|Credicorp’s chief operating officer Walter Bayly|
Banco de Crédito del Perú (BCP) has successfully navigated the slowdown in its domestic economy this year and is now well placed to become the most profitable bank in the region in 2018.
In the first half of this year, Peru suffered a sharp slowdown after a severe El Niño weather system disrupted production and a corruption scandal caused the delay of infrastructure projects.
The country’s banks saw a slowing in credit demand in the first half of the year, but are already showing a rebound – aided by an increase in public investment, which the central bank said grew by 24.2% in September 2017 when compared with the same month in 2016.
The early recovery is already visible in the results, announced in November, of the country’s leading private sector bank BCP. The bank accounts for nearly 37% of total deposits and although the bank’s third-quarter loan growth was still soft – up by only 0.9% year-on-year – its better-than-expected asset quality led to a 5% increase in quarter-on-quarter pre-tax earnings.
And with Goldman Sachs forecasting that Peru will top the regional growth table next year, with 4.2% growth and enjoying a stable environment as one of the few Latin American countries not having important elections in 2018, the outlook for the sector – and for BCP – looks good.
“Lending activity has begun to recover in the second half of 2017 and we forecast 10% growth next year, primarily driven by consumer and SME lending.”
Fernando Dasso, chief financial officer of BCP’s parent group Credicorp, agrees that loan demand will begin to grow again, but has a more conservative view of loan demand growth for 2018, at about 7%.
“[This] will be very helpful after it has been very flat this year, at between 0% and 1%,” he says.
However, Dasso adds that if metal commodity prices continue to improve, or if the execution of projects that are under way deliver positive surprises, the risks are to the upside.
Meanwhile, even without a notable increase in credit demand, BCP’s efficiency ratio improved in the quarter to reach a level of 43.1%, a year-on-year improvement of 40 basis points. The improvement is explained by the gradual recovery in income generation and the bank’s tight control on expenditures, which fell by 0.6% in the quarter.
“The efficiency ratio is being driven by improved revenues and very strict cost expenditure and net interest income, and NIM figures are beginning to see a slight improvement, thanks in part to higher lending in soles, which is more profitable, and these dynamics will further help the efficiency ratio,” says Dasso, alluding to the central bank’s attempts to discourage dollarization in the banking system.
The central bank has brought dollar deposits down to below 45% of total deposits in June 2017, from 53% at the end of 2015.
Credicorp’s chief operating officer Walter Bayly adds: “We are extremely focused on digital initiatives – this will require some expenses going forward, but hopefully we will have top-line growth and we will be able to maintain good efficiency levels.”
Moody’s is very positive on Peruvian banks, saying that the country’s system will have the most profitable lenders in Latin America, as measured by the net income to tangible assets ratio. Peru’s ratio, at 2.0%, is higher than the other main Latin American systems, with Colombia at 1.7%, Mexico at 1.6%, Chile at 1.2% and Brazil at 0.9%.
“Profitability has proven resilient to the economic slowdown in recent years thanks to the system’s diverse sources of earnings,” says Moody’s.
“While the loan portfolio contracted by 0.7% in the six months to June 2017, net income remained stable at a robust 2% of tangible assets during the same period thanks in large part to an ample net interest margin of 5.7%, a reflection of banks’ strong pricing power.”
Credicorp’s Dasso says that BCP expects to continue reporting returns on equity well above 20% – in the third quarter the metric increased 70bp quarter-on-quarter to 22.7%.
Profitability at BCP and within the entire system has been maintained despite the economic slowdown because of strong asset performance. For the system, total delinquencies rose just 30bp to 3.1% of gross loans as of June 2017, compared with 2.8% at the end of 2016 and 2.5% in 2015.
“Loan delinquency ratios will likely remain broadly stable over the outlook horizon, owing to a pickup in lending activity,” says Moody’s. “The recovery in investment, GDP growth, and job creation will support borrowers’ repayment capacity.
“In addition, banks have indicated that they have reduced lending to small companies and certain high-risk segments of the consumer market as low income households to further limited asset deterioration.”
Bayly at Credicorp says the “disappointing” macro environment in Peru was fading into the past.
“We have already had a turnaround past the inflection point and expect we will have a decent year-end on in terms of the retail segment and demand from mortgages is looking good,” he says.
Meanwhile, Bayly acknowledges that BCP has this year lost market share in the consumer segment because, he says, it refused to enter into “non-rational” pricing competition – adding that some banks are lending at rates lower than the central bank pays for excess liquidity.
However, he believes BCP will be able to win this market share back in 2018.