- Bank to business lending is forecast to contract 3.8% (net) this year, from net growth of 3.7% in 2022, before returning to growth (of 0.9% net) in 2024
- UK mortgage lending to grow just 0.4% (net) in 2023 – the slowest since 2011 – with slightly higher growth of 1.4% (net) forecast for 2024
- Demand for consumer credit forecast to rise 4.8% (net) this year, and 5.3% (net) in 2024
- UK assets under management are forecast to grow 2.6% this year and 6.5% in 2024, after a projected fall of almost 11% in 2022
Bank to business lending is expected to contract 3.8% (net) this year, representing one of the sharpest falls in a decade, according to the latest EY ITEM Club for Financial Services Forecast. The fall is largely due to the deteriorating economic environment reducing demand and a rise in borrowing costs.
The outlook for business lending is set to improve next year as the economy begins to recover. However, growth remains subdued, and only 0.9% net growth is forecast in 2024 as businesses, especially SMEs, continue to deal with the economic shocks of recent years.
Demand for mortgage lending is also set to be affected this year, as the housing market faces multiple headwinds. Cost of living pressures, falling real household incomes, and rising interest and mortgage rates mean only 0.4% growth is forecast this year, which is the lowest rate of mortgage growth since 2011. Slightly higher growth of 1.4% (net) is forecast in 2024.
At the same time as market demand wanes, banks are expected to tighten their mortgage lending criteria as a result of higher interest rates, a challenging outlook, and falling house prices.
On the consumer credit side, growth of 4.8% is forecast this year, increasing to 5.3% in 2024. While falling real incomes may to some extent weaken demand for big ticket items often funded by borrowing, a prospective recovery in the economy in the second half of this year is likely to boost consumers’ confidence in using credit.
Anna Anthony, UK Financial Services Managing Partner at EY, comments: “The series of economic shocks in recent years and the current cost of living pressures are having a significant impact on both households and businesses. Those most affected are the vulnerable in society and small businesses which may have limited financial cushions of support to fall back on. Stretched affordability will affect loan demand across all fronts and banks should be preparing for low and, in some cases, negative lending growth rates. Banks also face the prospect of the number of loan defaults rising amid the economic downturn. However, default rates are expected to be much lower than recorded after the financial crisis, and given the sector’s much higher relative level of capitalisation, banks are in a strong position to help consumers and businesses through this difficult period.
“While the economic environment is likely to be tough over the next few months, economic conditions are expected to improve over the course of 2023. This is likely to have a positive impact on consumer and business confidence - and lending growth - as we head into 2024.”
Business lending to contract this year due to challenging economic environment
While bank lending to businesses soared during the pandemic as businesses utilised state-subsidised lending schemes (in 2020, growth sat at 8%), and grew in 2022 (3.7%), this year it is forecast to fall into negative territory by almost 4% (-£18.8bn). Borrowing demand is expected to weaken as firms – both large corporates and SMEs – face multiple pressures from higher costs of servicing debt, lower earnings and continued global supply chain disruption.
2024 should see growth in net lending to firms resume as high inflation eases and the economy starts to recover. However, it is likely to be sluggish, and the EY ITEM Club forecasts low growth of 0.9%, equating to net lending of £4bn, reflecting the damage to sentiment from the series of economic shocks in recent years. Growth is forecast to then pick up to 3.1% (£15bn) in 2025.
Mortgage demand to fall to lowest level since 2011 as cost of living pressures felt
After net mortgage lending growth of 4.1% in 2022, the EY ITEM Club predicts growth will fall significantly this year to just 0.4% (equating to net lending growth of £6.5bn). This would be the weakest growth since just after the financial crisis. This forecast is against a backdrop of real incomes continuing to fall while house prices remain high.
With inflation set to fall back throughout 2023 and the Bank of England predicted to cut interest rates around the end of the year heading into 2024, affordability should start to improve and boost the outlook for the housing market. The EY ITEM Club forecasts net mortgage lending to rise 1.4% in 2024 (equating to a £23bn increase) and 2.4% (a £40bn increase) in 2025.
Consumer credit growth to rise just under 5% this year – a little faster than 2022
Growth of 4.8% (net) is forecast for unsecured credit this year (equating to growth of £9.9bn), a little above the 4.4% net growth recorded in 2022. This represents a rebound from the pandemic period over 2020 and 2021, when consumer credit fell by over 10%.
Demand for unsecured credit is currently affected by competing forces. On the one hand, consumer confidence is currently very low, meaning people are cautious to take on debt, and real incomes are falling, which is affecting demand for big ticket items that are often funded by borrowing. But, on the other hand, debt repaid during the pandemic and a prospective recovery in the economy in the second half of this year may increase consumer confidence around using credit again.
The EY ITEM Club predicts growth of 5.3% (£12bn) in 2024 before dropping back slightly to 4.1% in 2025 (£9bn).
Higher year on year loan losses predicted, but rates remain lower than financial crisis peaks
Recession and higher borrowing costs are likely to push up write-offs on all forms of lending in 2023. However, the EY ITEM Club expects levels to be lower than the peaks recorded in the financial crisis.
