The key chart

Summary

UK corporate lending grew 11% in April 2020; the fastest rate of growth since July 2008 and in direct contrast to slowing trends in the household sector. April’s monthly change was lower than March’s “dash for cash” but was still double the monthly amounts borrowed over the previous six months. The cost of borrowing also fell to the lowest level since December 2010. NFCs are also increasing financing from bonds, commercial paper and, to a lesser extent, equities.

Behind these positive trends, the gap between large NFCs and SMEs is widening in volume terms. SMEs are benefitting from lower borrowing costs but volumes remain low and growth subdued. Furthermore, only 24p in every £ lent in the UK is directed to the NFC sector. More concerning, 77p in every pound is directed at less-productive FIRE-based lending (FIs and real estate).

The fact that NFCs are accessing finance in larger volumes and at lower costs is welcome, but the widening gap between large NFCs and SMEs and the on-going concentration of lending in less-productive sectors means that headline numbers are not as positive as they appear at first.

Mind the financing gap

UK corporate (NFC) lending grew 10.7% YoY in April 2020, the fastest rate of growth since July 2008. This was in contrast to trends in the household (HH) sector, where credit growth slowed to only 2.5%, the slowest rate of growth since June 2015.

Outstanding NFC loans grew by £8.4bn in April. This was lower than the £30.2bn raised in March but was still approximately double the average amounts borrowed over the previous six months (£4.3bn). The cost of (new) borrowing for NFCs fell to 2.26%, the lowest rate since December 2010 and 30bp lower than in February.

Looking at wider financing trends, NFCs raised a total of £16.3bn from financial markets in April, down from the £31.6bn raised in March but still above the average monthly financing of £3.2bn seen over the past three years. After March’s “dash for cash” from banks, NFC repaid £1.0bn of bank loans in April but raised £7.7bn in bonds and £7.0bn in commercial paper (including finance raised through the Covid Corporate Financing Facility) and £1.4bn in equity.

These positive trends mask that (1) the gap between large corporates and SMEs is widening sharply in volume terms and, that (2) NFC lending remains a relatively small part of UK bank lending. SMEs are benefitting from lower borrowing costs: the effective rate on new loans to SMEs fell by 52bp to 2.49% in April the lowest level since 2016 (when the BoE series began) and almost 100bp below the 3.44% cost of borrowing in February. SMEs borrowed £0.3bn in April and March but this is only 1.2% higher than a year earlier.

Despite the rise in NFC lending described above, only 24p in every £ of UK lending is lent to the NFC sector. Alternatively, using my preferred distinction between more productive “COCO-based” and less-productive “FIRE-based” lending, 77p in every pound lent in the UK is directed at financial institutions and real estate with obvious negative implications for leverage, growth, stability and income inequality.

Conclusion

The fact that UK corporates are accessing finance in larger volumes and at lower costs is welcome. Nonetheless, the widening gap between large corporate and SME financing is of concern as is the fact that UK lending remains concentrated in less-productive FIRE-based lending. This week’s Bank of England data contained good news for sure, but not to the extent that headline numbers might suggest.

Please note that summary comments above are extracts from more detailed analysis that is available separately.