Press release

2 Nov 2020 London, GB

COVID-19 will cause firms to borrow over five times the amount in 2020 than in 2019, with many unlikely to start repaying until 2022

Total stock of bank lending to businesses forecast to close 2020 at £493bn, an 11% year on year increase, due to firms borrowing heavily through the pandemic

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Victoria Luttig

Manager, Media Relations, Ernst & Young LLP

Part of the UK PR team, focused on financial services. Covers all things to do with banking, insurance and wealth and asset management. Love sports and travelling. Married and mum of two boys.

Related topics Financial Services
  • Total stock of bank lending to businesses forecast to close 2020 at £493bn, an 11% year on year increase, due to firms borrowing heavily through the pandemic
  • Consumer credit predicted to fall by 5.6% in 2020, the biggest decline since 2011
  • Mortgage lending proving resilient, with growth forecast to be 3.2% in 2020 and 3.4% in 2021 – but new lockdown restrictions could dampen outlook
  • The value of UK asset manager assets under management (AUM) is forecast to drop 1.5% in 2020, while the insurance sector faces challenges across the general and life markets

The COVID-19 pandemic is expected to cause UK firms’ 2020 borrowing to be over five times higher than the amount borrowed in 2019 in net terms, according to the latest EY ITEM Club for Financial Services Forecast. Bank lending (including government-backed loans) has been critical to businesses of all sizes during the pandemic, and it is predicted that most firms will only start repaying this debt and reducing their borrowing from 2022, provided pre-crisis economic conditions have returned.

Bank lending to households has also been significantly affected by the pandemic. Demand for consumer credit is predicted to fall by 5.6% across 2020, the biggest decrease since 2011, and consumer confidence is likely to be affected further as new restrictions and lockdowns are announced.

However, whilst mortgage approvals fell by almost 90% between February and May, mortgage lending picked-up as lockdown restrictions relaxed over the summer and is expected to end the year with reasonable annual growth of 3.2%.

Omar Ali, UK Financial Services Managing Partner at EY, comments: “Financial Services Firms entered the pandemic in a position of capital strength and have supported the economy and business to unprecedented levels since March. However, rising unemployment and the ongoing challenges faced by small businesses mean the outlook for the sector is testing. Insurers are facing multiple challenges this year, asset managers are contending with a fall in assets under management and banks are facing squeezed interest margins, slow growth in consumer credit, and increased write-offs on loans.”

Business lending rises as firms seek help to keep afloat amid the pandemic

COVID-19 has seen bank lending to the corporate sector increase rapidly, with many businesses looking for loans to help them through the crisis as revenues stalled. Banks lent (net of repayments) non-financial companies £43.2bn between January and August 2020 – a fivefold increase on the net amount they lent over the whole of 2019 (£8.8bn). Supported by government-backed loan schemes, lending volumes peaked in March (£34bn) and continued at historically high levels over April and May, resulting in year-on-year growth in corporate loans rising from 0.6% in February to 11.1% in May.

Net business lending fell over June, July and August, indicating early repayment by firms that took out loans as a precautionary measure rather than for pressing cashflow needs.

However, for the vast majority of firms the loans appear to have been critical, and it is forecast they won’t start to repay debt, and reduce their borrowing, until 2022 or even later if new lockdowns materially affect the projected timeline to the return to more normal economic conditions.

Given the scale of growth in H1 2020, the EY ITEM Club expects the UK to close out the year with the stock of business loans rising 11% on the previous year (a 12-year high), compared to only 2% in 2019 and an average of -1.4% from 2010 to 2019. Business lending growth is then forecast to slow to 5.2% in 2021, before turning negative in 2022 (- 0.8%), assuming the economy has returned to pre-COVID-19 conditions. Recently announced lockdown restrictions could cause borrowing to rise further, although this depends in part on what form new the new Government lending schemes take.

Consumer credit sees the biggest fall in demand in nine years

The stock of consumer credit is forecast to fall by almost 6% this year, the biggest decrease since 2011, and 2021 is forecast to see growth of just 0.5%. This reflects the prospect of heightened unemployment and continued consumer caution, which could worsen under the new COVID-19 restrictions.

During the lockdown between March and June this year, net lending via credit cards and personal loans turned negative for the first time since 2011 as a total of £15.4bn of consumer credit was repaid.

Since coming out of lockdown consumer credit turned net positive, but the average monthly rise over July and August of £0.7bn was still some way below the pre-pandemic norm and overall consumer spending appears to be falling short of the level reached at the start of the year.

It may be the case over the coming months that consumers use lockdown savings rather than credit to buy big-ticket items, resulting in any rebound in consumer lending remaining subdued. The EY ITEM Club expects the stock of consumer credit to end 2020 at £212bn, compared to £224bn in 2019.

