Monetary policy and renewed infrastructure spending in Peru help banking sector

Despite the deceleration of the Peruvian economy in 2017, driven in large part by the simultaneous impacts of the El Niño climate cycle and the corruption scandal at Brazilian construction giant Odebrecht, the banking sector has remained stable. According to international credit ratings agency Moody’s, at the close of 2017 the sector was exhibiting sustained profitability, diverse earning sources and improved operating efficiency, with the annual report from the Peruvian Association of Banks (Asociación de Bancos del Perú, ASBANC) reporting a 4.7% increase in system-wide net income to PEN2.46bn ($757.4m). In 2018 the banking sector is expected to continue to act as an economic bellwether, maintaining positive indicators in terms of liquidity, solvency and efficiency.


Peru’s banks are regulated by the Superintendency of Banking and Insurance, and bank deposits are protected from the risk of institutional failure 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 an 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.

According to Chris Gilfond, head of debt and equity capital markets for Latin America at Citibank, more regulatory-driven issuance can be expected not only in Peru, but in the rest of the region as well. Peru and Chile are both moving to adopt Basel III capital adequacy standards. Peru’s banking system seems well placed to adapt to the new regulations without too much change, as, according to international credit ratings agency Fitch, Peru has largely been in compliance with the standards since 2012.

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 banks by assets accounted for 86.8% of the sector’s total assets of PEN371.3bn ($114.3bn) as of the end of 2017. The largest institutions are Banco de Crédito del Perú (BCP), BBVA Continental, Scotiabank Perú and Interbank. BCP and Interbank are locally owned, while BBVA Continental and Scotiabank are subsidiaries of global banks based in Spain and Canada, respectively.

BCP, whose operations date back to 1889, continues to be the largest bank not only by assets, which increased from PEN127.6bn ($39.3bn) to PEN139.54bn ($43bn) in 2017, but also in terms of deposits and direct loans The bank’s sustained profitability derives from a well-established franchise, supported by its dominant market share, diversified earning sources, relatively low funding costs and strong expense management. Its 37% loan market share, nearly twice that of its closest competitor, has supported ample profitability despite lending growth of just 1.2% year-to-date in June 2017. In October 2017 credit ratings agency Moody’s reaffirmed BCP’s “Baa2” baseline credit assessment.

BBVA Continental continues to rank second by all three metrics; however, its assets eased slightly over the course of 2017, from PEN78.62bn ($24.2bn) to PEN76.59bn ($23.6bn). Fitch stated that “relative to local peers, the bank’s funding is broadly based, stable and diversified with growing access to capital markets”. In April 2018 ratings agency Standard & Poor’s raised its long-term credit rating of the bank from “BBB” to “BBB+”, while also reaffirming its “A-2” short-term rating with a stable outlook.

Scotiabank Perú is ranked third by assets, which increased from PEN58.27bn ($17.9bn) to PEN60.79bn ($18.7bn) in 2017, as well as third in terms of deposits and direct loans. According to Moody’s, thanks to its diversified portfolio of commercial and retail loans, the bank’s overall risk profile has remained stable in recent years despite a relatively high appetite for risk, coupled with deterioration of its loan book to small and medium-sized enterprises (SMEs).

Interbank, which ranks fourth, saw its assets rise from PEN42.33bn ($13bn) to PEN45.32bn ($14bn) over the year. Moody’s raised the bank’s credit outlook from stable to positive in September 2017, reflecting its strong profit generation, good capital base, positive asset quality, broad access to low-cost funding and liquidity. It also maintained a “Baa2” credit rating on Interbank’s long-term debt.

Loans & Liquidity

After expanding by approximately 4% in 2016, GDP growth decelerated to 2.5% in 2017, according to the most recent figures from the IMF, principally as a result of more modest private consumption growth, as well as weaker private and public investment. Private consumption’s mixed performance was largely attributable to a decrease in employment and stagnation in average household income growth in the early part of the year.

However, the amount of credit being extended to households saw renewed momentum in the third quarter, and consumer goods imports – an important indicator of domestic demand – began to register double-digit growth rates in early 2018.

By the close of 2017 bank credit to the economy had increased by 5.5% to PEN245.55bn ($75.6bn), more than doubling the pace of headline GDP growth. Sector-wide deposits, meanwhile, were up 10.9% at PEN229.36bn ($70.62bn), according to the 2017 annual report from ASBANC.

