Press release

16 Apr 2020 London, GB

Bank of England credit conditions survey offers encouragement for small and medium sized businesses – EY ITEM Club comments

The Bank of England’s credit conditions survey for the first quarter of 2020 shows that lenders were planning to increase their supply of credit to businesses of all sizes in the second quarter, having been unchanged in the three months to February.

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  • The Bank of England’s credit conditions survey for the first quarter of 2020 shows that lenders were planning to increase their supply of credit to businesses of all sizes in the second quarter, having been unchanged in the three months to February. The credit conditions survey was carried out during 6-20 March, so will have only partly captured the Government’s announced supportive measures to boost bank lending to businesses – most notably the 17 March announcement that the Government would guarantee £330 billion of bank lending to businesses.
  • The survey offers encouragement for small and medium-sized businesses that have concerns that they are not receiving financial support quickly enough.
  • The survey showed that the expected balance of available credit for small businesses for the next three months (second quarter of 2020) saw improvement, jumping to +39% from a balance of -1.4% in the past quarter. The balance for the proportion of loan applications from small businesses expected to be approved rose to +8.6 for the next three months from -1.3 over the past three months.
  • Overall, the credit conditions survey showed that the balance for credit expected to be made available to the corporate sector jumped to +28.4 for the next three months from an actual outturn of +0.8 for the past three months. This is the highest expectations balance for the next three months since the third quarter of 2009.
  • The main reasons given for demand for loans from businesses over the next three months was inventory finance (+64.4) and balance sheet restructuring (+50.7). Unsurprisingly, there was a balance of -52.3 for capital investment.
  • The expected substantial increase in credit being made available to corporates – especially SMEs – comes despite lenders expecting sharply higher default rates on loans in the second quarter, after a significant pick-up in the first quarter for small-companies. Specifically, the balance of expected default rates on loans to small companies jumped to +72.2 for the next three months from +23.0 over the past three months.
  • For the household sector, lenders are expecting to cut back on the credit made available, both for mortgages and for unsecured borrowing. Demand for mortgages and unsecured consumer borrowing is expected to fall in the second quarter.

Corporate sector

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

The Bank of England’s credit conditions survey for the first quarter shows that lenders were planning to increase their supply of credit to businesses of all sizes in the second quarter having been unchanged in the three months to February. The credit conditions survey was carried out 6-20 March so will have partly captured the Government’s announced measures to boost bank lending to businesses, most notably the 17 March announcement that the Government would guarantee £330 billion of bank lending to businesses.

Specifically, the credit conditions survey showed that the balance for credit expected to be made available to the corporate sector jumped to +28.4 for the next three months (second quarter of 2020) from an actual outturn of +0.8 for the past three months. This is the highest expectations balance for the next three months since the third quarter of 2009.

The expected balance of available credit for small businesses for the next three months saw particular improvement jumping to +39% from a balance of -1.4% in the past quarter. The balance for the proportion of loan applications from small businesses expected to be approved rose to +8.6 for the next three months from -1.3 over the past three months.

There was a similar marked improvement in available credit for medium-sized companies to +35.9 from 0.0. However, the balance for the proportion of loan applications from medium businesses expected to be approved was little changed at -1.1 for the next three months from -1.0 over the past three months. “For large companies, the improvement of available credit was to +28.0 from +2.2.

Meanwhile, the balance for expected demand for loans from small businesses spiked to +90.2 for the next three months from -8.2 over the past three months. For medium-sized companies, it was up to +77.2 from +9.2. For large companies, it was up to +77.3 from +33.4.

The main reasons given for the demand for loans from businesses over the next three months was inventory finance (+64.4) and balance sheet restructuring (+50.7). Unsurprisingly, there was a balance of -52.3 for capital investment.

The anticipated increase in credit being made available to corporates – especially SMEs – comes despite some lenders expecting higher default rates on loans in the second quarter after a significant pick-up in the first quarter for small-companies. Specifically, the balance of expected default rates on loans to small companies jumped to +72.2 for the next three months from +23.0 over the past three months.

For medium-sized companies, the increase was up to +62.1 from -3.8. For large-sized companies, the increase was up to +63.5 from +12.0.

Household sector

For the household sector, lenders are expecting to cut back on the credit made available, both for mortgages and for unsecured borrowing. Demand for mortgages and unsecured consumer borrowing is expected to fall in the second quarter.

Specifically, the balance for expected credit to be made available for mortgages fell back to -22.8 for the next three months from -3.5 over the past three, with a particularly sharp drop for borrowers with loan to value ratios above 75%. Demand for mortgages was seen falling sharply over the next three months (balance at -70.8 from +27.9 over the past three months).

Meanwhile, the balance for expected credit to be made available for unsecured lending to households fell back to -25.4 for the next three months from +5.5 over the past three months. Demand for unsecured credit was seen falling over the next three months (balance at -7.2 from +30.6 over the past three months). The high balance for unsecured consumer credit for the past three months was entirely due to strong demand for credit card borrowing (balance at +39.8) while there was reduced demand for other loans (balance at -18.8).