Peru Banking Report

Friday, January 26, 2018

Peru's private sector banks saw loan growth pick up speed during the second half of last year, with an improving economy and stronger domestic activity triggering increasing demand for loans.

The loan recovery is at risk, however, as the Andean nation undergoes political upheaval. President Pedro Pablo Kuczynski barely escaped impeachment in December after being linked to disgraced Brazilian construction group Odebrecht. The fact that Kuczynski decided to pardon imprisoned ex-president Alberto Fujimori only days after the former leader's son, legislator Kenji Fujimori, marshaled enough support to block the impeachment – in evident quid pro quo – only added to the political turmoil.

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With his political capital significantly reduced, the market-friendly Kuczynski will have a much more difficult time pushing through reforms and stalled investment projects to spur faster economic growth. Fitch Ratings warned this month that the political tensions had raised new governance challenges for Peru and was likely to negatively impact investments and GDP growth, both this year and in 2019. 


Lending to the private sector grew in double digits in the first half of this decade, when Peru's strong economic growth was fueled by the commodities boom. But the end of the boom hit the economy hard, with GDP growth slowing from 5.8% in 2013 to 2.4% in 2014. The growth rate for financial system loans to the private sector slowed accordingly, from 12.9% in 2013 to 9.6% in 2014, then to 8% in 2015 and to 5.6% in 2016, according to figures from the central bank.

The pace of lending continued to slow in the first half of 2017, but the second half saw loan growth accelerate thanks to an improving economy and stronger domestic demand.

Lending by the private banks grew 5.5% last year compared to 4.5% in 2016, according Asbanc, the association representing the private sector banking institutions. Loans to individuals and families increased 6.7% in 2017, while loans to companies were up 4.8%.

If the economy continues to improve and political risk decreases, Peru has the potential to return to double-digit loan growth rates given the vast potential to lend more to the many low-income families and small businesses that have limited or no access to bank financing, Alberto Morisaki, Asbanc's economic research manager, told BNamericas.

But the fallout from Kuczynski's near impeachment, which has left the president severely weakened, and continuing corruption investigations related to Odebrecht, have all made economic and loan growth much more uncertain.

Good economic news did emerge from the IMF on Thursday. Published after the latest political turmoil, IMF sees the Peruvian economy making a significant acceleration from last year's expansion of 2.7% to 4% in both 2018 and 2019. Stronger growth will be driven by higher domestic demand, robust exports, structural reforms as well as counter-cyclical fiscal and monetary policy, it said.

Asbanc released its 2018 loan growth forecast for its members the same day as IMF provided its forecast, projecting a loan expansion of between 7% and 9%. Stronger loan demand will be driven by public and private investment, as well as private sector consumption.

Asbanc members finished last year with a fairly healthy non-performing loan ratio of around 3%. After some years of increasing NPLs, the coming years could see a downward trend if the economic recovery gains strength.


The financial system is comprised of 16 private banks, state-owned Banco de la Nación, and a wide range of non-bank lenders. The Peruvian banking sector is one of the most concentrated in Latin America, with the top four players enjoying a dominant position compared to the other banks – and there are no signs that the high level of market concentration will change in the foreseeable future.

Controlled by local financial services holding CredicorpBanco de Crédito is by far the largest player with more than 30% of both loans and deposits.

The subsidiaries of Spain's BBVA and Canada's Scotiabank hold the second and third spot respectively on the loan and deposit rankings, reflecting their strong bets on Peru that included acquisitions of major local banks.



In the case of Scotiabank, Peru is part of a strong strategic focus on the countries that form part of the Pacific Alliance trading group, which also includes Chile, Colombia, and Mexico.

Several other foreign banks are also present in Peru, including SantanderCitigroup and China's ICBC, although with smaller market shares.

The physical size of the private banking sector has seen strong growth in the past several years. While the number of banks has only increased to 16 from 15 in 2011, the number of branches and ATMs rose to 2,112 and 7,677, respectively, in November from 1,603 and 5,042 in 2011, according to the latest figures from Asbanc.


Created in 1967, Asbanc promotes the growth of the financial system's private sector, providing a range of information services for its members.

The banking sector is supervised by financial services regulator SBS, which also oversees the insurance and private pension industries. In addition, SBS is the entity in charge of preventing and detecting money laundering and terrorism financing.


SBS has published draft regulations that will govern the implementation of a law designed to strengthen local savings and loan entities, or cajas municipales, as they are known.