Demand for loans and credit registered a further increase in the first quarter of 2018, according to Ramón Barúa, general manager of Intercorp Perú. “We’ve seen growth, particularly in terms of credit extended to individuals,” he told OBG. Bank credit expanded by 6.9% year-on-year (y-o-y) during the first three months of the year, the highest rate of growth since July 2016, according to data from the Department of Economic Studies (Departamento de Estudios Económicos, DEE) at Scotiabank.

“Holdings in domestic currency, linked to domestic demand, also recorded a recovery, but at a more moderate pace, going from 2.4% in the first quarter of 2017 to 4.9% in the first quarter of 2018,” a DEE report concluded. Meanwhile, credit to companies was up 11.5% y-o-y – the first double-digit expansion seen since August 2016 – driven by the 8.7% growth experienced in wholesale lending.

Total liquidity posted similar growth over the course of 2017, accelerating from 5.1% in 2016 to 10.1% in 2017, according to data from the Central Reserve Bank of Peru (Banco Central de Reserva del Perú, BCRP). This was driven by more rapid growth in term deposits, which accelerated from 0.6% in 2016 to 16% in 2017. Demand deposits were also up, albeit by a smaller multiple, from 3.6% to 7.1%. Significantly, liquidity growth occurred in both local and foreign currency terms, although the sol-denominated liquidity growth was more robust, at 12.5%, compared to 5.5% in dollar terms.

The trend continued into 2018, with private sector liquidity accelerating for the sixth consecutive month in February to 12.4% y-o-y. As was the case in 2017, sol-denominated growth outpaced dollar-based growth, at 15.2 and 7.1%, respectively.

The liquidity dollarisation ratio eased in 2017, as the sol strengthened by 3.5% against the dollar due to monetary tightening by the US Federal Reserve and a sustained recovery in global commodity prices.

Monetary Policy

Monetary policy was a key determinant of credit growth in 2017, as the BCRP pursued an expansionary monetary policy. The headline interest rate was cut four times over the year, by 25 basis points each, lowering the rate from 4.25% to 3.25%, for a real interest rate of less than 1%. The BCRP trimmed the rate further in the first half of 2018, to 3% in January and 2.75% in March. It held the rate steady at its July meeting.

The central bank has similarly loosened its reserve requirements for both soles and dollars, from 6.5% to 5% for the former, and 70% to 35% for the latter. In addition to boosting mortgage and corporate lending these moves are credited with the rebound in domestic demand starting in the latter half of 2017.

Headline inflation returned to the central bank’s target range of 1-3% in 2017, easing from 3.23% to 1.36% by year’s end, and is expected to remain within this band through to 2020. Core inflation, which excludes food and energy, was recorded somewhat higher, at 2.15%; however, this was down from 2.87% in 2016. According to the BCRP report published in March 2018, inflation is forecast at 2-2.4% for 2018, a slight revision from an earlier projection of 2-2.5%. Inflation dropped as low as 0.37% y-o-y in March 2018, but had rebounded to 1.43% as of June.

Financial Inclusion

Successive administrations have sought to deepen Peru’s financial markets, increase the share of the population with access to banking services, and address the wider issue of financial inclusion and poverty reduction. In this regard, the new government of President Martín Vizcarra Cornejo will likely represent a continuation of policy. The country has achieved significant progress to date. The ratio of total loans to GDP, a key indicator of banking penetration, increased from 7.2% of GDP in 1991 to 16.1% in 2004 and 36% in 2016. However, penetration remains below the 60% target set by the previous administration of President Pedro Pablo Kuczynski, as well as short of others in the region (see analysis). In Colombia, for example, the indicator stands at 50%, while the Latin American average is around 55%. Chile boasts a higher penetration still, with levels above 80%, according to Alberto Morisaki, manager of economic studies at ASBANC. “In recent years, in which the economy has not grown at levels close to its potential, loans granted by banks have not shown the expected dynamism, and in this context, it will be difficult for us to reach a level of financial penetration of close to 60% by 2021,” he told OBG.

