The economy got off to a weak start in 2019, as it only expanded 2.3% in the first quarter, although this was considered a temporary setback by analysts.

Growth is expected to remain healthy this year, but predictions on how fast the expansion will be vary considerably: Scotiabank Perú and the IMF forecast GDP growth of 4.0% and 3.9%, respectively, while the UN’s Eclac and Capital Economics forecast expansions of 3.6% and 3.0%, respectively.

For years Peru has been blessed with a low-inflation environment and the IMF predicts that the annual inflation rate will end the year at 2.4%, which is within the central bank’s target range of 1-3%.

In May, the monetary authority kept the key interest rate unchanged at 2.75% for the 15th consecutive month and monetary policy is widely expected to remain expansive during the rest of the year as the economy is growing below potential and inflation is benign.

The biggest risks to the economic outlook – and loan growth – are continued fallout from the Odebrecht corruption scandal, major natural disasters and the possibility of increased tension between President Martín Vizcarra and the opposition-controlled congress, as well as an economic slowdown in the country's main trading partner, China.

The good thing is that for many years the Peruvian economy has shown strong resilience to the country’s frequent political and corruption scandals – although experts agree it would be able to grow faster without such distractions.

THE FINANCIAL SYSTEM

There are 15 private sector banks and these command approximately 90% of the assets in the financial system, which also includes a large number of non-bank lenders.

Peru has a single financial system regulator, the SBS, which oversees the banking, insurance and pension sectors. This year’s incorporation of the country’s cooperatives under the supervision of SBS was a major regulatory milestone for the financial system.

The move, which was approved by congress last year, had been called for by the likes of the IMF because the cooperatives were either under very lax supervision of a trade group or not regulated at all.

LOAN GROWTH

The pace of loan growth accelerated last year due to the better-performing economy, with loans issued by private banks growing 8.8% compared to 5.5% in 2017, at constant exchange rates.

The same banks saw lending increase 7.2% in the 12 months through April, with growth held back by low demand for financing among companies due to the poor performance of the economy in Q1, according to the private banks’ trade group Asbanc.

First-quarter demand for bank financing in the business sector was also affected by Peruvian corporations tapping the international capital markets amid relatively low interest rates, noted Valeria Azconegui, a banking analyst at rating agency Moody’s.

Loans to companies and families increased 5.01% and 11.3%, respectively, in the 12 months through April.

Azconegui expects loan growth for the full year to reach 10.3%, driven by local currency-denominated loans to individuals (such as consumer loans, credit card financing and mortgages) with corporate lending expanding at a slower pace.

Mario Guerrero, head of economic research at Scotiabank Perú, forecasts loan growth in the 8-10% range, and says there could be an increase in loan demand among companies in the construction, industrial production, retail and services sectors later in the year, on the back of stronger domestic demand.

PROFITABILITY, ASSET QUALITY

The average profitability of the private sector banks in terms of ROE was 18.3% in April, which is one of the highest levels in Latin America.

The sector's ROE is expected to remain at its high level throughout the year and Azconegui points out that Peruvian banks have been good at delivering strong profitability even during years of slow economic growth.

At the end of April, the average non-performing loan ratio (NPL) for the same banks stood at 3.05% compared to 3.11% a year earlier.

For the full year Guerrero expects a similar NPL level, with the likelihood of a small increase among medium-sized firms and a small decrease in the consumer segment.

Azconegui feels “comfortable” with the Peruvian banks’ current NPL level, and she adds that SBS applies a stricter NPL criteria than in most other Latin American countries and that the banks' asset quality benefits from well-diversified loan books and ample loan loss provisions.

M&A

Banking and insurance are the sectors that have seen most M&As in the recent years, topping the ranking in terms of the number of transactions in 2015, 2016 and 2018, being the second most active sector in 2017, according to M&A research firm Transactional Track Record (TTR).

Last year the banking and insurance sectors saw 17 deals and there were four transactions in 1Q19. The deals include M&A, as well as asset acquisitions, private equity and venture capital transactions.

Local and foreign investors are drawn to the two sectors’ high profitability, vast growth potential and solid regulatory framework.

The government submitted a bill in March that gives competition and intellectual property watchdog Indecopi the power to block M&A transactions that could harm competition or negatively impact consumers.

Marcela Chacón, Latin America analyst at TTR, says the effectiveness of the proposed law will depend on Indecopi’s technical expertise and the adequate evaluation of the different characteristics that can be found in each business sector.

Existing regulations for the financial system require M&A transactions to be approved by the SBS and the impact of the new law is therefore likely to be more limited for banks than for other business sectors, notes Guerrero.

FINTECH SCENE

Peru has seen strong growth in the number of fintechs in recent years as part of a trend sweeping across Latin America.

The number of firms in the fintech sector has reached 130, according to the latest figure from local trade group FinTech Perú, published in May.

The main focus of the fintechs is currently payments and remittances (23.8% of firms), alternative financing (20.0%) and foreign exchange operations (18.5%).

Two trends that are growing in importance in Peru’s ecosystem are growing collaboration between fintechs and banks, and the entry of fintechs from other Latin American nations, says Javier Salinas, who is vice president of FinTech Perú and director of Universidad del Pacifico's entrepreneurship and innovation center Emprende UP.

Fintechs that have entered the local market so far have mostly come from Argentina, Chile and Colombia.

Peruvian players are increasingly also venturing beyond the home market, which was seen in March when Krealo paid US$19mn for payment acquirer Multicaja in Chile.

Krealo is the tech innovation arm of Peru's largest banking and financial services holding Credicorp, and it was set up to create, invest in and manage fintechs.

On the regulatory front, Salinas expects the crowdfunding bill that the government recently sent to congress to be the only major development in 2019, with more regulations set to come in 2020.

Source: Business News Americas / BN Americas - Chile