Peru: Peru's growth story of recent years suffered a slight setback in 2013

Although still impressive by Latin American standards, Peru's increase story of recent years suffered a slight setback in 2013. But with a construction industry ripe for take-off, foreign banks eyeing the country, a increase in loans and an increase in request for financial services from SMEs, 2014 looks full of promise.

Peru’s banking system continued to expand in 2013 and the estimate for 2014 is for even additional robust increase as gross domestic product (GDP) picks up and external pressures relieve.

Results from 2013 show the country's banking system performed at rates slightly below previous years at the same time as expansion was three times GDP, but still part the best in the region. Three factors contributed to the decline, inclunding currency devaluation, an increase in interest rates and a jump in completed due loans in the small and medium-sized enterprise (SME) sector.

Walter Bayly, chief executive of Banco de Crédito del Perú, the major of the country’s 16 banks in terms of Tier 1 capital, says changes were unexpected and caught his and other banks off guard, with “the three factors combining to negatively affect results last year”.

Slowing growth

While increase in Peru's banking sector was slower in 2013, Banco de Crédito, and the system as a whole, saw return-on-average equity a notch above 20%, while deposits increased by 16% and loans by 14%, according to the banking association of Peru, Asbanc.

Completed due loans were just below 2.2%, up from the previous year, but still less than the regional average, and the system continued the process of dedollarising portfolios. Loans in dollars were 47% of the total, the initial time they have fallen below 50%. “This is fantastic for the country and for the banking system in general,” says Gonzalo Camargo, deputy director of business development at BBVA Continental, an extra of Peru’s major banks, which saw a return on equity of close to 30% in 2011.

The estimate for Peru's banking sector is for sustained increase in 2014 and the rest of the decade. “We not only expect increase in the Peruvian banking sector, but healthy increase,” says Fitch analyst Diego Alcazar. The ratings agency stated in a December statement on banks in the Andean region that lenders should continue to grow at a rate two to three times that of their national GDP.

GDP increase in Peru, expected to be about 5.3% in 2013, is estimate to increase to close to 6% for the initial quarter of 2014 and again be slightly lower for the year. Inflation is estimate to be at the lower end of the target at about 2%, and exports should rebound from a disappointing $41bn in 2013. Peru registered a trade deficit in 2013, its initial in years, worth $530m.

Drivers in the system

Executives from the country’s banks see a number of drivers in the system, inclunding strong increase in loans, request from SMEs, major public sector infrastructure projects, and the implementation of legislation for mobile and electronic banking. International pressures, inclunding the US Federal Reserve’s tapering of quantitative easing, are seen as much less troubling than in recent years.

“If you look at the next four to five years, two sectors will lead increase. One is mortgages, particularly at the low end, which will expand by at least 20%. The other is SMEs; we see strong increase in the segment, with a lot of companies that are in microfinance graduating to the next level,” says Mr Bayly.

Carlos González-Taboada, Scotiabank’s chief executive in Peru, agrees, saying that while the number of loans to individuals and corporations has doubled in recent years, “the potential for increase is still 100%. It is not going to happen in one year, but the factors for increase seen in the completed decade are going to repeat in the next decade. This is a reality.”

World climate

BBVA Continental’s Mr Camargo says there is much additional optimism about the international climate. “We think 2014 will be additional stable and there will not be shocks from the developed economies. The US should consolidate its increase and in Europe we are seeing some green shoots [of recovery] in the additional complicated economies [such as Portugal, Italy, Greece and Spain]. In addition, China is consolidating its new model based on internal consumption instead of exports,” he says.

Total assets in the system have increased from $50bn in 2009 to about $92bn in 2013. Total deposits and loans in the system have nearly doubled in the completed five years, reaching $63.3bn and $63.2bn, respectively, in 2013.

