BANKS are expected to boost lending to British companies for the first time in four years as their appetite for corporate risk returns following a “quiet” improvement to their balance sheets.
In its latest report on financial services, the Ernst & Young Item Club forecasts that lending to firms will grow by 3 per cent in 2013 to £440 billion, despite only a small effect from the Bank of England’s Funding for Lending (FLS) scheme.
The pace of growth is expected to accelerate in 2014, when business loan books are expected to grow by 8.5 per cent to £477bn.
Andy Baldwin, head of financial services in Europe, the Middle East, India and Africa at Ernst, said: “In recent months, much of the media and political attention has focused around banking competition on the high street and you might be forgiven for thinking we were still in the midst of the banking crisis, but behind the scenes banking fundamentals have quietly been improving and banks are now in a better position to be able to provide funds to the wider economy.
“Our analysis suggests the main drivers of banks’ return to lending will be better access to wholesale funding and a decrease in non-performing loans, rather than the FLS scheme making a material difference.
“That said, the scheme is making a contribution in shifting emphasis and encouraging lending expansion across the sector while also helping to restore confidence and stimulate demand from consumers and SMEs (small and medium-sized enterprises) alike.”
Launched as a joint venture between the Bank of England and the Treasury last year in a bid to ease the flow of credit to cash-strapped businesses and households, FLS has been criticised for failing to increase lending to small firms.
Lending to corporates shrank by 5 per cent last year, hitting the lowest level since 2006. Recent figures showed that net lending to businesses shrank by £2.8bn in February following a £300m contraction the previous month.
Last week, Chancellor George Osborne unveiled a revamp to the scheme and insisted his plans would give “a big boost for the small and medium-sized businesses that are at the heart of the British economy”.
Along with a one-year extension, until January 2015, the initiative will look to encourage banks to direct more lending towards small firms by offering access to additional discounted funds.
According to the Item club, the Chancellor will be helped by the fact that bad loan write-offs have now peaked following the financial crisis. As a result, provisions against loan losses at UK banks are broadly expected to remain stable, and write-offs to both businesses and households are expected to decline further.
However, this forecast is dependent on the interest rate remaining at the current low level. The lowest base rate on record and increased forbearance by banks has helped many struggling business to stay afloat, but Baldwin warned that the situation is “finely balanced”.
“It wouldn’t take a significant shift in interest rates to increase the repayment burden of families and businesses across the UK, at great social cost and with a detrimental knock-on effect on lending,” he said.