UK Credit Conditions

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As regular readers of our blog know, we pay particular attention to the quarterly lending surveys of the major central banks, as they give a decent insight into the changes in the transmission mechanism (credit flow) and thus impact on the wider economy. We therefore read with interest the Q1 Credit Conditions Survey published yesterday by the Bank of England, which was conducted over the period 27-February through 17-March. 

In summary, the leading UK banks and building societies reported no changes to the supply of secured credit to UK households, although unsurprisingly there was a reduction in the supply of unsecured credit (i.e. tightening). For corporate entities it was a similar story, with the supply being unchanged along with the expected supply for Q2; which we think has to be viewed as an encouraging indicator. 

On the demand side the picture was a bit more mixed with the banks reporting a decline in household secured loan requests, although this is expected to increase in Q2, as consumers become more confident that UK borrowing levels have reached their terminal rate. Corporate loan demand also slightly declined over Q1 but unlike the household sector this is expected to remain at a lower level in Q2, as businesses reign in borrowing ahead of the expected economic slowdown in H2-2023; despite the report of a slight decrease in loan spreads.    

On the unperforming loan situation the banks reported an increase in defaults for both secured and unsecured household loans, with an expected increase in Q2. No surprises here with higher rates, although banks have offset this with higher capital buffers and general provisions. Defaults on SME loans also slightly increased in Q1 and are expected to increase further in Q2, although there was no change for loans to larger corporates in Q1 and likewise no expected changes in Q2. 

Attention will now turn across the pond this afternoon as JP Morgan kick off the US bank results and will reveal what they are seeing at the coalface. However, in summary this latest survey for the UK points to a slight weakening in the overall credit situation and supports the theory of a general economic slowdown with a softish landing; although more light will be shed when the Q2 survey is published on the 13-July, particularly following on from the Credit Suisse and US regional bank issues. But for now the UK banks seem confident that the flow of credit remains positive for the underlying economy.