31.10.2011
By Simon Miller
Bank loan write-offs will be £3bn higher than previously forecasted according to Ernst & Young’s ITEM Club.
The group, which uses Treasury data, said that upward pressure on bank loan write-offs was already present and the weaker growth outlook for the UK economy will lead to write-offs over the next few years being £3bn more than previously assumed, coming from non-financial corporate and unsecured household loans.
The ITEM club forecasted that UK GDP was set to just grow by 0.9% this year and 1.5% in 2012.
In addition total loan growth over the next two years was forecasted at just 0.5%pa - a reduction of 30 basis points.
Dr Neil Blake, senior economic advisor to the Ernst & Young ITEM Club, commented: ““As the financial services sector comes under increasing pressure, the supply of credit to the broader economy slows, which in turn impacts the growth prospects of the wider UK economy.
He added: "Banks may now also face increasing competition for corporate lending from non-bank lenders who are unencumbered by some of the balance sheet restraints that banks currently face. This expansion of the UK’s shadow banking system may be beneficial for UK businesses as they seek out alternative funding, but for banks it is another factor which puts pressure on their current business models, risking long-term loss of market share.”
However, there was some better news with banks succeeding in deleveraging with the ratio halving between 2007 and 2010.
As a result, UK banks are set to hit Tier I Capital targets. In addition, reliance on wholesale funding has more than halved, meaning banks were better placed in case of a financial crisis or wholesale markets drying up.
“Although this progress on building capital ratios and deleveraging may have had a negative impact on the growth of the economy in the short-term, it has improved the health of UK banks. Despite significant economic headwinds UK banks remain on course to hit both Basel II and ICB CT1 targets,” said Blake.
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