The EY ITEM Club forecasts write-off rates on business loans to reach 0.8% in 2023, before dipping to 0.6% in 2024 and 0.5% in 2025. This compares with 0.2% in 2021 and 0.3% in 2022. However, the forecast rise for 2023 is still a long way short of rates of 1%-1.5% in the early 2010s, following the financial crisis.
Dan Cooper, UK Head of Banking and Capital Markets at EY, comments: “With more than 70% of corporate bank loans on variable rates, UK businesses are likely to be affected in the short term by increases in interest rates. SMEs are currently more vulnerable to a rise in loan impairments than larger businesses as they are less able to insulate themselves against higher rates and also because of the volume of bank debt they hold, which has grown since 2019.
“On a more positive note, many small businesses that took on debt during the pandemic are currently on low interest, fixed rate government-guaranteed loan schemes, which will help them manage their repayments. Corporate balance sheets across the board have also strengthened as stresses associated with the pandemic have eased.”
The EY ITEM Club adds that a housing market downturn this year is likely to drive a rise in write-offs on mortgage loans, but the increase should be below that of past recessions. Tighter mortgage regulation since the financial crisis should mean mortgage holders are better able to deal with higher rates, while the savings built up by some households during the pandemic will provide a cushion of support.
The forecast also says that the modest peak in forecast unemployment should keep non-performing loans down, while the greater leniency by lenders, such as switching mortgage holders to interest-only deals, should also help reduce the number of defaults. Impairments on mortgages are forecast to rise from 0.01% in 2022 to 0.05% this year, 0.04% in 2024 and 0.03% in 2025. For context, they reached 0.08% in 2009 during the financial crisis.
A weaker economy is likely to push up the ratio of non-performing consumer loans. But while interest rates on consumer credit products are typically higher than on mortgages, they are not as sensitive to increases in Bank Rate. Further, deleveraging by households over the last few years, together with only a modest rise in unemployment expected, should mean write-off rates aren’t as high as they were post-financial crisis.
The EY ITEM Club forecasts consumer credit write off rates to be 2.7% this year; the highest since 2011 and up from 1.7% in 2022 and 1.3% in 2021, but down from 5% in 2010. Rates are then forecast to be 2.3% in 2024 and 1.9% in 2025.
Dan Cooper adds: “Banks are undoubtedly in for a difficult period, particularly in the first half of this year. A contraction in net business lending and general downturn across the housing market looks inevitable, and an increase in loan defaults seems unavoidable. The more positive news is that higher interest rates will have strengthened banks’ interest margins and fundamentally they are in a strong capital position to continue weathering this storm while providing ongoing support to customers. Although economic recovery looks like it will start in the second half of this year, banks will need to continue to manage their balance sheets carefully and ensure they are prepared for all eventualities."
Weakness in car sales and housing market activity to impact non-life insurers
High inflation and falling real incomes are expected to continue to hold back consumer spending on big-ticket (and insurable) items such as cars, especially in the first half of this year. And a fall in housing market activity will also have a negative impact on demand for non-life insurance.
The EY ITEM Club’s latest forecast sees non-life premium income growing 4.5% in 2023, down from projected growth of 4.9% last year, with growth forecast at 3.8% in 2024 and 4.7% in 2025.
Life premiums to decline this year but bounce back in 2024 as economy recovers
The EY ITEM Club forecasts gross life premiums to decline 2% in 2023 (from projected growth of 4.6% in 2022), as inflation and the weak economy affect pricing and demand. Excluding the pandemic period, this would be the first decline since 2016. 2024 is expected to see a strong rebound, with premium income rising around 8%, before falling back to 5.8% in 2025.
UK AUM set to rally this year and next following big fall in asset values in 2022
High inflation, rising interest rates and the impact of the war in Ukraine had a negative impact on values across asset classes last year and UK AUM is projected to have fallen 10.7% in 2022. This would be the first decline in four years and the biggest since 2008.
The EY ITEM Club expects central banks globally will slow or pause rises in interest rates this year as inflation falls back, which would support AUM growth. While recessions or slowdowns across developed economies point to a difficult first half of this year, the economic environment should start to improve later in 2023, boosting investor confidence, putting households in a better position to save and encouraging inflows into the asset management sector. The EY ITEM Club forecasts UK AUM to rise 2.6% this year and for 2024 to see a stronger 6.5% rebound, taking UK AUM to £1.71t. In 2025 growth is predicted to fall back slightly to 3.8%.
Anna Anthony concludes: “On top of geopolitical uncertainty and a weakening economic picture in the first half of the year, UK financial services firms are also facing individual challenges. Banks will have to contend with low, and even, negative lending growth, while insurers will be affected by weakening product demand. For asset managers who saw estimated UK AUM fall by over 10% last year – the biggest fall since the financial crisis – there is considerable pressure to reduce cost bases and continue long-term transformation activity. However, despite the challenges, all financial sectors are resilient and well positioned to continue to provide strong support to consumers, businesses and the wider economy. And the industry as a whole remains a leading player on the world stage, committed to shaping its post-Brexit path with sustainability, digital innovation and strong governance at its core.”