Peru is attractive to bankers for a variety of reasons, principally its record of economic success. For the past five years, financial and monetary stability has been maintained and the economy has grown an average of 5.5% a year.
Oscar Dancourt, acting president of the central bank, told The Banker: “The economy this year will grow even more, around 6.5%, and high mineral prices that have driven an export boom [and in turn fuelled private investment and domestic demand] will continue until the end of 2007.” The latter is very important for Peru: half of the country’s exports are minerals, namely gold, silver, copper, zinc and molybdenum (used for steel hardening).
Another reason why the banking market holds interest for bankers is because it is so small, comprising just 14 banks plus 20 municipal and rural savings banks, which specialise in micro-finance. Their total assets, $18bn, represent 24.5% of Peru’s GDP. It is also a highly concentrated banking industry. Four banks – Peruvian-owned, Banco de Crédito del Perú (BCP), the largest private bank with the biggest branch network; BBVA Banco Continental, 50% owned by Spain’s BBVA in second place; Canada’s Scotiabank, third; and Peruvian-owned Interbank, fourth – account for more than 70% of deposits.
It is precisely because of these limitations that the market has “more possibilities for growth and for providing more banking services, and to more clients, than practically any other banking sector in Latin America,” says Juan José Marthans, head of Peru’s banking superintendency, in an interview with The Banker.
Mr Marthans says that is a chief reason why HSBC recently requested and obtained permission to operate in Peru, and why three other banks have also requested authorisation. Rabobank, it is rumoured, is one of them.
Even before these applications, a positive development was Scotiabank’s completion in March of a $390m purchase of two Peruvian banks, Banco Wiese Sudameris (with a focus on middle and low-income clients) and Banco Sudamericano (focused on high-income clients), to form the third biggest banking group in the country.
Carlos Gonzalez-Taboada, CEO of Scotiabank Perú, says a strategic plan for the new bank will be formally announced in the autumn. But anticipating this, he says the ultimate aim is to convert Scotiabank Perú into “the biggest retail bank in the country with an emphasis on developing products and services for middle and low-income groups”.
Political stability
HSBC and Scotiabank made their decisions to invest in Peru before the country’s presidential and congressional elections in April, at a time of political uncertainty. That uncertainty dissipated in the near term with the election in June of Alán García Pérez, as president – considered the least damaging of two unattractive choices.
An erstwhile left-winger, Mr García tried to nationalise Peru’s private banks during a disastrous first term in office in the 1980s. But in his recent electoral campaign he sought to project an image of being a responsible political leader, pledging support for free markets and for a free trade agreement with the US, signed in December.
But like the garrua, a dense sea mist that casts a shroud over Lima’s low-lying, earthquake-proof buildings, making all but near vision difficult, Peru’s future political stability appears nebulous. Not least because Mr García’s chief rival in the elections, Ollanta Humala, is a radical nationalist, close to Venezuelan President Hugo Chávez, and has the largest bloc in the new congress.
Added to this, although Peru’s impressive economic performance benefited a small upper and middle class, mainly resident in Lima, it did little to alter the profound social and economic disadvantages of the country’s indigenous and mestizo majority. About 52% of the population, 15 million, still live on less than $2 a day and 64% are unemployed or under-employed.
That aside, another reason why bankers have confidence in Peru’s banking system is because of the way it is supervised. This is an understatement.
In the aftermath of a severe liquidity crisis in the sector in the late 1990s, sparked by Asia’s and Brazil’s financial crises, which resulted in seven banks either merging or leaving the country, Mr Marthans hastened the modernisation of the sector, greatly increasing prudential measures. For example, he established a new supervisory body to monitor and categorise credit risks according to types of loans and market segments. He also introduced additional liquidity and capital ratio requirements that are well above those of Peru’s 1999 banking law and international requirements.
“Traditional supervision in Latin America has involved different schemes that have rarely been either timely or served to alert the system. So in Peru we decided, although we cannot avoid future problems, at least we can guarantee that banks have a much bigger margin of capital to deal with them,” says Mr Marthans.
