UK lending: will ‘recovery’ persist?

There is talk of ‘recovery’ in the latest De Montfort report, but 2016 could set things back  

We’re so used to hearing words such as “constraint”, “retrenchment” and “retreat” in relation to the banks, that when a word like “recovery” is used, it prompts a double take.

But that was the word quite justifiably deployed by De Montfort University in the 2015 version of its Commercial Property Lending Report, which came out earlier this week.

It appears that Nicole Lux, the former Deutsche Bank executive who has been announced as the new co-author of the report – taking it over from current authors Bill Maxted and Trudi Porter as from next year – has brought with her a change in fortunes. After all, a key finding was that new loan originations in the UK last year reached a six-year high.

The total amount of outstanding debt at year-end stood at £168.4 billion (€222.1 billion; $247.9 billion), a 1.9 percent increase from the £165.2 billion total at the end of 2014 – and the first increase since 2008. Over the same period, loan originations went up from £45.2 billion to £53.7 billion.

But the market was not just stronger, it was also healthier. The report found that UK banks have been highly effective at dealing with their bad loan problems. Year-end 2015 saw a near-50 percent reduction in the number of loans recorded as “distressed” (those in default and in breach of financial covenant) from £23.2 billion to £12.1 billion. At the end of 2009, the figure was £47.6 billion.

Furthermore, the recovery shows every sign of being sustainable, since current transactions are being done on a more conservative basis. At the end of last year, 87.5 percent of outstanding debt had a loan-to-value ratio of 70 percent or less. The equivalent figures one year and two years prior were 77 percent and 63 percent respectively. Average LTVs in 2015 fell across all sub-sectors.

The word ‘recovery’ is certainly applicable up until now; but, moving forward, those less positive words used in the opening paragraph could come into view if current trends continue.

While the picture was brighter in 2015, it was also smaller — for the banks and building societies, that is. Their share of the new loan origination market had fallen to 34 percent by the end of 2015 – lower than their 39 percent share the previous year and indeed the lowest level ever recorded by the report. The main challengers in the new loan origination stakes were insurance companies, which saw their share rise to 16 percent.

As volatility rises, the banks pulling back further could lead to lower origination numbers in 2016, especially if other lending groups are unable to pick up the slack. It’s also a point worth noting that confidence is a fragile thing. In the first half of 2016, with volatile macroeconomic factors rife and many lenders tempted to sit on their hands – particularly with the EU referendum looming – origination may be taking something of a knock, as discussed in last week’s Weekly Digest.

“In terms of fundamentals, sentiment and discipline, the market was in a good place coming into 2016,” said Peter Cosmetatos, chief executive of lenders’ trade association CREFC Europe, in response to the report.

But whether it will still be in a good place by the end of this year is a tougher call.