Peru has taken its fair share of economic and political knocks – but it has come out fighting. Monica Campbell reports from Lima, where the mood is upbeat.Despite the economic crises experienced by its South American neighbours and ongoing political unrest at home, Peru’s financial sector has managed to pull through and is now poised for growth. Although profits at most banks are still far from showy, a better regulatory and economic climate is setting the foundation to support the system’s rebuilding.

Peruvian bankers are a tough lot. Over the years they have weathered a series of financial storms, from hyperinflation and economic “shock therapy” in the late 1980s to recession in the late 1990s. The political scene has also been subject to squalls. In 2000, after a decade in power, then-president Alberto Fujimori abruptly resigned, leaving the government in the hands of an interim president. The eventual entry of the current president, Alejandro Toledo, has been far from smooth, with public protests on the rise over general frustration with his government’s lack of success in reducing poverty and creating jobs.

The idea that the local financial market might recover from such economic blows seemed wildly optimistic, but it has happened. A decline in loans came to a halt last year and consumer deposits reached $14bn by December 2002, which was 3.8% higher than in the previous year. At the end of 2002 total loans granted by banks was $10.6bn, after tumbling 17% in 1999, according to the national banking association. Liquidity also remains strong, totalling $6.6bn in 2002, with most banks surpassing official requirements. The rate of non-performing loans also dropped to 7.7% in 2002 from 9.1% in 2001.

José Antonio Colomer, general manager at BBVA Banco Continental, Peru’s number-two bank, says: “Think about it. We’ve had a president who resigned, disputed elections, economic shocks throughout the region – everything you can think of basically – and the banking system has come out solid. We’ve learned here how to be efficient at the margin of political instability. Of any country in Latin America, we’ve been most satisfied here in Peru. We’re staying for the long run.”

Takeover trend

Yet the better days have not been without casualties. The trend for takeovers, mergers and liquidations in recent years has gutted Peru’s banking sector. Since 1998 the number of banks operating in the country has shrunk from 25 to 14, with institutions falling by the wayside because they were plagued by bad loans or struggling with low consumer demand.

“It was a big, costly clean-up. But it wasn’t a universal banking crisis like that in Argentina. It was an organised restructuring,” says Benedicto Cigüeńas, chief financial officer at Banco de Crédito de Perú (BCP), the country’s top bank.

The shake-out left Peru’s banking system ruled by a small handful of players. Today, the three largest banks handle about 75% of all deposits. Despite paltry profits – the sector as a whole posted only $150m in earnings in 2002 because most banks had to offset huge losses from write-offs of bad loans in the late 1990s – there is an air of optimism.

A major reason is Peru’s broad-based economic recovery. Last year, the country posted GDP growth of 5.2%, a turnaround from 0.2% growth in 2001, and especially impressive given the economic crisis in Argentina and political jitters surrounding the presidential elections in Brazil.

Broad based recovery

The recovery was prompted by an increase in domestic demand, a healthy construction sector and improving manufacturing, fishing and mining activity, all of which are crucial to Peru’s economic livelihood. Inflation is down and exports are up. Meanwhile, policymaking remains pro-market. Investor confidence was demonstrated in 2002 when Peru accessed international capitals markets through two bond issues of $500m each. The issue offered in February 2002 was the first such emission of sovereign bonds in more than six decades.

A rocky international scene has dampened the economic outlook for this year – GDP growth is expected to fall to 3.6% – but most financiers remain upbeat. “Peru has solid economic fundamentals. Foreign reserves are strong. GDP is growing. I think there is good opportunity for development here,” says Raúl Barrios, president of top local bank Banco Wiese Sudameris.

A solid regulatory environment is also behind the optimism. Major financial reforms approved in April 2000 went beyond the cosmetic, ensuring that financial institutions would be strictly regulated and supervised. Insolvency procedures were clarified and greater legal certainty has been granted to both debtors and creditors. It also helps that Peru’s central bank is independent and enjoys fairly broad discretion. It sets its own goals and is free of state meddling. “The central bank has done the most to give people confidence in the banking system. The currency has remained stable in the face of steep devaluations elsewhere in Latin America,” says Mr Colomer.

Some bankers grumble that the sector is now over-regulated but few can deny that, overall, the changes are positive, have encouraged an increase in commercial bank credit and bring the local financial system in line with international standards.

Better economic times and more modern regulations have created a healthier playing field for banks. But the battle is on for new customers. “You’ve got banks with growing deposits, more liquidity, but new customers are still hard to come by. Only 46 of every 100 clients we check out are approved for loans,” says Mr Cigüeńas.

Indeed, although the total amount of bank loans in 2002 reflected a sharp rise from 1999 levels, it remained virtually unmoved compared with loans granted in 2001. And only a nominal rise in Peru’s loan rate is expected this year. The stagnation is worrying most bankers as most of their institutions’ loans are corporate. A steep increase there is not expected because levels of private investment remain scant due to general risk aversion toward Latin markets and Peru’s stalled privatisation programme.

Battle for the populace

So the battle is on for Peru’s unbanked populace, many of whom work in the country’s enormous informal sector and account for more than half of the labour force. Banks have traditionally ignored this segment of the market but are now aggressively targeting the numerous microbusinesses, most of which are found in the low-income outskirts of metropolitan Lima, the country’s bustling capital.