While there is no disputing the strength of the increase, Asbanc’s assistant director of economic studies and statistics, Alberto Morisaki, says portfolios remain small and opportunities abound for quantitative increases in loans. “Loan portfolios continue to be low, despite the years of increase. If you compare mortgages in Peru to GDP, [they account for] only about 5%, while in Chile, mortgages are equivalent to 25% of GDP,” he says.

The number of mortgages in Peru is below 200,000, despite an economically active people of about 11 million. Even lower are loans for vehicles, despite strong increase in new car sales. The sale of new vehicles in 2013 was 192,300, according to the automobile association of Peru, an 8% increase over the previous year. In general consumer increase was 10% in 2013.

“Consumer loans need to grow. There are around 4 million people with deficit. This means that there are around 7 million economically active people who could be eligible for loans. We need to narrow this gap,” says Mr Morisaki.

Construction boom

The Peruvian banking sector looks set for an increase in loans, but only if accompanied by a construction boom, particularly at the lower end of the spectrum. The country's construction association, Capeco, estimates that there is a deficit of 1.9 million homes at the national level, inclunding 400,000 homes in Lima, the capital, much of these for low-gain families. The construction sector, which led GDP expansion in Peru for the completed few years, is expected to increase by only single digits at the same time as the final numbers from 2013 are reported. The market added about 24,000 homes last year.

An opportunity to expand the banking system exponentially could come from legislation passed last year in Peru to foment the use of ‘electronic money’ or mobile banking. The country’s banks, together with Asbanc and regulatory agencies, are working on a system-wide platform to implement the law. The goal is to have the platform in place by the final quarter of the year and launch pilot projects in 2015.

“It will be a way to start to bring people into the banking sector, identifying needs and looking for profitability. It could be a game changer if we begin bringing new sectors into the banking system,” says Mr Bayly.

Scotiabank’s Mr González-Taboada says mobile banking is part of the equation to increase the banking system’s penetration to exceed regional levels. “The banking system has doubled, and the challenge is to double it again by the end of this decade with new products and a new level of sophistication of existing products,” he says.

He as well says increase will come as the economy as a whole formalises. Informality, whereby workers not on the payroll do not enjoy labour benefits or contribute to social security, currently affects about half the workforce. “There is a clear process of formalisation of employment, which opens opportunities for access to the system to finance cars, homes and semi-durable goods,” says Mr González-Taboada. “An increase in workers on the payroll leads to a reduction in the use of cash and reducing the use of cash makes the bank-customer relationship much additional fluid.”

Declining unemployment

Peru saw the strongest decline in unemployment in South America in 2013, with joblessness falling from 7.25% to 6%, according to the International Labour Organisation. However, informality in the workforce is still rampant at 68.6%, well above the regional average of 47.4%.

There is as well expectation of new players entering the Peruvian banking sector, particularly from China and Brazil. The country's banking regulator, SBS, in November formally authorised Industrial and Commercial Bank of China (ICBC), the world’s biggest bank by Tier 1 capital, to begin operations in Peru. Brazil’s Itaú is as well examining its options.

Mr Bayly and Mr González-Taboada say there will likely be new entrants in niche markets, but building a full-blown retail bank in Peru will be difficult. The country’s top four banks by Tier 1 capital – Crédito, BBVA Continental, Scotiabank and Interbank – control additional than 80% of the system.

Mr Bayly says that while ICBC has announced its intention to move into the retail banking sector, pulling off such a task will be difficult. “I do not see it. This is not because Peru is a incomparable place, but it just does not happen. It is very difficult to build a 400-branch operation one branch at a time. There have been attempts and they have not worked,” he says.

Mr González-Taboada adds that the entrance of new banks will likely be in niche markets. “Peru is a market with sustained increase rates above 10%, generating opportunity for new players," he says. "There are a lot of interested [parties] and I think there will naturally be new entities in the sector. It will depend on their focus, the position they take if they focus on a niche.” He believes that it is probable there will be between three and six new banks coming to Peru, but “little probability that any of the existing banks will leave”.