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In recent years it had begun to feel as if Latin America was experiencing a kind of internal continental drift. In the north, the countries were pulling away and out to the Pacific, bound by aspirations for the free market disciplines of the Trans-Pacific Partnership and the Pacific Alliance, in sharp contrast with the political disunity and economic stasis of the aging Mercosur bloc. However, 2015 was the year that this changed: Colombia struggled as falling oil prices highlighted a weak fiscal base; Mexico continues to frustrate largely due to political risk; and Peru and Chile were subdued as Asian export markets struggled and inward investment slumped.
Meanwhile, president Mauricio Macri’s election caused a seismic shock in the south, as Argentina threw away the previous government’s mismanagement, and with it economic inertia and a moribund financial system. With renewed access to the international markets, the sovereign and the provinces raised record amounts in capital from international investors. In a not unrelated development, Brazil’s president Dilma Rousseff was controversially – and as yet not definitively – removed from power.
To add another dynamic, central America and the Caribbean generated positive energy as their economies – oil importers and tied to a growing US economy – took the strain in trying to lift the region’s aggregate economic growth rate.
While such diversity is good news for the regional franchises that benefit from a portfolio of businesses, single-country banks are more or less hostage to their home country’s economic performance. That is the case of this year’s best bank in the region, Banco de Credito del Peru (BCP).
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Walter Bayly, BCP |
In a successful strategy to divorce its fortunes from a slowing Peruvian economy, the bank changed tack. Three years ago BCP, led by CEO Walter Bayly, pivoted from expansion to consolidation – from risk-on to risk-based return. Simply put, the bank realized that the country and the region would be hit by a slowdown in demand from China, the end of the commodity super-cycle and an end to easy international finance. Anticipating this new environment the bank adopted a new, logical strategy.
“It became very evident at that time that the world we had lived in for the past few years was not the same as the one that was coming, due to the greater weakness of China and the reduction in commodity prices,” Bayly told Euromoney in September 2015.
“We were coming from a period when the country had been growing between 5% and 6% and the financial system was growing about 25% per annum, and our strategy had been: let’s ride this wave of growth. We had been very aggressive in terms of making sure that we had fingers in every possible pie – everything that was growing – but we didn’t know by how much it would continue to grow. Some small businesses were going to explode and become very large – but we didn’t know which ones – so we made sure we were everywhere. But once we realized that the future was going to be different, we decided to narrow down our focus: we placed a small number of bets that we thought would grow more than the rest and we decided to shut down investments that had not grown to the size we’d hoped or expected. During this period of growth, we as a bank did not pay a lot of attention on our internal efficiency. We were focused on capturing the growth and we started to make a big push on efficiency. Two years ago the cost-to-income ratio of the bank [Credicorp as a whole] was in the 50s, and now it’s in the 40s.”
BCP’s efficiency ratio hit 42.1% in the first quarter of 2016 and now the bank is in great shape to take advantage of the return of growth in Peru. The country has shaken off the political risk of a close election and investors are unconcerned about a new government taking office in July, led by president Pedro Pablo Kuczynski Godard (PPK).
“Peru is once again approaching a macroeconomic sweet spot,” says Goldman Sachs in a recent client note. “Growth is stabilizing at a fairly solid level, inflation has been moderating, and the external accounts have started to show signs of adjustment. The absence of resource pressures across the economy and the recent stabilization of the exchange rate remove the pressure from the central bank to tighten policy, increasing the likelihood that the positive momentum may last longer.”