One of the obstacles to increasing financial inclusion is the difficulty of developing a nationwide banking presence. This is particularly challenging in a large country like Peru, in which geography ranges from deserts and mountain ranges to tropical jungles. However, the national banking network has, by many measures, expanded in recent decades. By the end of 2016 there were 2149 branches in operation, more than double the number in 2001, according ASBANC, while the footprint of ATMs was up sixfold at 7650. The number of bank correspondent units – retail outlets where bank transactions can be conducted – increase by a factor of 13 to 50,300.

In the years ahead, however, the emphasis is expected to shift towards digital transactions, which are easier to roll out nationwide, and can benefit from lower operational costs in terms of staffing, thanks to advancing customer relations technology.

Digital Landscape

Indeed, during the Business Summit of the Americas, held in Lima in April 2018, financial technology (fintech) was among the leading topics of discussion, along with the evaluation of credit risk, the fight against money laundering and new schemes for financial regulation.

Summit participants underscored the fact that 80% of financial transactions in South America are still made in cash, which represents a significant logistical cost for businesses and banks, and highlights a key avenue for growth in financial inclusion. “People are already part of the digital world, and now they have to integrate into the financial system,” Gilberto Caldart, Mastercard’s president for Latin America and the Caribbean said. “E-commerce is growing rapidly, but if we do not include the users financially, it will not continue to prosper.”

In the context of SMEs, Alicia Bárcena, executive secretary of the Economic Commission for Latin America and the Caribbean, stressed that because less than half have access to a banking institution, many instead opt for fintech services, because these tend to reduce transaction costs and generally have fewer bureaucratic barriers. However, in order to develop a system where fintech companies are trusted and their development is ensured, the regulatory framework of both Peru and the region will need to be further developed.


The introduction of chatbots and the automation of routine operations have been gradually adopted by Peru’s financial sector, allowing fintech companies to rapidly expand in the region. Banks have joined the trend, aiming to make operations more efficient, as well as to offer more customised products to customers (see Global Perspective). Among the first chatbots implemented by Peru’s banks was BCP’s Arturito. After its first year, 109,000 users had registered to chat, with an average conversation time of six minutes, according to Arturo Johnson, manager of alternative channels at BCP. “At some point, we will enter a hybrid conversation, where some simple transactions will be served by a chatbot, and other more complex issues will be still addressed by people,” he said to local press.

Interbank also plans to find other areas where it can develop its digital offering. It released a mobile banking platform in 2014, and 45% of the bank’s clients now interact with the institution at least once a month, with 95% of transactions made through a digital channel, Alfonso Díaz, vice-president of distribution channels, told local media. He added that artificial intelligence is already in the bank’s plans, both in terms of reading consumption patterns and interacting with customers. “We have started pilots with robots that incorporate artificial intelligence to answer queries or specific orders,” he said.


After a couple of challenging years the Peruvian banking sector is in the midst of a recovery, with credit expanding and plans to reach more SMEs and individuals. On the institutional front, local banks will continue to align themselves with Basel III standards, while maintaining their integral role in supporting infrastructure reconstruction plans.

This come after public and private sector infrastructure investment, an important determinant of broader economic growth, experienced some setbacks in 2017 due to corruption scandals in the region. As revelations broke about “Operation Car Wash” – a money-laundering and corruption scandal that implicated regional heavy-hitters such as Odebrecht and Brazil’s state energy company Petrobras – various projects in Peru were postponed, which acted as a brake on infrastructure investment and related bank financing. However, public sector construction projects are expected to resume in 2018, and economists expect GDP growth to rebound to approximately 3.5-3.7% (see Economy chapter).

Two principal drivers of renewed infrastructure spending in 2018 are the Reconstruction Plan, a PEN25.66bn ($7.9bn) plan approved in 2017 to rebuild coastal areas damaged by flooding from El Niño, and the Pan-American Games, which Peru will host for the first time in July and August of 2019 (see Construction & Real Estate chapter).

“There are significant negative influences, such as political turbulence and corruption issues, but there are also strong positives to counterbalance those,” Guillermo Arbe, manager of economic studies at Scotiabank Perú, told OBG. However, Arbe emphasised that political turbulence – notably the resignation of President Kuczynski in March 2018 – never truly put economic management at risk, and terms of trade and external accounts remain strong. Although fiscal accounts have deteriorated, they are still considered as manageable. “There are strong macroeconomic balances in general, and a very strong financial sector overall,” he added.


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The Report: Peru 2018

Banking chapter from The Report: Peru 2018

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