Publish in Perspectives - Wednesday, July 22, 2015
Banco de Crédito del Perú, the country's top bank, recently acquired of microfinance and SME lender Mibanco. (Photo: Antonio1990)
Peruvian banks are expected to continue posting healthy growth and positive results.
Bank loans in Peru were up nearly 10 percent in April as compared to the same month last year, on top of increases of more than 9 percent in each of the past two months, state news agency Andina reported in May. Is Peru’s banking sector poised for stronger growth this year? What factors are constraining the Andean country’s banks, and what’s been working in their favor? How important has microlending become for the financial sector in Peru, a country that is historically lacking in access to credit and formal employment?
Jeanne Del Casino, vice president, and Lauren Kleiman, associate analyst for Americas banking, both at Moody’s Investors Service: We would expect Peruvian banks to continue to grow their loan books in 2015 but to a lesser degree than in prior years because of slower economic growth and credit demand, as well as the banks’ more cautious credit stance in light of rising non-performing loans. Higher problem loan levels in the small and medium-sized business (SME) and microfinance segments have curbed banks’ appetite for these loans during the past two years, while the banks have focused on corporate lending and lower risk mortgages. SME and microfinance entities nevertheless will remain a target for future growth, as is evident in Banco de Crédito del Perú’s recent acquisition of microfinance and SME lender Mibanco. The transaction is also representative of the consolidation taking place in this lending segment at the moment. Peru’s economy is slated to grow between 3 and 4 percent in 2015, supported by private consumption and government investment, which is taking up part of the slack in private investment. The recent upsurge in loan growth is largely a reflection of the central bank’s measures to stimulate growth in local currency lending, including maintaining benchmark rates at a low 3.25 percent, and in particular, cutting reserve requirements on the banks’ local currency liabilities and supplementing them through the auctioning of low cost sol deposits. Wider margins on local currency loans coupled with a lower cost of funding will help offset lower revenues as a result of slower loan growth, and support profitability. The system’s financial dollarization remains a challenge, as depreciation of the Peruvian sol has made repayment of loans in dollars more expensive for sol earners. Much reduced foreign currency lending owing to tighter reserve and capital requirements is helping to curb this risk.
Cynthia Cohen Freue, associate director for Latin America financial institutions ratings at Standard & Poor’s Ratings Services: We expect credit to grow in nominal terms about 14 to 15 percent in 2015, considering our expectation of GDP growth close to 3.5 percent. Even though we expect credit growth to somewhat accelerate from last year, we also see improvement in economic prospects this year, mainly driven by infrastructure, mining and monetary and fiscal stimulus, and so we see a similar trend to last year’s in terms of the relationship between credit growth and GDP growth. The central bank has recently adopted measures to boost the economy and de-dollarize the banks’ balance sheets, which we believe will encourage credit growth. The central bank has lowered reserve requirements in soles and is offering economical funding through repurchase agreements for expansion of credit in soles and conversion of loans in dollars to soles. Moreover, corporates’ shift from external funding to domestic funding will also have a positive effect on credit growth. We see as a constraining factor for credit growth the fact that the sluggish economy and weaker credit quality metrics have driven banks to tighten underwriting policies, particularly small business lending. Moreover, the banking superintendency has established stricter capital requirements for mortgages with higher loan-to-value ratios and even stricter ones for dollar-denominated and/or loans with variable rates; and for higher risk auto-loans or long-term consumer loans. With regard to micro-lending, we consider this segment will remain a key market of focus for the financial system. The aggressive growth in micro-lending in previous years, and consequent increasing indebtedness in the sector has resulted in pressures in the payment capacity affecting its credit quality. As a result, banks have reduced growth in micro-lending, tightened underwriting standards and adjusted their models to be able to operate more efficiently in this segment. With the adjustments, we expect credit in this segment to regain growth.
Diego Alcazar, director for Latin American financial institutions at Fitch Ratings in New York: Growth rates have been somewhat bloated by depreciation and mask the important de-dollarization progress encouraged by the central bank. At constant exchange rates, dollar-denominated loans declined about 9 percent, while local currency loans increased almost 30 percent year-on-year in April. Loan growth should be faster in 2015 (12-15 percent) as the economy rebounds from an abnormally weak year, though we do not expect banks to return to strong double-digit growth. Taking a pause, adjusting and consolidating previous growth is a welcome phase for banks; this should allow them to replenish capital that was a bit stretched by rapid growth and depreciation. Besides a cautious approach to the new environment, the key factor constraining growth has been asymmetrical liquidity (high in dollars, tighter in local currency). Central bank actions have been very effective in providing local currency liquidity, and new measures (public sector deposits auctions) should allow banks to grow loans well into 2016. But this does not solve depositors’ preference for dollars; hence while dollarization is becoming less of a threat, progress on the deposit side will be slow. In favor of Peruvian banks are their relatively low banking penetration, high profitability, strong, proactive regulation and credit discipline. As long as regulation keeps abreast of systemic risks and banks adhere to cautious credit policies, growth should remain healthy and profitability continue to be positive. Microlending has become mainstream in Peru; the top three banks have brought their funding muscle and balance sheet strength to this segment, which is not without risks. Asset quality has been a challenge, highlighting the need for credit discipline, but this does not rule out continued growth.
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