By Daniel Hunter
Consumer credit is already starting to recover slowly, and while business lending is still forecast to hit a five-year low at £422b in 2013, it is forecast to recover quite strongly from 2014, according to the EY ITEM Club forecast for financial services. Lending to UK business will grow by 7% in 2014 and 10% in 2015.
By 2017, business lending will have surpassed the 2008 peak at £602b, more than 40% higher than it is today.
“Few industries will be happier to see increasing signs of stability and growth in the UK economy than financial services. The banks should now be able to increase their credit supply - regulation permitting. Consumer credit is already improving and this month we have seen a slight increase in business lending," Chris Price, UK head of Financial Services at EY, said.
“Corporate lending won’t increase enough in 2013 to compensate for the dire first half of the year, but we expect it to pick up more significantly in 2014, which raises hopes that UK companies may start to invest some of the cash currently sitting on their balance sheets back into the wider economy.”
In just a few years crowdsourcing has developed from a niche on-line business to an established source of funding, lending an estimated £200m to SMEs last year, and it is expected to grow further. Industry reports suggest it could grow to five times its current size, hitting £1b by 2016.
“Alternative finance for SMEs will not fall away just because business lending is going to bounce back. SME lending is still very expensive for banks, especially given some of the regulatory pressures on asset quality, and some of the funding gap will continue to be filled by non-bank lending," Carl Astorri, senior economic adviser to the EY ITEM Club financial services forecast, said.
"Private equity companies, hedge-funds and asset managers have all been mobilising to fill the gap. We also expect peer to peer lending to grow rapidly in the next few years as demand for funding from SMEs outstrips supply from the banks.”
Consumer loan write-offs are falling — write-offs will be 2.3% of outstanding consumer loans this year, down from a peak of 5.5% in 2010. Personal insolvencies are also falling from 131,000 in 2012 to 115,000 in 2013. By 2016 we expect them to have fallen to 76,000 per year.
“By the end of this year the rate of write-offs on consumer loans will have more than halved from their 2010 peak, making it easier for banks to extend new credit to consumers. This drop in write-offs is a reflection of the robust developments in employment, as well as the fact that the riskiest loans were written off in 2008-2010," Carl commented.
Financial markets are usually influenced by the US, but the UK gilt market has tracked the US bond market particularly closely since the start of forward guidance by the Federal Reserve in August last year. The new Governor of the Bank of England, Mark Carney, attempted to dampen this link in his first week by telling markets they should not be pricing in a rate rise as early as 2015.
“We expect base rates to start rising in Q1 2016, but anyone with bonds on their balance sheets will be watching Mark Carney’s actions this week carefully. If bond yields continue to go up at the rate we saw in May and June, banks and insurers could face significant losses on their bond portfolios," Carl said.
Premium growth in life insurance should begin to improve from 2014, supported by rising incomes and a stronger housing market. Property transactions are expected to rise by 7.2% in 2013 and 6% in 2014, with turnover growing by 125% by 2017. By 2017, almost 20% of the UK population will be aged 65 or above — which is 1.4m people more than in 2000.
“Life insurers have seen a steep drop in investment sales following the Retail Distribution Review, so the recovery in the property market will be very welcome news for them," Mark Robertson, UK head of insurance for EY, said.
"They do however need to continue to develop better solutions for the ageing wealthy population. Retirees have worryingly few choices over how to draw down their assets. Cracking this problem is the only real way to reignite profitability in the life insurance market.”
In the past three years roughly twice as many funds were opened as closed, but this year the trend will reverse.
“Fund closures are not a novel idea but asset managers are showing a new willingness to rationalise their product range. This hard-headed attitude not only reflects the threats to profitability but also the limited availability of seed capital. Firms are increasingly dividing mid-tier funds into those that should be wound down and those with scope to grow," Gill Lofts, UK head of asset management at EY, said.
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