Bad commercial
loans to rise and lending to drop as UK enters
recession
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
The UK’s banks and
lenders are expected to write off the highest number of commercial
loans in nearly 20 years, following confirmation the economy is in
a double-dip recession.
The Spring Forecast
from financial services firm Ernst & Young’s ITEM Club
predicted 1.9% of business and corporate loans will be written off
in 2012 compared with 1.6% last year.
The estimate
represents the highest percentage of write-offs in the commercial
loan sector in almost 20 years and comes as the UK economy
officially returned to recession.
Quarterly results
from the Office of National Statistics in April revealed UK GDP
shrank 0.2% in the first three months of the year following a 0.3%
decline in the previous quarter, marking a return to economic
decline following post-crisis GDP growth in early 2010.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataDeeper
tightening
Commenting on the
research in The Times, Neil Blake, senior economic adviser
to the ITEM Club, said: “Although 1.9% doesn’t sound big, this will
be the highest annual rate of write-offs since the mid-nineties –
and the more loans banks have to write off, the less money they
will have to lend.”
The ITEM Club also
forecast corporate lending to drop 6.9% in 2012 to £419bn (€522m),
a heavier drop than expected.
Despite government
lending incentives and the Bank of England’s quantitative easing
programme, the figure remains a long way from the £575bn pre-crisis
peak for commercial lending in 2008.
Referring to the
government £20bn credit easing programme announced in March, which
is intended to take a percentage point off the price of loans by
allowing banks to benefit from the government’s lower borrowing
costs, the report said: “This may ease concerns over a deeper
tightening of credit in coming months; however, the scheme is
unlikely to result in a sharp increase in corporate
lending.
“While lowering the
cost of credit is clearly not unhelpful, the benefit of reducing
interest rates by one percentage point is likely to be too small to
significantly alter the investment and hiring plans of
SMEs.
“The size of the
scheme has also disappointed business leaders – the Bank of
England’s Project Merlin data showed lending to SMEs by the four
largest banks amounted to £74.9bn (€57.8bn) for 2011.
“As the
government’s £20bn scheme is being spread over three years, then we
can say that it will cover only around 9% of SME lending on average
over the next three years.
“Indeed, small UK
businesses which want to invest often have trouble accessing
finance in the first place, particularly as non-price credit
conditions are expected to remain tight.
“The latest Bank of
England Credit Conditions Survey reported that the overall
availability of credit to the corporate sector remained broadly
unchanged for all sizes of company in the first quarter of 2012,
with little change expected in the subsequent quarter.”
Manufacturing suffers
In a sector
breakdown, the report has revealed lending to the manufacturing
sector has suffered the most since the economic crisis with a 42%
decline in lending since the start of 2009.
Lending to
non-financial companies has dropped 21% and lending to the
construction and real estate sectors 15% over the same
period.
The ITEM Club
report suggested lending to manufacturers is likely to remain
subdued until demand for loans to fund investment expenditure
recovers and, even then, the sector could prove sluggish as many
larger firms, which normally account for four-fifths of business
investment spending, are holding a cash surplus.
Looking further,
the report predicted a return to lending growth and a reduction in
write-offs in 2013 and subsequent years.
The Finance &
Leasing Association would not be drawn on the extend of bad debt in
the leasing sector as they do not measure write-offs.
However, the latest figures from the trade body show asset
finance deals of up to £20m grew 13% year-on-year for the first
quarter of 2012 with plant and machinery showing growth of
26%.
