Outlook for Peruvian banking sector positive despite pressure

With Peruvian GDP growth improving to 4% in 2018, lending saw some renewed dynamism after a slow couple of years. Showing its fastest growth since 2010, lending from private sector banks was up 8.77%, according to the Peruvian Banking Association (Asociación de Bancos del Perú, ASBANC).

Though different data providers offer different figures, partly due to fluctuations caused by the dual-currency nature of Peru’s credit markets, it appears that the era of the early 2010s, when annual loan growth was in the high teens, is in the distant past. Nonetheless, the current, favourable trends are likely to be maintained.

ASBANC expects loan books to post average growth of 9-10% in 2019, while Moody’s predicted in October 2018 that banks would increase lending by 11% in 2019, up from an average of 4% in 2016-17. Demand is highly skewed towards local currency loans, with the central bank (Banco Central de Reserva del Perú, BCRP) having kept a low benchmark interest rate of 2.75% since March 2018.

Sol-denominated loan portfolios held by private sector banks grew by 11.88% in 2018, versus an expansion of 2.67% in dollar terms. As of April 2019 more than 68% of outstanding loans were in soles, compared to 20% in 2002 and 50% as recently as 2012, due to the declining cost of credit in local currency thanks to persistently low interest rates. “We are now seeing the central bank’s expansive policy reflected in the bank lending market,” Alberto Morisaki, head of economic research at ASBANC, told OBG. “Banks are able to achieve very cheap funding that is allowing them to compete strongly.”

Domestic Drivers

Internal economic dynamics are the key driver of growth, in both the business and retail segments of the market. Domestic demand was up 3.9% in 2018, after posting slight improvements of 1% in 2016 and 1.6% in 2017. Spanish multinational bank, BBVA forecast that domestic demand growth would remain on a solid footing, steadying at 3.9% in both 2019 and 2020.

“Unlike previous years, when primary sectors were responsible for growth in the economy, in 2018 domestic demand was driving GDP expansion,” Morisaki said. “Peru is likely to post a similar level of economic growth led by internal demand, so we could see comparable levels of loan growth in 2019.”

Loans to businesses – which ASBANC categorises along a spectrum ranging from major corporates to small and medium-sized enterprises – represented 64.9% of the outstanding total as of December 2018, and accounted for the majority (5.11 points) of the 8.77% growth. The sizeable increase in business loans was also closely linked to the domestic economy. Of the 7.8% annual increase in lending to businesses, commerce (2.36), manufacturing (1.79) and real estate (1.02) together accounted for 5.17 points, according to ASBANC.

Continued Momentum

Private consumption also showed better numbers – up from 2.5% in 2017 to 3.8% growth a year later, its strongest showing since 2015. Economists believe this pace of growth will be sustained; BBVA forecast private consumption would grow by 3.6% in 2019 and 2020. This dynamism, in particular, has helped the retail segment post double-digit year-on-year growth every month for the second half of 2018. Retail lending – including consumer loans, mortgages and credit cards – grew at a faster pace than business loans, at 10.6% versus 7.8%, respectively.

Mortgage lending rose by 8.81%, according to ASBANC, which uses constant prices, or 9.7%, according to the Superintendency of Banking, Insurance and Pension Funds (Superintendencia de Banca, Seguros y Administradoras de Fondos de Pensiones, SBS), which uses current prices. Mortgage lending posted a slight improvement on the growth witnessed in 2017, estimated at 7.2% by the SBS, but paled in comparison to the sharp increase in consumer lending, including credit card loans, which ticked upwards from 5.2% to 12.6%.

“The El Niño phenomenon really affected consumers in 2017,” Marco Contreras, head of research at Kallpa Securities, told OBG. “2018 was a rebound year and thus we predict domestic demand will increase by 3.5% in 2019, which will keep driving loan growth. Some banks are growing their consumer portfolios exceedingly fast.”