Smaller, niche banks say that they can move swiftly in this trickier market because they already tend to cater to smaller businesses. “This is our core client base,” says Ramón Larrea, head of Banco Financiero, a medium-sized bank backed by Ecuador’s Banco del Pichincha. “We handle the accounts for small firms in every sector of the market, from fishing to construction, and offer our clients very specialised and personal attention.”

Larger banks vying for loot from small businesses must also compete with Mibanco, which has a $55m portfolio. It is a leader in microfinancing, thanks to its policy of granting loans using unorthodox criteria (it is routinely criticised, however, for charging higher-than-average interest rates).

Informal opportunities

BCP is well poised to go after the informal market. It has opened new banks in Lima’s poorer areas, offering simplified cash-management services and has created Solución, a subsidiary that specifically caters to small, informal businesses.

The bank is also on healthy footing. It emerged strong from a difficult time between 1997 and 2000, when its net income fell by more than two-thirds and its past-due loan ratio rose to 11.2% from 5.1%. Through steep write-offs and provisioning, it now boasts a clean portfolio and is generally viewed as one of Peru’s more transparent and trusted banks. It runs 230 branches and manages nearly 40% of Peru’s total deposit base, well ahead of Banco Continental’s 21%. Its past-due loan ratio was 8.4% in December 2002. And it raised the coverage of overdue loans to 104% at the end of 2002, from 98% the previous year, by applying a conservative provisions policy.

In late 2002, taking advantage of its high liquidity, BCP paid $50m to acquire Banco Santander Central Hispano Perú’s retail banking and mutual funds portfolio. The purchase of the Spanish bank’s holding (it held a 4.7% share of all Peruvian deposits and 6.8% of the country’s loans) fit well with BCP’s strategy to boost it market share. Although the purchase meant extraordinary costs for the absorption and restructuring of operations, BCP predicts that by 2004 the Santander acquisition will generate a three-percentage point rise in earnings.

Another large local bank, Banco Wiese Sudameris, controlled by Italy’s Intesa, is also hungry for new customers. It is hoping to speed the recovery from a run on its deposits in late 2002, when rumours circulated that Intesa had plans to quit Peru as shareholders in Italy grew nervous about the parent bank’s South American holdings. However, after re-evaluating the potential of the Peruvian market, Intesa silenced the buy-out whispers in February by announcing that it would inject $150m into Banco Wiese to shore up its liquidity levels.

Mortgage market

Now, along with growing its microfinancing and retail units, Banco Wiese is keen to tap Peru’s growing mortgage market. To increase lending, the bank recently announced that it would facilitate mortgages to those Peruvians who can demonstrate (over the course of a year) that they receive remittances regularly from family members living abroad (most reside in the US). The drive behind Banco Wiese’s sales tactic is MiVivienda, a government-sponsored, low-cost housing programme that involves the construction of homes valued between $4000 and $25,000. Many banks expect that the ambitious initiative will kick-start the market for mortgages, which comprise about 10% of all banking loans in Peru.

Housing loans also represent a relatively safe way to engage in long-term financing in a country where most loans have a maturity of less than one year. While the resulting market potential of the programme will not prove a windfall for any single bank, the risk associated with it is relatively low. “It is a big deal for people to buy a house in Peru and they work hard to make good on that commitment. The rate of default here is low,” says Mr Barrios.

Meanwhile, enthusiasm about Peru’s capital market business remains tepid and activity levels remain desperately low.

However, the seeds for a proper private pension funds market are being sown. Last October, Congress passed new reforms that allow private pension funds to invest abroad. Also, the government’s decision to finance the fiscal deficit entirely in the domestic market, along with the growing pool of savings represented by the private pension funds, raised liquidity levels in the market slightly. Nearly five years after their creation, the private pension funds represent 8.9% of GDP and are expected to rise to 18.5% by 2010.

The government hopes that its efforts will encourage competition in the financial system by developing deep and liquid securities markets. Still, most banks continue to shun the local capital market, writing it off as too small and riddled with costly transactions.

Despite the calmer state of the financial sector, there is one underlying worry that few bankers can shake off: the state of Peruvian politics. Many banks are only now bouncing back from blows to their public image as a result of ties (both direct and indirect) with Vladimiro Montesinos, former president Fujimori’s notoriously corrupt intelligence chief. More than one banking bigwig showed up in the well-publicised “Vladivideos”, secretly filmed videos of the spymaster taking bribes or pledges of campaign funds from various members of Peru’s elite.

Political concerns

Lack of confidence in President Toledo is keeping political concerns alive. In late May, the government declared a 30-day state of emergency after a swarm of protests hit major cities. Politicians from both opposition parties and from Mr Toledo’s Perú Posible squabble constantly with the president, leaving key reforms in limbo, particularly those concerning the sale of state assets. “The biggest challenge here is political. With the current administration, there is always the possibility that the rules of the game could change at any moment,” says Mr Colomer.

Luckily for Peru, it has enough foreign exchange reserves and cash in hand to survive a political shock – barring a wholesale collapse of confidence among Peruvians leading to large-scale capital flight. Although remote, such a scenario should not be ruled out; as many who operate in Latin America well know, there is always room for the unexpected.


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