By Lucy Barrett, Managing Director, Aria Finance
Times are tough but the capacity for commercial lenders to pivot solutions should not be underestimated.
Commercial lending has had to endure some short, sharp blows in recent months. Unfortunately, the sector isn't a special case. We aren't immune to the machinations of the macro-economic outlook.
Across the board, governments, central banks, wholesale funders, commercial lenders, businesses and even households have had to rebalance budgets and re-evaluate their appetite to risk, financial sustainability and fiscal responsibility.
Responding to the inflation spike, swap market volatility, base rate hikes and downbeat economic forecasts has made the picture complete and tricky to navigate. Inevitably, caution has become a watchword and a guiding principle for anyone considering either their household budget or a large-lending balance sheet. It's entirely natural and understandable.
That is why we have seen a retrenchment from certain high-profile commercial lenders in recent weeks while they wait for the choppy waters to calm. More challenger banks have increased their minimum loan size, and lending to business borrowers with a high loan-to-value has become more difficult across the board.
As we know, uncertainty is the antithesis of confident lending. So the Organisation for Economic Co-oper-ation and Development's (OECD) prediction that the UK economy will shrink faster than that of any other G7 country next year doesn't help quell concerns.
According to the OECD, the UK government's decision to spend billions of pounds to subside high energy bill will drive up inflation and, as a result, base rates will have to follow suit in an attempt to redress the imbalance.
The Office for Budget Responsibility has also confirmed the UK is in recession and predicts that growth will fall by 1.4% next year. It has cautioned us to expect the worst fall in living standards since records began in 1956, with a 7.1% drop in real disposable income in the next two years.
There is no point in dressing it up: the outlook is looking tough. But, as the old saying goes, tough times don't last but tough people do. The industry has taken some short, sharp blows, but I have no doubt we will all return to the fray wiser and more resilient as a result.
Among the leading commercial lenders, the industry has the funding, processes, checks and balances to ensure we lend sustainably and confidently. Bust most importantly we have experienced and talented people who will bend over backwards to help borrowers and brokers find the solution with that appropriate risk profile that is right to them.
Adverse market conditions also create opportunities for us all to learn. Although unpleasant, experience of economic downturns can be invaluable in helping the whole industry to be better able to spot the warning signs and make the necessary preparations to ensure a softer landing each time one comes along.
CHECKS AND BALANCES
There is no doubt that across the industry - retail and commercial - lenders have far better checks and balances in place than during the financial crisis of 2008-09, and that will stand us in good stead as we move into 2023 and beyond.
Perhaps the most crucial thing to remember here is that market conditions can, and do, change quickly. Owner-occupied profitable businesses still have strong high-street options, and lower-LTV investment mortgages are there for the right asset, which should be reassuring.
Of course, some lending products have been taken off the shelves. But they will return. Fears around heightened risks will begin to settle along with the economic picture. We have already seen swap markets start to stabilise into a 'new normal' and I expect that, as certainty returns, so too will more product options for borrowers and brokers alike.
REDRAWN LINES OF RISK
We have all been adjusting to redrawn lines of risk. But the capacity for commercial lenders to pivot and provide solutions should not be underestimated. Brokers should expect to see more innovation and variation in the type and availability of products in the not-too-distant future.
To quote another truism, this time from 1980s pop icon Billy Ocean, when the going gets tough, the tough get going - and we are already well under way.