EY ITEM Club Forecast: Outlook for Financial Services Autumn 2013
Forecast for Banking
The Parliamentary Commission on Banking Standards recommended a number of initiatives to stimulate increased competition. On paper the UK banking market is poised for a shake-up.
TSB has returned to UK high streets, Williams & Glyn’s should follow soon and several non-traditional banks are planning to enter the current account market. Yet, the response to current account switching has been under whelming and may actually see the bigger players take more share. We will not see real competition in the market until new entrants are able to effectively compete on price, proposition and offer radically differentiated services. The good news is that economic recovery is boosting confidence. Consumer lending is gathering pace, and Help To Buy is giving additional support to mortgage demand. However, net business lending continues to contract, particularly to SMEs.
Demand for SME credit remains weak, but we hope the economic recovery will end firms’ singular focus on reducing debts and conserving cash. It is harder to predict how the supply of SME credit will evolve. Banks have made continued efforts to lend over the past year, but they have not always been able to do so at rates — or on terms — that SMEs have found attractive. New high-street banks may have an impact at the smaller end of the SME spectrum, but SMEs are increasingly turning to alternative sources, such as peer-to-peer lending and crowdfunding for finance.
Medium-sized firms, like their large corporate counterparts, continue to have more funding options. Banks unwilling or unable to increase their own lending are partnering with institutional investors to offer their clients alternative credit sources. Capital will continue to be constrained. While not subjected to the Asset Quality Reviews (AQR) of the Eurozone, the Bank of England’s evolving regime of stress testing is setting a clear tone for UK banks. Despite growing economic confidence, most UK banks will remain constrained in their ability to increase net lending for the foreseeable future. As alternative funding solutions establish themselves in the UK, banks risk losing ground permanently.