- Consumer credit demand ended 2019 on a relatively positive note, but the 3.2% growth forecast this year would be the lowest for six years
- Mortgage approvals rose in December 2019, but overall mortgage lending growth is only forecast to rise 4.1% this year – close to the average of the last five years
- Bank business lending forecast to grow at a subdued 3.4% this year, as investment grows only modestly and firms continue to look at alternative forms of finance
LONDON, Monday 17th February 2020: Consumer credit is forecast to grow by just 3.2% in 2020 - the lowest in six years - according to the latest EY ITEM Club Outlook for financial services. Although lending rose a little at the end of 2019, signalling a post-election pick-up in demand, the annual growth forecast remains significantly down from 2017’s peak of 8.3%.
The forecast for other forms of bank lending also remains subdued despite the decisive General Election result and clarity on the first stage of Brexit. While mortgage approvals rose in December 2019 to the highest level since the summer of 2017, overall mortgage lending growth is only set to rise 4.1% this year – close to the average of the last five years. And bank business lending is forecast to grow by just 3.4% - soft by historical standards.
Omar Ali, EY’s UK Financial Services Managing Partner, comments:
“2020 began with increased political certainty which is positive for consumer and business confidence, and the growth in lending at the back end of 2019 has given cause for cautious optimism. However, it is still too early to tell whether these early green shoots will translate into a full and sustained economic recovery this year which will drive growth for Financial Services Firms. It is very early days in the negotiations for the new UK-EU trading relationship, with expectations that any Financial Services deal will be hard fought. On top of that, all businesses are facing additional and significant challenges from wider global geopolitical uncertainty and the yet unknown economic impact of coronavirus. The industry will be watching how the next few months play out very carefully.”
Despite sentiment pick-up, demand for consumer credit remains low
Year-on-year unsecured consumer credit growth rose modestly in December to 6.1% from 5.9% in November¹, consistent with sentiment starting to improve post-election. However, the 3.2% growth forecast for this year is the lowest in six years, down from 3.7% last year and significantly down from the 2017 peak of 8.3%.
While consumers are set to benefit from a combination of low inflation and moderate pay growth this year, there are some structural changes at play which will continue to impact the demand for credit. Notably, the shrinking market for new cars and the fall in demand for associated motor finance. New car registrations in Q4 2019 were down 1.6% year on year; the sixth consecutive quarter to record an annual decline. This reflects ongoing concerns over diesel vehicles and the growing use of ride sharing services. With motor finance accounting for around a third of the total stock of consumer credit, these changing consumer behaviours are having a big impact.
On the supply side, there has been some tightening in credit conditions in the unsecured lending market. Having run at an expected 3.7% last year, the growth in stock of consumer credit is forecast to slow to 3.2% this year, before rising to 4% in 2021.
Mortgage approvals rose in December but low annual growth still predicted
Mortgage approvals rose to 67,241 in December 2019 from 65,514 in November - the highest level since July 2017, suggesting a boost in confidence following the decisive election result. It is unclear at this early stage, however, whether this momentum will continue. Overall mortgage lending growth is forecast to rise 4.1% this year and 3.9% in 2021 – close to the average of the last five years and well down on pre-financial crisis rates. Despite historically low interest rates and accommodative Loan to Value ratios, affordability remains a key challenge for prospective homebuyers. In Q3 2019, the average house price was equal to 4.7 times the average borrower’s income - close to a record high.
Bank business lending likely to be depressed by trade deal uncertainty and alternative finance sources
Last year, Brexit uncertainty weighed heavily on business investment and associated borrowing. While investment is expected to return to growth this year following more clarity on the first stage of the Brexit process, the 1.4% predicted rise is modest reflecting the fact that the UK-EU trade deal has still to be negotiated. Bank business lending is further hampered by firms seeking alternative sources of finance. With continued low interest rates, investors are searching for higher returns and many see bond finance as an attractive source of finance to bank loans. As a result, business lending by banks is forecast to grow by a moderate 3.4% this year, followed by 3.1% in 2021.
Dan Cooper, Head of UK Banking, EY, comments:
“Whilst there are early signs that consumer confidence might begin to pick-up following the General Election, lending growth is expected to remain pretty uninspiring over the next couple of years and the low interest rates will continue to squeeze net interest margins. The structural changes taking place in the car market, combined with a sluggish property market and an increasing trend of firms looking outside of the traditional bank borrowing model for finance, are visibly impacting banks’ profitability. It’s vital that the banks assess their business models and strategies to ensure they reflect the reality of low lending growth and can continue to ride out this challenging economic time.”
Insurers still contending with challenging environment
Supported by low inflation, households are expected to see real incomes grow 1.8% this year, aiding demand for big ticket purchases and associated insurance policies. However, very low interest rates and the FCA’s soon-to-be published report on pricing practices is set to impact insurers’ profitability.
Motor insurers are also having to contend with a struggling car market. 2019 was the third year in a row of falling car sales, and the 2.3m cars sold, was 2.4% lower than in 2018. On a more positive note though in terms of premium income growth, the average price of motor insurance rose 8.6% year on year, the biggest rise in almost two years.
As for home insurers, prices for home policies rose 2.3% in December, up from a recent low of -1.4% in April 2019. In Q4 2019 housing transactions, an important driver of big-ticket and insurable household purchases, rose 0.7% on a year earlier. But this followed drops in the previous two quarters and still left transactions below the level in mid-2017. The housing market has largely remained subdued, however, a pick-up in December following the election result has suggested that improved sentiment could give a boost to homebuying. Overall, the EY ITEM Club Outlook for financial services shows non-life premium income growing 3.1% this year, up from an estimated 2.7% in 2019, before climbing to 3.9% in 2020.
AUM growth expected to lose some of its heat in 2020
Recent developments have been a mixed blessing for the value of UK Assets Under Management (AUM). Aided by last December’s election result the FTSE All-Share Index gained 14.2% in Q4 2019 compared to the previous three months; the biggest quarterly gain in almost three years. However, sterling rose more than 10% between early October and mid-December which weighed on the sterling value of foreign assets managed by UK asset managers. Overall, 2019 looks to have delivered a sizeable rise in the value of AUM. Predicted growth of 9.8% would be the strongest since 2016, taking AUM to £1.17tr. However, less heated growth is expected this year, and a rise of 3.8% is forecast for 2020, followed by 4% in 2021.
Omar Ali concludes: “A good Brexit outcome will continue to lay positive foundations for future growth, but there are deeper, structural changes and important emerging trends in both consumer and business finance which the industry needs to tackle.
“In this context, Financial Services Firms need to reconsider the role they will play in helping their customers navigate change. They have put the customer first in their response to Brexit and now need to do the same on climate change, trade and geopolitical unrest.”