Peru leads region with range of banking services

Responsible for regulating financial flows and channelling savings and investment, banking is the single most important component of the wider financial, insurance and pensions sector, which accounts for 3.8% of Peru’s GDP. The financial sector – which includes banks, finance houses and credit cooperatives – accounts for more than 85% of that figure alone, at around 3.2% of GDP.

There are 64 financial institutions operating in the country along with 17 full-service banks, operating a total of 2154 branches and employing 62,837 staff. In addition, there are hundreds of other institutions, including finance houses ( financieras) and regional and municipal savings and loans bodies (cajas de ahorro). In terms of GDP, the financial sector grew at an average annual rate of 8.3% in the six years to 2013.

Steady Growth

The Peruvian banking system continued to grow throughout 2015, with total bank credits rising by 15.26% year-on-year (y-o-y), to PEN250.8bn ($80bn) in September. An important feature of the system is that there is free convertibility between the sol, the national currency, and the dollar. Individuals and companies can hold accounts and transact business in either currency. The balance between the two – also known as the degree of dollarisation of the financial system – varies over time and according to market preferences (see analysis). The increase in bank credits in August 2015 reflected strong expansion in local currency lending, offset by a contraction in US dollar lending. Total outstanding local currency lending rose to PEN140.71bn ($44.9bn), at the end of August, 35.2% up y-o-y, while foreign currency lending was $23.67bn, down 18.6% y-o-y.

Non-performing loans (NPLs) stood at 2.7%, representing a y-o-y increase of 0.24 percentage points, according to the Peruvian Banking Association (Asociación de Bancos del Perú, ASBANC). This was caused by a rise in household NPLs ( particularly in mortgage loans), which was partly offset by a reduction in business-sector NPLs. The slight rising trend in NPLs is considered normal for a period of slower macroeconomic growth.

Loan Growth Elasticity

In recent years Peruvian credit growth has consistently outstripped GDP growth, sometimes by as much as three or four times. A high loan growth to GDP growth ratio – known as loan growth elasticity – is a common feature of Latin American banking, given that many economies are still relatively under-banked and there is room to increase market penetration. However, as economic growth has slowed across the continent, the ratio has begun to fall. Peru has nevertheless remained above the average. According to a Fitch Ratings report issued in August 2015, the average loan growth elasticity ratio in the region was expected to fall from 1.8 in 2013 and 1.7 in 2014 to 1.4 in 2015. In Peru, however, the ratio was still over 3 in August 2015.

“In recent years credit growth has been roughly three times GDP growth, so slower GDP growth will have an impact,” Alberto Morisaki Cáceres, head of the economic studies department at ASBANC, told OBG. “We’ve had credit growth of 15-18% per annum, and this year we expect it to come down to 10% or thereabouts. At the moment loans to corporates and mortgages are still growing strongly but micro-credits are slowing down.” He said that the majority of lending – around 65% – is to private sector companies, with most of the remainder going to individuals, mainly in the form of consumer lending and mortgages. In turn, some 90% of private sector company lending goes to the larger corporations, with only about 10% going to small and micro-sized companies.

Deposits also continued to grow in 2015. As the sol depreciated, interest rates on dollar deposits became more attractive. Total deposits in the banking system rose to PEN196.72bn ($62.8bn) at the end of August, up by 6.7% y-o-y. Local currency deposits totalled PEN93.06bn ($29.7bn), up by 1.8% y-o-y, while foreign currency deposits were $32.04bn, up by 11.4% on August 2014.

Rising Penetration

Bankarisation – a measure of access to banking services, defined as the ratio of gross loans to GDP – has been on a steady path of improvement, rising from 21.6% in 2007 to 28.6% in 2013. More recent figures from the BCRP suggest it rose further to 39% by December 2014. According to the World Bank, 29% of people over the age of 15 had an account with a financial institution in 2014, up from 21% in 2011 – another sign of increased banking penetration.

One of the issues holding financial institutions back is that a significant proportion of the population is “informal”, meaning it works outside the tax and benefits system. Informal employment can cover a whole range of activities, from subsistence farmers in isolated areas to street vendors, domestic servants and self-employed workers. Under existing Peruvian regulations, there are few barriers preventing informal workers from opening a deposit account in a bank.

However, even given the ease of opening an account, the majority of the adult population has not yet done so, reflecting low levels of financial education and awareness. “There is a lack of information when it comes to reaching unbanked segments of the population. The key to success is to develop a customer-focused culture,” René Jaime Farach, the general manager of Banco Ripley, told OBG. “Peru is a market where people place greater importance on the person selling the product than on the product itself.”

