Cars and insurance to be hit
Debt demand will slow in post-Brexit Britain, says EY
New research, ahead of an almost certain cut in interest rates this week, predicts a more cautionary consumer environment which will squeeze profits and margins across the financial services sector.
However, EY Item Cub says companies have developed an ability to withstand this latest downturn. As such it says the forecast slowdown in growth should not be exaggerated.
Sue Dawe (pictured), head of EY’s financial services practice in Scotland, says; “We had hoped 2016 would be the year that total lending recovered to pre-crisis levels, but with the revised economic outlook this looks increasingly unlikely.
“Whilst banks are still willing to lend, there is a strong sense of ‘wait and see’ from business and consumers as they await details of what Brexit will look like in reality.
“The impact of this shouldn’t be blown out of proportion – mortgages and consumer credit are still forecast to grow, albeit slower than before, and business lending is going to shrink slightly – the industry is in a good place to see through this ‘holding pattern’ period.”
Although banks have committed to lend, the forecast for slower economic growth means that demand for credit will weaken, with business and consumers less eager to take on debt.
Mortgage lending and consumer credit will grow, but at a slower pace than previously hoped.
Business lending is predicted to shrink by 1.8% next year, with the recovery in lending now revised back to 2019. Banks will also face a squeeze on net interest margins and depressed profits from lending due to prolonged lower interest rates.
Mortgage lending will grow less than 1% on average per year over the next three years compared to 3% in 2014 and 2015.
Reduced demand, slower growth in household wealth, and continued low interest rates will squeeze profitability across the insurance industry. Earnings are expected to decline this year for the first time since 2012. Profits will stabilise in 2018 before climbing back to £8.8bn in 2019.
Weaker consumer demand will hit general insurers, with car registrations in 2017 to see the first decline since 2011. General insurance premium income is set to rise by only 0.8% in 2017 compared to 2.8% last year.
Life insurance will see slightly stronger growth, with insurance premium income to grow 2% in 2017, albeit down from 3.4% in 2015. The demand for annuities will be depressed as the 20-year gilt yield will average only 1.9% in 2017 compared to almost 4% over the last decade.
For asset managers, the prospect of interest rate rises and investors regaining their appetite for risk has been replaced with a likely prolonged period of low interest rates, volatility in financial markets, and more sluggish growth in household wealth following the Brexit vote.
Sue Dawe added: “It is clear that the revised economic forecast will affect financial services players in different ways and each sector faces unique pressures.
“But this economic environment isn’t that different from what the industry has been contending with over the past eight years.
“In fact, thanks to the rigour instilled in their businesses through the crisis, the financial services industry is probably amongst the sectors best placed to deal with this within the UK.”