Mortgage lending resilience could be hit by new lockdown measures

Mortgage lending is expected to be resilient to the economic challenges, with predicted growth of 3.2% in 2020 (and a stock of home loans of £1.5tr) and 3.4% in 2021. These increases will be driven in part by savings accumulated during lockdown helping to fund property deposits and trading-up. However, the recent introduction of new COVID-19 restrictions, and the potential for more to come, could serve to dampen housing activity.

The national lockdown earlier in the year had a significant impact on housing market activity and lending, with mortgage approvals falling by almost 90% between February and May. However, the relaxation of social distancing measures released some pent-up demand, which alongside July’s temporary cut in Stamp Duty, prompted a rapid rise in house sales. In August, mortgage approvals reached 84,700, which was the highest number since October 2007.

COVID-19 likely to lead to rise in loan-losses

The EY ITEM Club expects write-off rates on consumer credit to rise from 1.3% this year to 2.5% in 2021 – a near-decade high. Mortgage write-off rates are expected to rise to 0.02% this year, which is double 2019’s 0.01%, before increasing further to 0.05% in 2021 – a rate last seen just after the financial crisis. Banks are also likely to face losses in the coming months as some businesses miss their loan repayments. Total business loan losses are forecast to rise from 0.3% in 2019 to 0.4% and 0.5% this year and the next respectively.

Dan Cooper, UK Head of Banking at EY, comments: “The ongoing financial impact of the pandemic is likely to be felt for some time, particularly as more restrictions and lockdowns come into force. Businesses are operating under increasing pressure, relying more heavily on bank lending than ever before, while on the flip side, consumers are sitting tight and borrowing far less than would normally be expected. This will naturally have an adverse effect on banks, especially as the potential for loan losses rise. The more positive news is that housing market activity has held up better than expected, with mortgage lending volumes set for reasonable growth despite the broader challenges facing the economy. However, exactly what impact the new lockdown restrictions and potential future virus control measures will have remains to be seen.”

COVID-19 continues to weigh on the insurance sector

COVID-19 related insurance pay-outs, including claims for event and travel cancellations, business interruption, and losses to investment portfolios are presenting challenges for growth in the insurance sector. In addition, the EY ITEM Club expects continued ultra-low interest rates, and the FCA’s insurance price review will likely have an impact on profits in 2021. Overall, while 2020 is predicted to challenge UK insurance profitability, the sector is expected to experience positive growth in 2021.

New car registrations down due to lockdown

The national lockdown earlier in the year resulted in a significant fall in new car sales, affecting demand for motor insurance policies. New car registrations in April were down 97.7% year on year, and the 4,321 new cars sold that month was the lowest number since 1946. There was some revival after showrooms re-opened in June but the rebound was short-lived and registrations fell again in September. The 1.7m new car registrations forecast for 2020 would be down from 2.3m in 2019, and the lowest since 1982.

In the year to August 2020, average motor insurance prices remained flat from the year before; for home policies, prices fell 2.3% – the fourth successive month of deflation. Overall, non-life premium income is predicted to fall by almost 2.5% across 2020 – the biggest fall since 2009 – before a return to growth of 2.9% in 2021.

Low interest rates increase pressure on life insurer returns

The rise in the state pension age to 66 in October 2020, along with the increase in the UK population aged 65 or older projected by the Office for National Statistics (from 12.3m in 2019 to 13.7m by 2025) may mean more money flowing into pension products. At the same time, opt out rates from pension auto-enrolment remain low, benefiting life insurers offering pension saving products. However, interest rates remain extremely low, increasing the pressure on life insurers’ returns. Life premiums are predicted to fall by 4.8% across 2020, the first drop since 2016, with growth of 3.4% expected in 2021.

Economic shock of COVID-19 set to decrease value of UK asset managers AUM

Although equity prices have made up some of the large losses seen during the lockdown, the FTSE All-Share Index ended Q3 2020 almost 22% down on its level at the start of the year. This represents the worst performance over an equivalent time period since 2009 and reflects the degree to which many asset classes have suffered from the economic impact of the pandemic. However, the effect of a weaker pound in pushing up the value of foreign currency denominated assets will go some way to mitigating the effect on the overall value of UK asset manager AUM. 2020 is forecast to see the value of AUM decline by 1.5%, a turnaround on growth of 11.6% in 2019. Assuming a return to more normal economic conditions in 2021, markets, and the value of AUM, should see a rebound next year; the EY ITEM Club expects the value of asset manager AUM to rise by 3.2% in 2021.

Omar Ali concludes: “Unfortunately, the possibility of a UK-EU trade deal not being agreed by 31 December and the rise in COVID-19 cases mean the risks to this forecast are overwhelmingly on the downside. The forecast shows the Financial Services sector will continue to support consumers, businesses and the wider economy, with business lending forecast to increase more than 5% next year. But we should be under no doubt, Brexit, climate change risk and COVID-19 are going to be a potent combination for Financial Services and the broader economy in 2021. The aim of the Financial Services sector will be to support the economy through the short-term volatility to put the UK in the best place to help build back a better Britain.”