the banks are well prepped to continue to support SMEs through the recovery effort and to flex to ensure they are helping those in need.”
“Looking ahead into next year, growth is expected on all lending fronts while interest rates look likely to increase, albeit it from a very low base – jointly this should help boost interest margins. Crucially, the sector remains well capitalised and ready to meet the multitude of ongoing challenges alongside the flow of regulatory demands and increasing sustainability focus.”
Insurers have shown resiliency during the pandemic and are set to benefit from economic gains this year with non-life premium income forecast to grow 8.6%, a marked increase on 2020’s 1.7% rise. This is in part due to the strength of the housing market and the purchase of associated insurance products. However, growth is forecast to slow to 3.5% in 2022 as the recovery’s momentum fades. Cost of living pressures as a result of rising inflation, higher energy costs and next April’s personal tax rises will affect demand for insurance, as will the end of the stamp duty holiday and the associated drag on the housing market.
Whilst nw car sales, which influence demand for motor insurance policies, have struggled in recent months, and manufacturers have also faced supply pressures. New car registrations initially responded strongly to the reopening of car showrooms in April but supply bottlenecks have curbed this momentum: new car registrations in Q3 were more than 30% down on the same level a year earlier. The EY ITEM Club forecasts a total of 1.77m new car registrations in 2021, around a quarter below the 2.3m registrations in 2019. However, the level of new car registrations should increase in 2022 once supply issues are addressed.
Anna Anthony continued “This year has undoubtedly been challenging for all concerned, and just as we think we’re seeing light at the end of the tunnel, a new COVID-19 variant emerges and prompts further economic uncertainty and health concerns. Through it all though, UK financial services have demonstrated resilience and agility, supporting struggling businesses and consumers impacted by the pandemic, as well as the wider economy, and this will continue.”
“Looking ahead to 2022, there are a number of different challenges facing UK financial services firms. From managing the spate of new regulatory requirements to turning sustainability pledges and net zero commitments into action, and pressing hard on digital transformation, this coming year is set to be as demanding as the last. But the industry as a whole is in a strong position to meet the challenges head on and, post-Brexit, will continue to forge new international relationships and deals, ensuring it continues to command a leading role on the global stage.”