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Peru mixes caution with exuberance

Credit growth in Peru is under control, but lending is highly dollarized and there are concerns about credit quality. High bank profits are probably not sustainable.

Bank lending in Peru has slowed this year as regulators have forced the banks to make greater provisions in an attempt to rein in fast credit expansion.

At the end of 2011, lending was expanding at an annual 19%, but this has now dropped to 13%, according to Moody’s. The central bank has raised reserve requirements many times during the past year, while the financial regulator has increased provisions and capital requirements to subdue credit growth, mainly for loans denominated in dollars. Banks are being forced to make countercyclical provisions, setting more aside in good years so that they can weather any problems in bad years.

"We think these measures are well timed and should be enough for now, but authorities need to remain vigilant in case credit growth does not decelerate;" says Juan Ruiz, chief economist for South America at BBVA Research.

Jeanne del Casino, vice-president and senior credit officer in the financial institutions group at Moody’s, says: "Credit growth rates have moderated in Peru, and this reduces the risk factor. There is a huge under-banked population and informal economy, which creates many opportunities for intermediation."

Analysts consider credit expansion is now at a sustainable pace for an economy that is growing at 6.5%,

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