“Growth in the UK economy is now filtering into financial services”

The latest EY ITEM Club forecast for financial services said although growth in lending to UK businesses would be slow this year, the amount of money borrowed will rise by almost 17 per cent by 2018.

That equates to an extra £66bn going into UK businesses coffers over the period and is in stark contrast to the last six years in which the corporate borrowing pot has fallen by around 31 per cent or £181bn.

Chris Price, UK Head of financial services said: “Growth in the UK economy is now filtering into financial services although turning that into profitable growth remains a challenge. While there is little doubt that traditional bank lending will find its feet again, it looks like the recent lending drought has permanently changed borrowing behaviour. The challenge for banks now will be regaining market share from the alternative finance providers who have successfully plugged the gap for the last six years.”

EY said the alternative finance sector had established solid foundations since the economic downturn began in 2008 and is “not expected to lose its footing just because banks are gearing back up for action”.

It said bond issuance has risen 23 per cent since 2009 running at £7.5bn per quarter last year – that is in sharp contrast with bank lending which averaged – £2bn per quarter in 2014 as companies repaid more than they borrowed.

EY has previously reported that SMEs have been particularly keen to seek out alternative finance providers with the number of firms using only bank loans, bank overdrafts or credit cards falling between 2011 and the first-half of 2014 from 29 per cent to 20 per cent.

Price however warned that “external threats” could de-rail banks resumption of lending growth citing political uncertainty across Europe. “The EU’s version of QE is unlikely by itself to revive pan-European growth, and may draw out the era of below-norm interest rates with the consequential effect for Euro exchange rates. That is not good news for the rebalancing efforts of the UK economy,” he said.

Elsewhere the ITEM Club predicted “unexpectedly” strong profit growth in the UK’s insurance industry this year, up from five per cent in its previous forecast to ten per cent. This will come off the back of a robust economy and rises in equity prices.

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