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Experian view on the current commercial credit risk trends

Despite the Bank of England acknowledgment of a wage-price spiral in the UK economy and vowing to raise interest rates to bring inflation back to the bank’s target of 2%, the news of the UK economy improving at a faster pace than expected and avoiding a technical recession this year provides commercial lenders with some reason to be positive.

There is optimism about positive income statistics and rising consumer confidence. However, the continued increase in debt levels and delinquency rates sends a clear warning that those businesses who are yet to lock in debt within fixed rate structures may find the coming months even harder, increasing the risk of further defaults and failures. Demand for external finance will likely continue, as businesses seek liquidity provisions to counteract supply chain issues, wage increases and increasing energy bills now that government energy support has been dropped. The increasing cost to borrow and the lack of available finance is constricting growth. This, coupled with the Bank of England’s plans to revamp UK bank capital rules as part of the final package of Basel rules in the UK, which could result in a 25% cut in small business lending, presents an increasingly challenging period for UK’s businesses.

Key UK Commercial Credit Metrics

Number of insolvencies, England and Wales

The number of insolvencies exceeded prepandemic (2019Q4) levels in all of the main sectors in 2023Q1. In total, insolvencies were the highest since 2009. Accommodation & food service saw the largest increase between 2022Q1 and 2023Q1, followed by wholesale & retail, reflecting the acute impact of high energy costs and labour shortages have had on these sectors.

% of businesses main concern in March 2023

The ONS Business Insights Survey (BICS) shows the top two concerns for businesses are energy (26.3%) and inflated prices (22.2%). Energy prices and inflation are major concerns for accommodation & food services, but post pandemic demand is strong. Falling demand is a concern for wholesale and entertainment given cost-of living pressures.

Commercial Credit - New Account Volumes - YoY Percentage Change

A significant bounce-back in new lending happened in 2021 and 2022. Both volumes and values waned significantly over the last few months of 2022 and 2023. Cost-of-living concerns and uncertain market conditions have dented confidence of supply.

Asset Finance, Credit Cards/Revolving Credit, Loans, and Mortgages

View from Experian

• The average and median Commercial Delphi scores for 2022 remained effectively flat compared to 2021.

• Credit card/revolving credit utilisation has fallen – but use of overdrafts by businesses has increased.

• Average and total Asset Finance and Credit Card/Revolving Credit debt has increased substantially since the start of 2023.

• External measures suggest improving business confidence for growth this year. The default rate increased by 20% to 0.07%.

written by Gareth Rees Head of Commercial Credit & Risk - Experian


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