Peru's economic growth may be slowing, but its bank are still turning in impressive results. The big opportunity on the horizon, however, is the launch of a cross-bank digital payment platform, which could bring a considerable increase in the country's financial inclusion levels.
Peru’s banking system has remained one of the bright spots as the country’s economy struggles to regain steam. The country's economy expanded by 2.4% in 2014, a steep decline from the 5.8% recorded in 2013. Growth in the first six months of 2015 was 2.4%, with the government forecasting that it will top 3% for 2015. Private sector banks that evaluate Peru have a wide spread of predictions for the country’s GDP this year, ranging from Bank of America Merrill Lynch’s 2.1% to HSBC’s 3.5%.
The banking system has far outshone other sectors in Peru, according to data released by the National Statistics and Information Institute (INEI) in August. The banking sector continues to expand at a rate three times that of the overall economy. The sector expanded by 10.5% in June, compared to the same month in 2014. It was also the strongest mover in the 12 months through to June 2015, expanding by 11%.
Strong system
“The financial system is strong. There is some turbulence, which is affecting emerging economies around the world, but I think that we will see things calm down once the [US) Federal Reserve makes a decision on interest rates,” says Julio Velarde, governor of the Central Reserve Bank (BCR), Peru's central bank.
Alberto Morisaki, assistant director for economic studies at Peru's national bank association, Asbanc, says that while growth in Peru's financial sector has slowed along with the economy, it still remains buoyant. Asbanc forecasts an expansion in the sector of 9% this year. “The rate of growth is not what it was a few years ago, but it is still quite good, expanding well above GDP,” he says.
Total deposits in Peru's 17-bank system amounted to 190bn nuevo sol ($58.56bn) as of June 2015 – up 6.6% on June 2014 – while total loans were 210bn nuevo sol – up 8.6% on June 2014. According to the INEI, consumer credit was up 17.8% in June compared to the same month last year, while corporate loans were up by 17.1% and mortgages by 14.4%. Deposits increased by 7.6%.
According to Theresa Paiz Fredel, a senior director at Fitch Ratings, Peru's banks are well capitalised, and have a good cushion in case there should be any unexpected changes. “It is one of the more profitable systems in the region,” she says.
Record profits
Peruvian banks ended 2014 with record net profits of 5.3bn nuevo sol – a 7.2% increase over 2013, according to the BCR. The top bank in the system, Banco de Credito, saw profits rise by 16.2% for the year, while at second largest bank BBVA Continental, they increased by 3%. Scotiabank, Peru's third largest, saw profits rise by 11.8% for 2014, and fourth on the list, Interbank, increased its profits by 9.5%. Net profits among Peru's banks as of May 2015 were 2.9bn nuevo sol, compared with 2bn nuevo sol as of May the previous year.
These four banks accounted for more than 80% of the Peruvian financial system, with Banco de Credito accounting for 33.7% of loans as of May, BBVA 22.1%, Scotiabank 16.2% and Interbank 11%.
Mr Morisaki and Ms Paiz say the system benefits from appropriate policies and regulations coming from the BCR and Peru's regulatory institution, the Banking, Insurance and Pension Superintendency (SBS).
“The central bank is managing monetary policy correctly. The stimulus measures adopted have helped us get through the economic downturn,” says Mr Morisaki. Ms Paiz adds that Peru has a “strong regulatory framework. Peru has taken an important step in moving towards Basel III standards in terms of regulation and supervision of the banking system.”
Great expectations
Peru’s government not only expects the economy to gain strength during the second half of 2015, but the Economy and Finance Ministry maintains that a series of new laws and regulations will have a major impact on the economic drivers, including the banking system.
Among the major changes was legislation published in July that creates new mechanisms for home rental and ownership, including a lease-to-own option. The government expects at least 30,000 homes to be covered by the new law in the final quarter of the year, when the legislation is formally applicable. Peru has a weak rent culture, with just 7% of the population living in a rental property, according to the country's housing ministry. This compares with 31% in neighbouring Colombia.
The long-term goal, according to housing minister Milton von Hesse, is to create opportunities for more Peruvians to qualify for mortgages. He says the lease law is not meant to replace mortgages, but it will help people to develop a credit history that can later be used to get funding from a bank.
Peru has a low level of mortgages, with 34.9bn nuevo sol in lending as of June 2015. Mortgages have, nevertheless, grown by the fastest rate on record in the past 12 months, increasing from 30.1bn nuevo sol recorded in June 2014. There were 206,000 mortgages on the books of Peruvian banks as of June 2015.
Asbanc has called on the government to review conditions for granting mortgages, arguing that there are too many steps, and that bureaucracy increases interest rates, keeping mortgage requests down. The association says that rigorous controls can be maintained, but with fewer steps and conditions.
Government help?
A burst in the housing sector could help revive Peru's construction industry, which was once the motor of the country's growth. The construction sector has been dragged down by a confluence of factors, including a big drop off in public investment in infrastructure projects. The huge projects awarded in 2014 through public-private partnerships, such as the $6bn second line of the Lima Metro, have only now started to gain traction. Less than 40% of investment budgets for the year were utilised by the three levels of government in the first seven months of the year.