Opportunity Knocks

Retail-focused Interbank, the fourth-largest lender in the country, posted 17.3% loan growth in 2018 to take its market share of total loans from 11.4% to 12%. The bank was able to manage this in part due to a 28% increase in credit card loans, more than double the consumer lending segment’s overall growth of 12.6%. Michela Casassa, CFO of Interbank’s parent, Intercorp, said in a year-end earnings call with analysts that she was predicting similar market share growth in 2019.

Scotiabank expanded its retail offering with the acquisition of 51% of the shares of Banco Cencosud. The purchase includes an agreement for Scotiabank to jointly operate Cencosud’s credit card operations, which the Canada-headquarted lender said would help it position itself in becoming the second-largest credit card issuer in the country.

César Ríos, CFO of Banco de Crédito del Perú (BCP) and Credicorp, said in April 2019 that the bank’s wholesale portfolio – particularly corporate borrowers – had witnessed poor growth over the first three months of the year. Ríos said that it was partly due to the rapid expansion in the last quarter of 2018, but also because major companies had been very active in raising funds on local and international capital markets. “I do not foresee that this will happen during the rest of the year,” Ríos told OBG.

“Lending to larger companies is growing at a slower rate because it depends on private investment growth,” Contreras told OBG. “Much of the growth in private investment comes from the mining sector, but these companies are often multinationals that are able to finance themselves using international banks or capital markets.”

According to ASBANC, outstanding loans to businesses in local currency fell from PEN99.81bn ($30.2bn) at end-2018 to PEN96.62 ($29.2bn) by February 2019, before recovering to PEN98.36bn ($29.8bn) at the end of April. In US dollars, the sector’s combined portfolio slipped slightly from $22.5bn to $22.1bn, before rebounding to $22.75bn over the same timeframe.

Credicorp saw an expansion in retail lending, led by mortgages. This is an area with significant potential given Peru’s low mortgage debt-to-GDP ratio relative to its neighbours. Both consumer and mortgage loan books have continued to grow across Peru, with sol-denominated mortgages increasing from PEN37.64bn ($11.4bn) at the end of December 2018 to PEN39bn ($11.8bn) by the end of April 2019; the latter represented 13.4% year-on-year growth.

Consumer loans, for their part, rose from PEN46.3bn ($14bn) to PEN48bn ($14.5bn) in the first four months of 2019, ending with 12.39% yearon-year growth. Dollar-denominated mortgages are on the way down, however, closing April 2019 off 10.31% year-on-year, whereas total foreign currency consumer lending saw sustained growth of 5.51%.

Sustainable Growth

While loan growth is generally viewed positively, it inevitably raises questions of capital adequacy. Interbank’s above-market growth in 2018 led Fitch to downgrade the borrower’s from “BBB+” to “BBB” in April 2019. However, its rating remains solidly investment-grade. According to the credit rating agency, the lender’s core capital ratio, which had been on track to surpass 12% of risk-weighted assets, slipped from 11.7% at end-2017 to 11.1% a year later. Its loan-to-deposit ratio deteriorated from 92.5% to 104.7%. Fitch also warned that BCP’s positive capital metrics had been modestly pressured by loan growth.

Lending is continuing to accelerate, but growth is far from the consistent 10-20% annual expansion that banks saw in 2010-13, which did not destabilise the system. Although Fitch has warned that portfolio growth caused a slight deterioration in asset quality at both BBVA and Scotiabank in 2018, SBS data showed that the broader sector’s non-performing loan (NPL) ratio – having increased from 2.14% in 2013 to 3.04% as of December 2017 – fell to 2.95% by the end of 2018. Using less stringent international standards, whereby NPLs are classified as those that have not paid in 90 days, the figure falls to 2.55%.

Amid lending growth, credit rating agency Moody’s therefore expects liquidity metrics will remain adequate and that delinquencies will level off over time as financial institutions had previously positioned themselves in the market by tightening their origination standards in the more difficult operating environment over the past couple of years.