A survey carried out in 2013 by the financial regulator, Superintendencia de Banca, Seguros y AFPs (SBS), suggested that 45% of respondents were regularly saving money, but only half of them did so through the formal financial system. For the banks, increasing the proportion of the population that use their services requires supporting the government’s wider policies designed to promote greater financial inclusion (see analysis).

Good Margins

Banks have seen healthy profits in recent years. According to statistics gathered by the SBS, total bank profits in the first eight months of 2015 were PEN4.74bn ($1.51bn), up by 39% y-o-y. Return on equity rose to 22.1%, up from 20.1% in the year-earlier period. According to Paúl Lira, an economist at Universidad Peruana de Ciencias Aplicadas, the sector’s higher profits in 2015 reflected increased gains from foreign exchange operations and reductions in operating costs.

Giovanna Prialé, an analyst at local financial consultancy Gerens, said operating costs were likely to fall further, given the increasing emphasis on digital marketing and online banking, as well as the pending introduction of a universal mobile banking system (see analysis). “If credit growth continues to be good and the economy keeps growing – even if at a lower rate – we can expect the banking sector to have some of the highest profit margins in the economy,” Prialé told OBG.

Regulation

Peru’s banks are regulated by the SBS, and bank deposits are protected from the risk of institutional failures by a deposit insurance fund. Current regulations concerning risk management are based on a local adaptation of the Basel II international standard. They include a “cyclical or dynamic” element, designed to promote the accumulation of additional provisions during the expansive phase of the economic cycle that can then be drawn on during a downturn. Elements of the Basel III standard, such as short-term liquidity risk management, are also present.

Industry Structure

Peru’s banking sector has traditionally had a high level of concentration, which has continued despite the entrance of new players. The top four institutions are Banco de Crédito del Perú (BCP), BBVA Continental, Scotiabank Peru and Interbank. BCP and Interbank are locally owned, while BBVA Continental and Scotiabank are subsidiaries of global banks based in Spain and Canada, respectively.

These four are the dominant players in their shares of total loans, total deposits and total assets. At the end of September 2015 the top four accounted for 83.1% of total loans in the Peruvian banking system, with BCP accounting for 33.9%, followed by Banco Continental (21.7%), Scotiabank (16.4%) and Interbank (11.2%). These banks also held a combined 82.3% of total deposits and 80.3% of total assets, representing the vast majority of banking deposits in Peru.

However, analysts say this may overstate the overall level of industry concentration. Some of the smaller banks have developed strong niche positions in particular types of lending. Banco Falabella Perú, for example, is strong in consumer lending, while Mibanco has a reputation for micro-lending to small and medium-sized enterprises. In early 2014 Mibanco was acquired by a subsidiary of Credicorp, the financial holding controlled by the Romero family, which also owns BCP.

Topping The Rankings

A 2015 ranking of the top banks in the Latin American region carried out by América Economía, the Chile-based business publication, put three Peruvian banks in the top five. Brazil’s Itaú and Bradesco were ranked first and second, respectively, while BCP, BBVA Continental and Interbank occupied the third, fourth and fifth spots. The ranking was compiled using a system of weighted scores, under which 15% was given for capital adequacy, 10% for asset quality, 25% for management, 20% for earnings, 10% for liquidity and 20% for overall size.

Latin American banks had weathered a period of economic slowdown and depreciating currencies without major difficulties, América Economía reported. Of the 250 banks it analysed in the year to June 2015, only eight had made losses. As a result of currency depreciation, bank assets had fallen in US dollar terms by 14.7% on the preceding year, but most of that reduction was concentrated in the Brazilian banking sector.

Slowdown Concerns

Despite their recognised strengths, slower macroeconomic growth has affected the ratings of some of Peru’s banks. In September 2015 Standard & Poor’s (S&P) lowered its ratings on five banks (BCP, Banco Interamericano de Finanzas, BBVA Continental, MiBanco and Interbank) and affirmed its rating on a further three (Scotiabank Peru, Corporación Financiera de Desarrollo and Fondo Mivivienda).

The agency said that the downgrades reflected, first, a belief that “Peru’s growth trajectory will no longer be consistently well above that of its peers with a similar stage of economic development” and that credit quality was weakening in Peru after “persistent rapid growth in credit and private sector leverage in the last few years”.