The financial sector is also lobbying the government to adopt additional measures that will stimulate not just the economy, but also help increase the penetration of the financial sector. Peru continues to have a lower level of bankarisation, with only about one-third of the population using the formal financial system, which includes both banks and savings and loans institutions.
One proposal is to follow the lead of Uruguay, and reduce the value-added tax (VAT) when purchases are made using electronic payments, such as credit and debit cards. Mr Morisaki says that if a VAT of 16% – two points below the current tax – were applied to purchases made with credit cards, it would contribute to getting people into the financial system so that they could take advantage of this benefit.
He says that research done in Uruguay and South Korea, where the mechanism has been applied, not only shows an increase in people using the financial system, but also reveals that government revenues do not decline. “Sceptics say government revenue would decline, but there is evidence demonstrating that this is not the case because consumption actually increases,” he says.
Dollarisation decline
A significant change in Peru’s market has been the ongoing decline of dollarisation in the financial system. “Dollarisation is now a little more than one-third of the system. It is still too high, but we will see it continue to decline,” says BCR governor Mr Velarde.
Loans in dollars were down to 38% in June 2015 – less than half the record high of 83.4% registered in July 2000. Deposits in dollars were 45.3% of the total in June – down from a high of 77.5% in October 2005. Dollar deposits have actually crept up in the past two years, after dipping below 40% in March.
The BCR launched a basket of policies at the start of 2015 to continue de-dollarising the Peruvian economy, despite the depreciation of the nuevo sol. The central bank has increased the reserve requirements in dollars, while lowering them in nuevo sol to encourage banks to strengthen portfolios in the local currency. It has also required banks to reduce loans in dollars by 5% as of June and another 5% by the end of the year.
Mr Velarde says that most banks had actually reached the 10% by June, and he expects the system as a whole to beat the target. He says the BCR “is going to keep as a ceiling the percentage of loans in dollars we reach in December. This means that the percentage will slowly drop as the overall portfolio grows in [nuevo sol].”
The nuevo sol depreciated 8% in the first seven months of 2015, and 14% in the 12 months through to July. It is expected to lose more ground with the increase of interest rates in the US.
Some concerns have been raised about the BCR’s de-dollarisation policy, with ratings agency Standard & Poor’s warning in July that the central bank’s use of repo operations to provide nuevo sol to banks needing to swap out dollar-denominated loans could create a dependency. Mr Morisaki says this is not an issue, because the BCR “has maintained a close and constant conversation with the banks. The central bank talks individually with each bank to make sure there are no complications.”
Financial inclusion drive
A big change on the way in Peru is the formal launch of a financial inclusion platform for digital methods of payments. Design of the platform has been finished, and will be rolled out in stages in the final months of 2015.
The platform will be fully operational in 2016, but scope will depend on volume. The first goal, within 18 months, is to have all financial institutions and telecom operators fully integrated into the platform, offering new services to people currently outside of the system. The goal within five years is to incorporate at least 2 million people into the financial system.
According to Asbanc, only about 4.5 million Peruvians have some kind of link to the formal financial system. This represents about one-third of the country’s economically active population. Mr Morisaki says the platform will not only benefit people living in remote areas where financial inclusion is low – penetration of the financial system in seven of Peru’s 25 regions or states is below 40% – but will allow Peruvians to use mobile phone technology to transfer money, provide new channels of payment for businesses and reduce the need to move around actual currency. It will also enable the government to use digital methods to disburse payments for social programmes.
Carolina Trivelli, the director of the electronic money project and former development and social inclusion minister, says the platform will allow Peru’s entrepreneurs – the vast majority of whom are informal – to get to know the financial system and allow the financial system to know them. Small businesses and micro-enterprises represent about 90% of the businesses in the country, and account for 70% of the economically active population, but less than one-quarter of these businesses are in the formal financial sector.
“In a few years we are going to see a host of new products and services for this sector of the population, which today has no access to the financial sector,” says Ms Trivelli.
Unique system
While other countries in Latin America have developed electronic money programmes – most recently neighbouring Ecuador – Peru’s system is unique, and already the focus of study. It has three characteristics setting it apart from other systems. First, it is not an individual effort of a bank or telecom company, but an initiative of the entire financial system – 17 banks and 18 savings and loans institutions – together with the telecom operators and state agencies.
“In other initiatives, the objective is a network of cash-in and cash-out, but here the objective is financial inclusion, to incorporate Peruvians into the financial system and the formal economy,” says Ms Trivelli.
Second, the four telecom operators – Chile’s Entel, Mexico’s Claro, Spain’s Telefonica and Vietnam’s Bitel – are involved. Platform users will be able to move money regardless of the mobile provider they use.
Finally, the platform will have the same brand. Electronic wallets will differ depending on the bank a client chooses, but the actual product will be the same, regardless of the bank or the telecom server. Clients will also be able to transfer money in real time and at a minimal cost, regardless of the bank used.
The long-term impact, according to Mr Morisaki, could be an expansion of the financial sector itself, with new banks moving into the market to target small businesses. “We have a stable economy, a solid financial sector and a population requiring new financial products. I think there is room in this picture for more commercial banks,” he says.
Ms Paiz also sees this as an option. “Peru is a country that is under-banked in terms of penetration of the financial system. Economic growth and more people coming into the formal economy would support the need for financial services,” she says.