Peru’s supervision was not only rated the best in Latin America by the IMF in 2005, but it also received the highest rating ever since such IMF evaluations started in the region.
The upshot is that ratios for non-performing loans (NPLs) in Peruvian banks fell from an average of 10% in 2001, when Mr Marthans was appointed to the superintendency, to 2.1% in April 2006; and in April this year, banks had an average 236% coverage for NPLs, another record.
Local currency lending
The risks of excess dollar exposure of Peruvian banks have been declining slowly, as a result of the superintendency’s efforts and a growing awareness among bankers of the dangers of lending in dollars, especially when borrowers (such as utilities, highway companies and families) earn in soles, the local currency.
Whereas 82% of all private bank loans were issued in dollars in 2001, this percentage had fallen to 68% by April this year.
Bankers agree that the superintendency has done an excellent job and that banks are now well capitalised, well provisioned and profitable. “They have a lot of liquidity. Inevitably their strategy is growth,” says Scotiabank Perú’s Mr Gonzalez.
Banks are also having to diversify their portfolios as more and more Peruvian companies raise money in capital markets.
Banks have been re-allocating their loans to consumer credits, mortgages and micro-finance, all of which have doubled in value between 2001 and 2005. By contrast, commercial banking, though still the biggest area of private bank lending (worth almost $9bn in December 2005), has declined as a share of total private bank lending, from 84% of the total in 2001 to 74% in 2005.
By far the biggest change in the sector is that most bankers agree there is a need to broaden their client base away from a traditional, almost exclusive, focus on high-income groups, where the market is now saturated, to middle and low-income groups, where only 50% and 20% respectively of the population have any kind of contact with a bank.
BBVA Banco Continental, which has won The Banker’s award for best bank in Peru three years in a row, is a case apart in this scenario. The bank, says CEO Jaime Sáenz de Tejada, “is number one in lending to large companies and institutions, in buying and selling treasury bonds. We are one of the very few banks [in Peru] with the capacity and sophistication to take firms to capital markets”.
| Mr Sáenz de Tejada shares the view of other bankers that there is “a lot of social exclusion” in Peru. Only 25% of the population have a bank account, equivalent to 7.3 million people out of a population of 27 million, and even fewer people, only 3.5 million, have a bank loan. Nonetheless, Mr Sáenz de Tejada gives little indication that BBVA Banco Continental, unlike its competitors Scotiabank Perú and BCP, is changing direction. |
And why should it? Its focus on medium and high-income groups and businesses is a winning formula. Between December 1999 and December 2005, the bank’s market share in deposits increased from 17.6% to 27%, and in loans from 13.3% to 23.7%.
Over the same period, BCP, despite making two acquisitions – of Santander’s $50m Peruvian portfolio and of Bank of Boston’s $300m Peruvian portfolio – only increased it share of deposits by 3.5% and of loans by 7%.
Reaching the unbanked
Walter Bayly, chief financial officer of BCP – which reported after-tax profits of $56.7m in the first quarter of 2006, the biggest of all the private banks – says: “The focus of BCP is not to increase our market share but to do business with the unbanked sectors of the population.
“It’s more of a challenge to find out how to get new customers than winning a few more in the wealthy neighbourhoods of Lima, which are overbanked anyway,” Mr Bayly says.
With this in mind, BCP recently invested about $7m in an innovative distribution channel in marginal areas on the outskirts of Lima and in the provinces, to attract people who are self-employed or who have micro-businesses in the black economy into the banking system. The black economy is widely estimated to be equivalent to 30% of the country’s GDP.
The project, which has so far involved the installation of 300 ATM-like machines that provide vouchers that can be cashed at a local store, is followed up with a travelling sales team to persuade users to open a zero-cost savings account at the bank.
“It’s a way to access people who earn more than the minimum wage and occasionally more than one salary, but who have been reluctant to open a bank account before, either because the fees were too high or there was no bank branch nearby,” Mr Bayly explains.