The affirmation of the rating on the three banks reflected group or sovereign support which was offsetting the higher economic and industry risks at country level. S&P drew attention to the fact that, while still low, private sector leverage (credit as a percentage of GDP) has risen to 39% in December 2014, up from 29% five years earlier. It argued that the increase in private sector leverage shown by this indicator “could weaken banks’ asset quality, profitability and capitalisation if the private sector debt burden becomes excessive if economic conditions worsen further”.

“An important issue affecting the sector is over-lending, which is a result of an information lag between banks and the Credit Bureau.” Carlos Polo Parada, general manager at Inversiones La Cruz, told OBG. “An individual’s credit profile might not accurately reflect their debts, so it is possible for the same person to ask for multiple loans before this information is updated in their credit profile.”

Other Institutions

Apart from full service banks, a range of other institutions provide financial services. They include finance houses ( financieras) and regional and municipal savings and loans cooperatives, known as cajas de ahorro.

Competition in this sector intensified during the course of 2015. In mid-2015 Caja Arequipa acquired Caja Señor de Luren, which had encountered financial difficulties and had been subject to SBS intervention. José Málaga, the president of Caja Arequipa, which has more than 1m customers and PEN3.15bn ($1bn) in loans, said that further merger and acquisition activity could be expected in the sector as the cooperatives sought to boost their customer numbers.

Under the Peruvian regulatory system, the SBS does not treat banks, financieras and cajas de ahorro differently; regulation is by financial product rather than by type of institution. One effect of this arrangement is that different types of institution can be competing for the same markets.

In late 2015 this appeared to be the case in terms of competition for the microfinance sector, which encompasses the small-scale deposits and loans business, also described as the “base of the pyramid” of the financial market. According to Mario Zambrano of PAD business school at Universidad de Piura, up to 200 separate institutions – including banks, cajas, cooperatives and financieras – were addressing this market. While the cajas had grown rapidly, the banks now had a comparable or larger volume of microfinance business.

Micro Level

BCP, the market leader in Peru, demonstrated its interest in the sector by acquiring Edyficar, a financiera, in 2009 and microfinance-centred Mibanco in 2014. BCP decided not to merge these institutions into its own brand, but to maintain them as separate companies dedicated to serving the microfinance sector.

BBVA, the global Spanish bank operating through BBVA Continental in Peru, has also shown a strategic interest in the microfinance sector by setting up Fundación Microfinanzas BBVA ( FMBBVA), which now controls eight microfinance companies in seven Latin American countries. FMBBVA controls Financiera Confianza, formed as part of a merger process between a finance house and various regional savings and loans institutions, including Caja Rural NorPerú, Caja Rural del Sur and Edpyme Crear Tacna.

Tightening The Belt

Over the course of 2014, as the Peruvian economy slowed, the central bank (Banco Central de Reserva del Peru, BCRP) adopted a moderately expansionary monetary policy. The minimum reserve ratio in soles was gradually eased (to 6.5% in mid-2015, down from 10.5% in October 2014 and around 15% in early 2014), and the BCRP’s key reference interest rate was kept at a low level, which represented a shift for the BCRP, A number of analysts said that the expansionary monetary policy stance in this period stood in contrast to a relatively tight fiscal policy. Fiscal policy was less expansive than the government would have otherwise wanted because regional governments were slow to execute their spending budgets, in part because, following local elections in October 2014, the new authorities took time to decide their spending priorities and become familiar with budget management processes.

Going into 2016, analysts agree that monetary policy is set to tighten. The BCRP surprised the markets by announcing a 25-basis-point rise in its key interest rate in September 2015, to 3.5%, the first increase in the rate since May 2011. At that point the 12-month inflation rate, which had risen to just over 4% in August, had begun to ease down to 3.9% in September. This was still significantly higher than the BCRP’s target range of 1-3% inflation. However, officials said that the overshoot was largely due to one-off factors (such as higher food and utility prices), and they envisaged that the actual rate would converge back down to the target range during the course of 2016.

Global Interests

The view that Peruvian interest rates are more likely to move up than down in 2016 is based on the regional and global economic context. Like many of its neighbours in South America, Peru has seen its currency depreciate against the dollar as a result of lower commodity prices for its exports, coupled with expectations of a rise in interest rates in the US. In the year to early November the nuevo sol depreciated around 10.2% against the dollar. The US Federal Reserve’s decision to raise interest rates in December 2015 is sure to have an effect on the nuevo sol in 2016.

