6 minute read 13 Dec 2021
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How financial services can remain resilient to meet challenges ahead

Anna Anthony
By Anna Anthony

EY UK Managing Partner, Financial Services

Passionate about helping the financial services industry become a force for social good. Champion of creating a culture of equality where people feel they belong. Keen wildlife photographer.

6 minute read 13 Dec 2021
Related topics Financial Services COVID-19 Economics Sustainability in Financial Services
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  • EY ITEM Club Outlook for financial services - forecast (pdf)

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Despite new headwinds, the EY ITEM Club forecast shows an increasingly positive economic outlook in 2022 for financial services.

In brief
  • Net UK bank to business lending is forecast to fall to minus £1.6bn over 2021, as firms pay down debt far quicker than expected.
  • Net consumer credit lending is forecast to fall 0.7% this year, adding to 2020’s 9.8% decline, due to savings amassed in lockdowns and low levels of new car sales.
  • Net mortgage lending is forecast to rise 4% this year (£60bn) representing the fastest increase since 2007, boosted by the now-ended stamp duty holiday.

Our latest EY ITEM Club forecast comes with a bigger ‘health warning’ attached than would typically be the case, as we all grapple with the emergence of the Omicron variant. From a forecasting perspective, the economy is still in a unique situation with no obvious historical parallels, and one of the only things we can say with complete certainty is that the environment is highly volatile.

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The economic recovery earlier this year was quicker and stronger than anticipated

Since our last update in May, the economic picture has evolved significantly, and many of the numbers have changed materially. This is in large part because the recovery has been faster and stronger than anticipated and businesses and consumers have coped financially better than expected. The economy is predicted to expand 6.9% this year. This is, of course, a good overarching forecast figure to share, but it’s a complex and nuanced situation with many moving parts that make up the whole – some of which are managing less well - and the economy has still yet to return even to its pre-pandemic peak. 

The immediate outlook for financial services firms paints a mixed picture, growing more positive the further into 2022 we get.

Net business borrowing to turn negative in 2021 as firms swiftly repay their COVID-19 debt

Despite the challenges of the last two years, UK banks have performed well, are seeing rising share prices, and continuing to provide a high level of support to businesses and the wider economy to cope with the pandemic. For context, banks lent firms £35.5bn in net terms last year (which included COVID-19-related government-backed loans). But the pace of recovery has been such that firms have paid down a lot of the debt – much of it precautionary - they took on far quicker than anticipated. As a result, the EY ITEM Club predicts growth in net business borrowing over 2021 to reverse and enter negative territory (falling to -£1.6bn from 2020’s £35.5bn). But the picture is not the same for all businesses. SME debt actually rose by over a quarter (£167bn to £210bn) from February 2020 to October 2021, indicating that smaller firms have needed greater financial assistance from banks through the pandemic and will likely need additional support through the recovery period. 

UK net business borrowing expected to fall sharply over 2021

-£1.6bn

Net business borrowing this year will turn negative as UK firms repay COVID-19 debt at pace.

Meanwhile, consumer credit is also now reversing expectations, and is set to fall by 0.7% this year as households use savings amassed in lockdowns in place of credit and purchase fewer cars due to supply bottlenecks. A return to growth of 6.6% is expected next year, but this would still leave the stock of unsecured debt almost 5% below 2019’s pre-pandemic level.¹ By contrast, the housing market has seen surprisingly strong levels of activity this year, with mortgage lending forecast to rise 4% in 2021 - the fastest increase since 2007 - boosted by factors such as the stamp duty holiday and demand for larger properties as more people worked from home. Growth is then expected to ease back slightly to 3% in 2022, reflecting the end of the stamp duty holiday in September and pressure on household incomes from higher inflation, tax increases and rising mortgage rates.

Insurers to benefit from an improving economy but will be hit by rising cost of living

Insurers continue to show resiliency to the pandemic, but the sector is facing a number of headwinds to growth and profitability including shortages from supply-side disruption impacting new car sales. The cost of living pressures faced by households as a result of rising inflation, higher energy costs - and the increase in personal tax levels in April next year - will all impact demand for insurance.

UK assets under management (AUM) to benefit from ongoing global economic recovery

The outlook for the asset management sector is strong. UK AUM have benefited from a sustained global recovery in asset values over the course of this year, and there is scope for future growth fuelled by savings built up by households during the lockdowns.

Financial services firms remain well placed to meet the challenges ahead

This year has been challenging for all and, unfortunately, it still remains unclear what the post-pandemic ‘normal’ will look like and when it will truly start. Alongside economic challenges, the pandemic triggered structural changes and has set in motion new, longer-term shifts - such as hybrid working, an increased focus on sustainability and possibly even a greater tendency to save, not spend. Many of these trends will directly and indirectly impact the financial services sector, and we will monitor this closely.

Right now, the financial services industry remains resilient and well-capitalised and will continue supporting consumers, businesses and the wider economy through short-term volatility and uncertainty. Despite a number of headwinds, a more positive economic outlook in 2022 is a welcome prospect and will aid the UK financial services sector as it continues to play a leading role on the global stage. Almost a year on from the Brexit deal, the UK market has lost none of its strength and continues to demonstrate its merits based on a system underpinned by gold-standard governance, cutting-edge technology and innovation and world-class talent. The financial institutions within this system will help drive change and progress and, as we saw at COP26, the sector is well-positioned to be at the forefront of tackling sustainability and climate change risk as we all work towards a net-zero future. 

How EY can help

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Summary

Uncertainty surrounding the new Omicron variant and how it might affect families and businesses across the world, mean the risks to our latest forecast are significant and could change rapidly. Whilst there are a number of different challenges currently facing UK financial services firms, the industry as a whole remains in a strong position to meet these head on and to continue supporting UK firms and households.

About this article

Anna Anthony
By Anna Anthony

EY UK Managing Partner, Financial Services

Passionate about helping the financial services industry become a force for social good. Champion of creating a culture of equality where people feel they belong. Keen wildlife photographer.

Related topics Financial Services COVID-19 Economics Sustainability in Financial Services
Upvote