Credicorp – the Peruvian financial entity that incorporates Banco de Crédito del Peru (BCP) – has reported very strong third-quarter earnings to support increasingly bullish analyst views on the individual credit, Peru’s banking sector and the country’s economic prospects.
The strong growth in Peru’s banking system between 2012 and 2015 had faltered thanks to commodity-driven tailwinds, and this year’s presidential election compounded that slowdown by making companies postpone investment decisions. However, the election of Pedro Pablo Kuczynski in June has reignited confidence, while growth in the second half of the year has picked up and should be maintained in 2017.
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Alfredo Thorne |
Peru’s new minister of finance, Alfredo Thorne, says he intends to try to speed up the delivery of infrastructure programmes through a series of decrees that should cut through the delays that have hampered projects. The government gave Thorne the power to issue these decrees in September, enabling him to sweep away obstacles stalling public private partnerships and public works projects and he also envisages creating an infrastructure fund to help get construction works moving.
Tax amnesty
The government is planning a tax amnesty – as also seen recently in Argentina, Brazil and Chile – to encourage domestic investment. Thorne also says that Peru may turn its state-owned mortgage bank Mivivenda into a guarantee and real estate financier akin to the US’s Fannie Mae as part of a wider reform of its four state banks (the others being Banco de la Nación, Cofide and Agrobanco).
The new government also plans to enact changes to the financial infrastructure of the economy to boost trend GDP growth to 5%, most of which should be positive for the existing banks, although some bankers say it may increase the competitive dynamics and lead to lower net interest margins (currently 5.6% for the system). Maria Valeria Azconegui, Moody’s lead analyst on a recent report into the Peruvian banking system, says: “The administration has also proposed initiatives to enhance competitiveness, including a plan to further open up the financial system to foreign investment which will potentially increase competition among the banks.”
In the longer term, the reform of the state banking sector and new foreign participation in the financial system (the specific details of how foreign banks will be attracted are unclear as yet) could be a negative for the private banks in the country, but it is likely the government will direct banks to participate at the lower end of the credit spectrum.
The banking system’s concentration also limits the threats of competitive pressures, with the four largest banks accounting for 86% of total deposits. For now, the private banks are focusing on efficiency to maintain their high levels of profitability – by some measures the highest in the region: net income as a percentage of tangible assets is nearly 2% in Peru, higher than that of Colombia (1.8%), Mexico (1.3%), Brazil (1.1%) and Chile (1%)
That focus on efficiency saw the system’s cost-to-income ratio fall to 44% in June from nearly 50% in 2011. A big factor has been the banks’ risk-management discipline through the cycle.
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In BCP’s recent results, UBS’s analyst Philip Finch praised lower provisioning and improving asset quality as the drivers of the bank’s 20.7% return on equity (18% in the second quarter of 2016). “The NPL improved across all segments including consumer and mortgage, down 6 basis points QoQ [quarter on quarter] to 2.79% [and] provision expenses were down 19.6% QoQ given better asset quality and higher recoveries,” says Finch, who also notes that Peru’s banks have been leading emerging market banks in benefiting from lower cost of equity and higher returns on equity.
Central bank boost
Peruvian banks are also benefiting from the central bank’s successful attempts to encourage local-currency savings. The high degree of dollarization in the economy has long been a potential weakness, but reductions in the reserve requirements for sol-denominated loans have stimulated local-currency credit growth.
The central bank has also been auctioning government-sold deposits to expand the money supply and is offering sol funding to banks in the form of currency swaps and repos. Dollar-denominated loans fell to 31% of all outstanding loans as of June, down from almost 50% in 2013 as banks have shifted from originating corporate, mortgage and auto loans that were traditionally transacted in dollars.
“This shift will continue to help contain risks with currency mismatches at the borrower level,” says Azconegui. “Dollar-denominated loans are now largely reserved for foreign currency earners.”Growth in local lending also supports bank profitability as it is higher yielding credit and offsets the negative margin pressure banks are seeing on dollar lending portfolios.
However, the level of dollar deposits in the system is proving more resistant to incentives to swap into local currency. As of the end of June, they had dropped to slightly below 50%. BCP accounts for nearly 40% of private-sector deposits and posted strong third-quarter results, beating consensus earnings estimates by 18% thanks to improved asset quality and stronger margins.
Despite its dominant position in a strong banking market in an exciting economy, its valuation (estimated price-to-earnings for 2017 are 10.1 times, compared with an average of 11.2 times for Latin American banks) offers upside, making it one of the most recommended stocks among the region’s banking equity analysts.
