The UK economy is facing “serious headwinds” that call for additional support for small businesses, according to the British Business Bank, the state-backed economic development investor.
The bank on Wednesday warned over the effect of rising interest rates, high inflation and supply chain disruption, saying conditions “remain tough for many smaller businesses as they work to recover from the Covid-19 pandemic”.
It added that the UK could be “entering a situation in which there is reasonably high employment, but with many people feeling worse off in real terms”.
Catherine Lewis La Torre, acting chief executive, said the bank was already planning for how it could help make up for any future shortfall in small companies’ funding. She pointed to the need for equity support for businesses rather than debt, given the threat of higher interest rates.
“We’re heading into choppy waters,” she said. “Often smaller businesses start to struggle to access finance. Our role will be extremely important.”
The bank administered the government’s Covid-19 emergency loan guarantee schemes, but it has been criticised for its handling of the “bounce back” loan scheme in particular, following estimates of billions of pounds of fraud.
Lewis La Torre warned that an economic downturn would probably lead to an increase in defaults on loans under pandemic schemes.
She said the rise in losses would be caused by companies being unable to repay loans, rather than by fraud, and that the number of defaults would increase if economic conditions deteriorated.
Losses would be at “the higher end of ranges” estimated by the bank, she added, if the economic headwinds continued and became more severe.
The bank achieved an adjusted return of 18.2 per cent, exceeding its target of 0.06%, in the year to March 2022.
Adjusted net income for 2021-22 was £585.5mn. Profit before tax was £604.8mn, up from £293.5mn year on year, driven mainly by an increase in net gains on investment assets.
However, Lewis La Torre said pressure was already building on valuations in the bank’s portfolio of equity investments, which are marked to the market rate every quarter.
Valuations in its equity programmes have shown significant increases this year, but the bank warned the vast majority were unrealised returns.
“There is a danger that credit and investment losses, including a large writedown of individual investments, could have a material impact on the bank’s ability to meet its return target in 2022/23.”
In total, the bank had £4.1bn of assets under management at the end of March this year, comprising debt financing to businesses of £2.2bn and £1.9bn of equity financing. In the year to March 31, it invested £1.2bn.
The bank said the nature of lending within its debt portfolios, such as start up loans and peer-to-peer platform lending, often to microbusinesses without collateral, made it more vulnerable to uncertainty.
“This could lead to an increase in credit losses within these portfolios,” it said.
Lewis La Torre last year earned £392,000, having met all the targets in her incentive package, up from £295,000 in 2021. She will this week step down as acting CEO, a position she has held since September 2020, but will remain at the bank as head of its British Patient Capital arm.
The bank was last year allocated new funding of £1.6bn to extend debt and equity investment into regional start-ups. As part of this, it will establish investment funds in each of the devolved nations for the first time.
Source: Financial Times