Corporate lending expected to shrink in 2012

Monday 23 July 2012

CORPORATE lending is expected to shrink 6.2% in 2012, according to the Ernst & Young ITEM Club.

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In its outlook for financial services the economic forecaster said the decline would be at a similar level to that seen in 2011.

However, consumer credit conditions have worsened, meaning an earlier prediction of 7.6% decline has been revised to 10.5%.

Carl Astorri, senior economic adviser to the study, said: "Despite the Government schemes that are coming into play, the contraction in overall lending this year will be even sharper than last year. "The Treasury's 'funding for lending scheme' looks promising, but although it should help to lower banks' cost of funding, banks will be very aware of companies' and households' heightened risk of default this year. "Some banks may also be reluctant to access these schemes for fear of the stigma it could create in the markets."The forecast for corporate loan write-offs has been raised marginally to 2%, which is the highest seen in more than 20 years.However, this is expected to be the peak level in the current economic cycle.Mr Astorri said: "The economy is expected to regain some momentum in the second half of this year, albeit gradually, and so write-offs on corporate and consumer loans are forecast to reach their peak in 2012, with improved economic conditions in 2013 stemming the tide of non-performing loans. "In contrast, the low-interest environment continues to shield banks and homeowners from increased impairments on mortgages."The forecast for growth in assets under management (AUM) was downgraded from 10.7% to 7% but there would be a bounce back to 10.5% in 2013.Profits at insurers will be under pressure due to low interest rates and business volumes coupled with greater capital requirements and higher hedging costs.Mr Astorri added: "2012 is proving a tough year for the insurance industry. Insurers need to plan their businesses on the assumption that the low interest rate environment is here to stay for some time."

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Corporate lending expected to shrink in 2012

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