Banks face a savaging as swathe of corporate loans is written off

Click to follow

A huge burst of insolvencies is set to blow a hole in bank balance sheets as write-offs on corporate loans reach their highest level since the 1990s recession, the Ernst & Young ITEM Club warned today.

Its latest assessment of prospects for banking and insurance firms also warned that a credit recovery for loan-starved businesses is still at least four years away as corporate lending fails to bounce back to its pre-crisis peak of £575bn until 2016 at the earliest.

Write-offs are set to increase to 1.9 per cent of loans to businesses this year, up from 1.6 per cent in 2011 as the recovery stutters. Insolvencies are likely to rise more sharply in the North East of England and in Wales, where economic output is set to contract by 0.1 per cent and 0.3 per cent respectively, E&Y added.

Neil Blake, the ITEM Club's senior economic adviser, said: "Although 1.9% doesn't sound big, this will be the highest annual rate of write-offs since the mid-Nineties – and the more loans banks have to write off, the less money they will have to lend. Consumer-led sectors such as retail will continue to struggle until real wages start to increase and the labour market improves as there looks to be little chance of any credit-related boost to spending. This will be especially so in regions hit hard by government spending cuts."

Banks will be hampered by exposure to weak commercial property markets for another three years, hitting prospects for lending in the real economy, the forecaster warned. It now predicts an even sharper 6.8% contraction in corporate lending this year. Mr Blake added: "The funding squeeze that corporates and SMES have been experiencing is only set to get worse.

"The government's three-year £20b scheme to boost loans to small businesses is just about large enough to cover around 9 per cent of SME lending on average over the next three years and is unlikely to result in a sharp increase in corporate lending.

"While the scheme's commitment to lowering the cost of credit by 1% is clearly not unhelpful, the benefit is likely to be too small to significantly alter the hiring and investment plans of those SMES who are lucky enough to secure a government-backed loan."