While currency depreciation increases export competitiveness and facilitates a necessary rebalancing of a country’s external accounts, it can also lead to a pass-through effect, increasing domestic inflation rates. The BCRP is therefore carefully considering how to calibrate its interest policy stance to keep inflation under control in the country without excessively inhibiting the domestic economic recovery.

“Hopefully the necessary tightening of sol interest rates will now be offset by a more expansionary fiscal policy,” Mario Guerrero, head of economic research at Scotiabank, told OBG. By November 2015 the central banks of both Peru and Colombia had increased their reference interest rates, while Chile and Mexico had not yet done so.

Mergers & Acquisitions

In December 2014 Scotiabank announced that it was acquiring Citi-group’s retail and commercial banking operations in Peru. In October 2014, Citigroup had announced its intention to exit 11 consumer markets outside of the US, including Peru. This was part of an emerging trend by which some global banks, struggling with higher capital requirements, tighter risk controls and below-expectations profits, have conducted partial withdrawals from Latin America. As a result of the Peruvian transaction, eight bank branches and 130,000 retail and commercial customers transferred from Citigroup to Scotiabank.

Fitch Ratings described the takeover as having a “modest” impact on Scotiabank’s global financial profile, since the banking assets being acquired represented less than 3% of Scotiabank’s total assets. Fitch noted that Scotiabank is committed to developing its presence in Latin America and is number three by market share in Peru. The acquisition of Citibank’s Peruvian assets would diversify Scotiabank revenues and offer increased cross-selling opportunities.

Speaking almost a year after the transaction was announced, in October 2015 Dieter Jentsch, head of international banking at Scotiabank, said that it had added 0.7 percentage points of market share and increased Scotiabank’s position in the local credit card business ranking. The bank’s Peruvian business, Jentsch said, was the best of its international operations. He said Scotiabank did not rule out a further acquisition in Peru.

At the beginning of November 2015 Deutsche Bank announced its decision to cease operating in Peru. It was the result of a global repositioning of the German bank, which announced record quarterly losses in the third quarter of 2015, and said it was also exiting nine other markets and laying off 15,000 staff. In Latin America, Deutsche Bank said it would also be withdrawing from Argentina, Chile, Mexico and Uruguay.

Analysis from Fitch suggested that the bank’s departure would have a small impact on market shares, with the potential beneficiaries, including local and global banks alike, focused on boosting their trading and investment banking businesses. In Peru, Deutsche Bank had been primarily involved in the provision of trade-related banking services and is not seen as a major player.

Rising Debt Levels

In overall terms there are no major concerns over levels of debt among either Peruvian companies or households. However, given slower economic growth in 2014/15 some debt indicators have risen, which could possibly create some problems in 2016.

José Beltrán, strategic planning manager for CrediScotia, told OBG that debt levels would need to be monitored. “Credit card borrowing has increased by 20% this year, at a time when GDP growth is unlikely to exceed 3%,” he said. “The reasons for that need to be examined. It may be that as the growth of household incomes has slowed, people have stepped up their credit card borrowing to maintain their previous level of spending. NPLs are under control for the moment, but the SBS is monitoring the situation closely.”

A survey of middle-class borrowing patterns carried out by Ipsos-Perú for the Peru-based business magazine Semana Económica suggested, however, that households are adopting a more prudent stance. The survey found that socioeconomic groups B and C were more cautious on debt. Within the B1 sub-segment, 91% of respondents said they had no plans to incur additional debt, a proportion that fell to 81% in sub-segment C2 (considered the lowest by income level within the middle class).

Eduardo Montero, a retail-banking manager at BCP, said that those in segment B will in the first instance draw on savings as an alternative to borrowing, because borrowing has negative historical connotations. Those in segment C who lack sufficient savings are more likely to borrow. Those who borrow, in turn, are likely to use credit cards first, because they are seen as simple and convenient, Montero said. The survey showed that 49% of those in segment C have credit cards, higher than the 45% in the better-off segment B.

Outlook

The outlook for the banking sector is moderately positive. Some major uncertainties loom over the country, which could affect the economy in a number of ways. According to Beltrán, these include political noise associated with the elections, the risk of disruption because of the El Niño weather pattern and the possibility of a further slowdown in China.

These are all factors that would have to be monitored as potential downside risks to an otherwise solid and healthy outlook for the banking and financial sector. External and regional factors withstanding, the country’s banking sector still appears healthy to most observers.

ASBANC emphasises that the health of the sector will depend on the general macroeconomic environment, predicting that Peru’s overall growth will recover toward a long-term trend of 4.5-5%.