UK firms will have borrowed more than £60bn by the end of 2021
UK firms will have borrowed more than £60bn by the end of the year, having borrowed £35.3bn in 2020, and been forecast to borrow a further £26bn this year, according to the EY Item Club.
Following the UK’s third national lockdown, EY predicted that many businesses are unlikely to start making inroads into repaying their debt until 2024.
Lending, including Covid-19 related government-backed loans, has been vital to businesses of all sizes during the pandemic, and for SMEs it has been particularly critical.
Covid-19 and the subsequent lockdowns have also had a considerable impact on bank lending to households, EY found, with households unable to borrow as much as before the pandemic.
Net lending via credit cards and personal loans turned negative in 2020, falling by 9.9 per cent – the largest drop since records began in 1994.
In addition, while demand for consumer credit is expected to enter positive territory in 2021, it is only expected to rise by 2.1 per cent.
Mortgage lending is predicted to grow by 2.3 per cent this year, down from the 3 per cent in 2020.
Anna Anthony, UK financial services managing partner at EY, said: “By the end of this year, businesses will have borrowed in the region of £60bn net since the start of the pandemic, which is a colossal amount, especially as for many it is just about survival, not expansion or growth.
“And the prospect of some, if not many firms, not being able make the required repayments is concerning for all involved.”
EY’s forecast figures are modelled on the assumption that the current lockdown lasts over 2021’s first quarter and then restrictions are steadily relaxed as the vaccination programme is rolled out, allowing the country and economy to reopen again
Covid-19 likely trigger rise in loan-losses
The coronavirus has seen bank lending to the corporate sector surge, as many UK firms have relied on government-backed lending schemes to help them survive the crisis.
Banks lent (net of repayments) non-financial companies £35.5bn last year – £34.7bn of which was lent since the start of the pandemic in March – four times the amount it lent during the whole of 2019, which stood at £8.8bn.
The rise in business lending has been particularly marked for SMEs. Net lending to SMEs in 2020 was more than 30 times higher than in 2019, according to the Bank of England.
The economic impact of Covid-19, which has resulted in increased job losses and reduced income for some, is expected to lead to a further rise in loan-losses.
EY predicted write-off rates on consumer credit to rise from 1.2 per cent in 2020 to 1.8 per cent in 2021; a near-decade high.
Mortgage write-off rates are expected to rise to 0.04 per cent this year, four times 2020’s 0.01 per cent, and stay at 0.04 per cent in 2022.
Banks are also likely to face losses in the coming months as some businesses struggle to meet their loan repayments.
Business loan losses are forecast to rise from 0.3 per cent in 2020 to 0.5 per cent this year.
Dan Cooper, UK head of banking at EY, said: “Lending to businesses remains high, but a quick look behind the numbers reminds us that this is not a story of a boom in innovation, growth and expansion, rather it is about survival as the banks continue to facilitate the government-backed loan schemes.
“Consumer lending is subdued and the mortgage market is now showing signs of cooling off, which will squeeze overall net interest margins. Added to that, banks now have to ensure they’re ready to implement negative interest rates in six months’ time, following the Bank of England’s recent announcement – another significant ask which will place even more pressure on the industry.”