PERU’S RICHES HAVE always been something to marvel at. The Incas built palaces of gold and the Spanish found treasure troves of silver, spices and precious stones. Now bankers are having their day, as the Andean nation’s unprecedented economic growth and low inflation attract global institutions such as HSBC, and home-grown successes such as Banco de Crédito are harvesting impressive profits.
Peru’s private sector banks reported a 56% increase in net profits to $382 million in the first half of this year, led by a surge in demand for consumer and private sector loans. Profits at Scotiabank’s Peruvian unit alone jumped 135% in the second quarter. Indeed, credit granted by Peru’s banks and financial institutions to the private sector grew 22.3% in the past 12 months to June, and bank loans rose by 19% to a record $18.7 billion at the end of June. Peru’s past-due loan ratio could drop to 1.3% by the end of this year, even as the banking superintendency uses tighter standards for declaring past-due loans than other Latin American nations such as Chile and Mexico.
"There is a huge part of the population that was long relegated to a very limited access to credit, and what we are seeing now is that with this economic growth, that whole sector is coming forward to seek credit," says Gustavo Urrutia, a banking analyst at Lima-based brokerage Centura SAB.
Companies ranging from Deutsche Bank to Chilean department store Falabella to Mexican low-income group Banco Azteca are queuing up to open banks in Lima, enchanted by 8% economic growth last year and 2% inflation, a far cry from the 2,775% annual inflation rate of 1989, when today’s president, Alan García, was last in power. Spain’s Banco Santander Central Hispano, which left Peru in 2002, has had a change of heart and has requested a licence to operate in Lima. As Peru taps on the door of investment-grade status, ratings agencies Standard & Poor’s and Moody’s in late July raised the outlook on the sovereign credit rating, citing adept debt management and strong economic growth.
A surge in Peru’s once depressed mining business because of high commodity prices, the success of its coastal agribusiness, and textiles exports to and trade preferences with the US have begun to change the face of the cities in a country where half the 28 million population lives on $1.25 a day. Political stability has meant interest rates for commercial loans in soles have fallen by almost 50 percentage points since 2002.
All this is a change of scene for Peru’s top bank, Banco de Crédito, which for years soldiered on when the economic collapse of 1990 forced international banks to desert the country. Now, with Peru in fashion, the bank, owned by local financial group Credicorp, admits it faces big challenges for its market share. "The growth in the economy means that we are able to grow our operations but the risk is that there is more competition," says Credicorp’s chief executive, Raimundo Morales. "Still, we believe that there are possibilities in the medium term to grow a lot more since bank penetration in the financial system is quite low."
Modernizer
With a 32% share of loans and a 38% share of bank deposits, Banco de Crédito has modernized banking in Peru and helped win back the confidence of investors and the local population, many of whom still do not trust the sol and prefer to save in dollars. It is also proving to be a profitable play for investors. Many investment banks are raising their price targets for Credicorp after better-than-expected earnings for the second quarter, as personal loan growth surged 24% in the April-to-June period and corporate loan growth jumped an impressive 12%. "Credicorp has shown its ability to take advantage of the positive macro environment," says Juan Partida, an analyst at JPMorgan. "We’re raising our December 2007 price target for Credicorp common shares to $77 a share from our earlier $60 forecast," he added, while also raising his 2008 earnings estimates for the group.
Overall, the feeling among bankers is that competition is just what a small market such as Peru – long dominated by a few players and where only a tiny fraction of the population has a bank account – needs. Peru’s banking superintendency is eager to attract more banks for a range of clients, ranking from the poorest Peruvians to global mining companies taking advantage of Lima’s deepening capital markets. Indeed, Peru’s story is largely one of banks seeking organic growth, with the exception of Scotiabank, rather than entering through a wave of consolidation. "There has been a change of strategy. Today in Europe and the US we sell the idea that even if there are many Peruvians without bank accounts, the market represents a huge field in which to grow," says Juan José Marthans, Peru’s banking superintendent and a former central bank director. "Moreover, even though Peru is small compared with other countries in the region, it is strong in retail banking and specifically in microfinance, which is one of the pillars of banking in the future."
Expansion
One of the fastest-growing segments is small business loans, which has been expanding from a very low base with competitive rates compared with the rest of Latin America. Unlike in Brazil, where bureaucracy makes it hard for small businesses to win credit and privacy laws prevent information-sharing, the market is thriving. Peru’s transparent credit bureau, with its open access to the credit histories of banks and companies and tough rules restricting companies with a history of bankruptcy, have helped immensely. Scotiabank grew its small business portfolio by 40% to $200 million in 2006 and hopes for a repeat performance this year, with returns increasingly being generated in Peruvian cities outside Lima, where economic and political life is heavily centralized. Banco de Crédito is opening branches in shanty towns that were once considered no-go areas for banks.