Under the law, which raises minimum capital requirements and tightens corporate governance, the entities can also offer additional products and sell shares to private investors, among other financial activities.

Under a separate law, the cajas municipales can become involved in the government investment program known as Obras por Impuestos. As part of the tax credit scheme, tax authority Sunat allows companies to invest a portion of their taxes in local infrastructure projects.


Peru has made significant financial inclusion progress in the past several years, and is internationally known for having one of the best regulatory environments in the world when it comes to financial inclusion.

The country has also been among the leaders in Latin America in using non-bank distribution agents (grocery stores, drugstores and other small commercial establishments) to reach a larger share of the population with basic banking services, especially in remote and rural areas. 


The ratios for loans and deposits as percentages of GDP increased to 40.3% and 38.6% at the end of last year, respectively, from 30.4% and 32.3% at the end of 2011, according to the latest financial inclusion report from SBS.

Despite the progress, the ratios remain very low when compared to developed nations and to the most advanced Latin American countries, such as Chile, Brazil and Panama.

The low level of bank penetration can also be seen when measuring loans per capita.


"The Peruvian banking ecosystem is centralized in urban areas, and the country has the lowest bank branch penetration in Latin America," María Camila Gómez, VP of global advisory solutions at Boston-based nonprofit Accion, told BNamericas. Through advisory and direct investments, Accion supports microfinance development in Latin America.

In its latest Article IV report for the country, the IMF included greater financial inclusion among its recommendations for Peruvian authorities.

In order to accelerate the financial inclusion process, Peru followed the example of some other Latin American countries and adopted a national financial inclusion strategy in 2015.

"Regulation is the single most effective way to promote or impede financial inclusion, and many Latin American governments, including Peru, Colombia, and Argentina, have recognized the importance of having a financial inclusion strategy," said Gómez.

The strategy involves both the public and the private sectors and places a strong focus on financial education.

Asbanc said that 67% of its member banks had undertaken financial education initiatives last year, compared to 53% in 2016 and only 39% back in 2012.

SBS has said that the financial inclusion goal is for 75% of the adult population to have an account in the financial system by 2021, with the private sector playing the main role with support from the watchdog. 


Digital banking and fintechs are on the rise in Latin America and are also starting to emerge in the Peruvian market. Asbanc has pledged to support the government in all its efforts to promote digital services, including financial services.

Peru has been on the regional tech forefront with the launch in February 2016 of a mobile wallet service known as Bim, which was created by Asbanc and ICT giant Ericsson with the goal of connecting 2.1mn people to the banking sector by 2019. Called the "Peru Model," Bim has received praise from abroad, including from think tank the Center for Financial Inclusion, which is linked to Accion.

According to a report published in May by the IDB and Finnovista, Peru had 16 fintechs, representing 2.3% of the Latin American total.

It is still unclear if the growing number of fintechs will become competitors or partners of Peru´s commercial banks, according to Asbanc head Oscar Rivera. In either case, there is "no going back" in terms of the impact that technology will have on financial services in the future, Rivera said at the Business Innovation Summit 2017.

SBS has said it is currently observing the local fintech market in order to draft regulations. There is "tremendous opportunity" for the fintech sector in Peru to "radically improve" levels of access and service quality for those who are unbanked or underserved by traditional banks, said Gómez.

"The Peruvian government and regulators, traditional financial institutions, and new fintech models all have an important role to play to build an ecosystem that can deliver a full array of high-quality, affordable financial services for the underserved," she added.

In Peru, Accion's partners include TiendaPago, a fintech startup helping small businesses access short-term working capital to better manage inventory and cash flow. These businesses are usually too small to access loans from traditional financial institutions, noted Gómez.


Given the high political risk and uncertain economic outlook, new foreign banks are not likely to enter the market until these issues offer greater clarity and certainty.

Morisaki from Asbanc did, however, tell BNamericas that the Peruvian banking sector offers attractive long-term opportunities to foreign banks given its low levels of financial inclusion and high profitability.

The average profitability (ROE) for Asbanc's members was around 17% last year, which is significantly higher than ROEs in developed countries and many other emerging market nations.  

Besides attractive growth potential and profitability, Peru also offers a market-friendly government, prudent macroeconomic management and a stable and well-regulated financial system. Therefore, if the country's politicians can get their act together and let the economy grow at its full potential, we should not be surprised to see more international banks coming to plant their logos on Peruvian soil.

Pictured: People protested against the pardoning of Fujimori and corruption in Lima last December, when the presidency of Pedro Pablo Kuczynski hanged in the balance.