Weak business lending to continue into 2024

Bank-to-business lending is forecast to contract 0.5% this year according to EY ITEM Club, as economic challenges and high borrowing costs dampen businesses’ appetites to borrow.

The forecast says net lending to SMEs has been much weaker than to larger businesses this year, with the latest Bank of England data showing loans to SMEs were 3.9% lower in September compared to the start of 2023, while the stock of loans to larger businesses was 2.4% higher.

Growth is forecast to return in 2024 at 1.8%, and the EY ITEM Club expects a larger rise of 3.7% in 2025 as the economic climate is forecast to improve and business investment is boosted by government tax incentives.

Higher mortgage rates have triggered a small rise in impairments, with write-off rates forecast to rise from 0.002% of total mortgage loans in 2022 to 0.015% this year and just over 0.02% in 2024 and 2025. This would be the highest since 2015, but well below the peak of 0.08% post financial crisis in 2009.

Write-off rates on consumer loans have not yet been significantly affected by higher interest rates or a subdued economy, and are forecast to rise 1.2% this year, unchanged from 2022, and 1.7% in 2024, before dipping slightly to 1.6% in 2025. In comparison, write-off rates peaked at 5% of unsecured loans in 2010.

Impairments on business loans are also expected to rise only marginally as many businesses have been paying down debt at a material rate, and the majority of SME debt taken on during the pandemic was issued via low-rate government-guaranteed loan schemes. Overall, write-off rates are forecast to reach 0.3% in 2023, 0.6% in 2024 and dip slightly to 0.5% in 2025; still a long way short of rates of 1%-1.5% in the early 2010s.

Dan Cooper, UK Head of Banking and Capital Markets at EY, said “The ‘higher for longer’ borrowing rates and ongoing cost of living pressures are continuing to have a very real impact on customers, and at the same time, banks are tightening their lending criteria. Firms are also watching impairment levels closely, particularly as fixed-rate mortgages roll onto higher interest rates. However, the combination of tighter regulation imposed post-2008, additional support from lenders, and household savings built up during the pandemic should help keep defaults to a minimum.”

“Banks are actively working to retain a strong capital position and support their customers in this challenging market. With interest rates now expected to peak at a lower level than previously predicted, we should see a gradual improvement in consumer and business confidence over the next two years, leading to greater appetite to borrow.”