2014 set to be real turning point for consumer credit - lending estimated to rise 3.1%
10 February 2014
- Consumer credit approaching highest levels since 2010
- Business lending to rise £10b, after £20b drop in 2013
- Banks continue to grow mortgage-lending as house prices rise and write-off risk decreases
- UK insurers to enjoy stronger growth than Eurozone counterparts
The consumer credit and residential mortgage lending markets are showing real signs of recovery; both will grow at a healthy rate of more than 3% this year, according to the EY ITEM Club forecast for financial services. But, while business lending has turned the corner, it remains 27.5% (£417b) below the 2008 peak.
Consumers are now a better bet for banks
Consumer credit rose only marginally in 2013, at 0.8%, but this year, with a predicted rise of 3.1% (£164b), the forecast for consumer credit is healthy, and signals a return to some form of normalcy for consumers after four years of falling credit availability.
Household debt-to-income ratios have fallen from 170% to 140%, and write-offs on consumer lending are forecast to fall to 2% by 2015. As a result, consumers are now a better bet for banks to lend to.
Andrew Goodwin, Senior Economic Advisor to the EY ITEM Club forecast for financial services, says: “2014 will hopefully be the real turning point for many UK households’ access to credit. Last year we saw growth in credit card lending and demand for car finance recovering strongly, but other forms of unsecured credit either fell or remained stagnant. This year we expect growth across the board – as well as a swell in consumer demand for credit cards, we expect stronger demand for big-ticket purchases, driving retail finance and personal loans, which will be good news for banks.”
Business lending plays catch up but struggles to reach noughties’ peak
In stark contrast to the last quarter of 2013, in which business lending hit a five-year low, it is set to rise significantly over the next three years. The increase will be gradual, with year on year increases of 2.5% in 2014, 4.5% in 2015, 5.5% in 2016, and finally hitting 6.8% in 2017.
Goodwin says: “A £10b increase in business lending is a very respectable start to what we believe will be ongoing growth for the next few years. However, while this is good news for those businesses who have been starved of finance, it must be seen for what it is, which is just half of the fall that was experienced in 2013. All the same, this should not take away from what is a positive step towards more ‘normal’ lending levels after 5 years of stagnant and falling lending figures.
Omar Ali, UK head of banking and capital markets, says; “Despite growing economic momentum and forecast increases in lending, the environment for UK banks remains challenging. Persistently low interest rates are not only bad news for savers, but also for net interest margins. To deliver the returns that investors demand, banks will need to offset this pressure by growing their balance sheets or generating stronger fee income, with neither of these options without their difficulties.”
Appetite for mortgage-lending looking up
Banks will continue to grow mortgage lending this year. The housing market is gaining strength on the back of falling unemployment, a return to real income growth and an improvement in consumer confidence, with further support coming from the Help to Buy scheme. The stronger labour market and likelihood that interest rates will increase only very slowly mean that write-offs will remain low. Write-offs are predicted to fall to 0.04% in 2014, which is lower than the fall to 0.05% in 2013, and it will fall to 0.03% of the stock on mortgages by 2017.
The forecast for UK mortgage lending is much stronger than the forecast for continental Europe. The UK has predicted growth of 3.8% a year over the 2014-17 period, while the Eurozone looks to rise on average only 2.25% over the same period.
Goodwin says: “Over the past year banks have demonstrated an increasing appetite for mortgage lending. Rising house prices and low write-off rates mean that banks see this as a relatively low-risk form of lending. However, while the banks have managed to maintain relatively wide lending spreads, guaranteeing this will be vital to ensuring it remains a profitable venture for the banks. The prospect of further price growth, allied to the ongoing support of the Government, through the Help to Buy scheme, should guarantee that banks continue to look favourably on mortgage lending for the foreseeable future.”
UK insurers also in better shape than their Eurozone counterparts
With predicted average growth of 3.8% a year for UK life insurance premiums, UK life insurers are expected to enjoy significantly stronger growth in their business than their Eurozone counterparts. This compares with lower forecast growth of 3.4% in France and just 2.7% in Germany, which reflects a considerably brighter macroeconomic environment in the UK.
Nonetheless, it is only in 2017 that life premiums will reach £214b and exceed their 2007 peak of £212b, highlighting the protracted nature of the recovery in the sector.
A similar recovery path is forecast for non-life insurance. After moderate growth in 2013, EY ITEM Club forecast for financial services expects a more robust pick-up in non-life premiums of 6.2% in 2014 (reaching £59.6b), due to recovery in housing and car purchases. Total non-life premiums are expected to exceed their 2007 peak by 2017, at £69.5b.
Mark Robertson, UK head of insurance for EY, says: “As the economy starts to pick up, unemployment falls and property sales increase, we are beginning to see signs of modest improvement at a macro level, but this has not translated into obvious improvement in the insurance market. This is due to such improvements being offset by industry overcapacity and the ongoing need for structural change.
Robertson continues: “Interestingly however, when comparing the UK life insurance market to that of the continent, it is clear that the UK is witnessing stronger growth than its European neighbours, which may help to start building the market back up following disappointing profits in 2013."
Multi asset funds to overtake bonds
Multi-asset funds’ Assets Under Management (AUM) are predicted to edge ahead of bond funds in 2014, reaching £135b, and rising to £149b in 2015, making them 10% larger than bond funds. The pace of growth however is then expected to slow down as the lower risk carried by multi-asset funds, compared with equity, becomes less attractive at a time when the economy is strengthening.
Gill Lofts, UK head of asset management at EY, says: “Growing risk appetite and a steady flow of good economic news mean that asset managers continue to ride a tide of rising equity markets. But despite this rosy picture, there is increasing recognition that asset managers cannot rely on equity growth forever. Economic recovery may allow further valuation gains, but a lot has already been priced in. The improving outlook is only bringing higher base rates, and lower bond valuations, closer.”