Category: Peru

Moody’s predicts stability in the Peruvian banking system, although it sees risks from a protracted economic downturn that would negatively affect loan growth as well as business volumes, while pushing up delinquencies. It also sees international EM investor risk aversion constraining Peruvian banks’ access to alternative dollar funding needed for growth, and says high dollarization is a latent risk to bank asset quality and earnings. “Given the much lower growth outlook for Peru in 2010 and the increasing trend in delinquencies, we remain vigilant as to the potential impact on bank earnings and capital going forward,” says Moody’s. “The banks’ recent capital and reserve building efforts have positioned the system well to absorb further losses even under a highly stressed scenario,” it adds. The agency notes that business conditions have largely stabilized, allowing banks to continue to be profitable, though less so than last year, but liquid and solvent, and therefore able to manage current and prospective asset quality pressures. It expects 1.7% GDP growth in 2009, down from 10.0% last year, but says banks are well placed to navigate domestic downturn. “Solid balance sheets position them well both to absorb potential losses and to resume loan growth during the next 12 months on the back of healthier economic prospects, as Peru’s GDP is estimated to grow in the range of 3%-5%,” concludes Moody’s.

As widely expected, Peru followed the trend seen in other LatAm countries and kept its monetary policy rate unchanged at 1.25%, citing a continued decrease in inflation. Shops such as Bulltick, Morgan Stanley, BofA Merrill Lynch and Barclays had forecasted the central bank would leave the rate unchanged and expect the rate to stay at this level for the rest of the year.

Peru’s central bank is widely expected to keep its monetary policy rate at 1.25% during tomorrow’s meeting. “With inflation broadly inline with the central bank’s forecasts and significant monetary policy stimulus already in the pipeline we expect the central bank to keep rates on hold despite inflation data that is now below the lower bound of the target range,” Morgan Stanley says. Bank of America-Merrill Lynch says, “A still incipient recovery and subdued inflation will likely keep the policy rate unchanged at 1.25%.” Barclays agrees and expects the bank to stay on hold, in line with other central banks in the region.

IFH Peru has sold $150m in 2019 bonds, upsizing the Reg S offering from a planned $100m. The holding company for retail units and financial services companies including Interbank priced the notes at 99.279 with a 8.625% coupon to yield 8.750%. A dollar-denominated tranche in which the principal amount varied with the Chilean UF inflation-linked unit was scrapped, says a banker on the deal, leaving a single dollar-denominated piece. The B+/Ba3 transaction was placed with investors in Chile, Peru and other countries, the banker says. Barclays and IMTrust managed the sale. Proceeds will be primarily used by IFH’s retail subsidiaries – which include Supermercados Peruanos and Tiendas Peruanas – to finance the expansion of stores and fund credit card businesses, according to an S&P report.

Fitch has improved to stable from negative the outlook for insurer Pacifico Peruano Suiza (PPS) and affirmed its BBB minus rating. The action reflects the improvement on PPS’ operating performance, which is sustained by a significant reduction of its claim ratio and controlled operating expenses while its leverage ratios are decreasing towards its historic average, Fitch says. It also reflects its adequate retention levels, solid market share and franchise in Peru and its association with the largest and dominant financial conglomerate, Credicorp. A capital injection made on late 2008 early 2009 of around $18m, the decision to stop cash dividends and the recovery of the losses of 2008, resulted in an improvement of the liabilities to equity ratio to 1.6x, from a high of 2.2x at the end of 2008.

Morgan Stanley has reduced its 2009 GDP growth prediction for Peru to 0.9% from 1.8%, but increased 2010’s forecast to 4.9% from 4.4%. The shop says that this year, “the economy has proven less dynamic than we had expected, lagging some of its neighbors in pulling out of the downturn. Sequentially Peru has contracted 0.5% in H109, underperforming Brazil (up 0.5%) and Colombia (up 0.5%).” Next year, it believes Peru will post one of the strongest rebounds in LatAm as private investment rebounds. “For 2009 we expect $3.5bn in FDI inflows – an equivalent of near 3% of GDP – . . . in line with the 3.3% of GDP average FDI inflow in the last 10 years,” the shop says adding that for 2010 it expects FDI to increase to at least $5.7bn, or about 4.0% of GDP. Morgan Stanley also improved its 2009 PES forecast to PES2.85 per USD from PES3.2 previously. In 2010, it changed it to PES2.8 per USD from PES2.9.

In line with consensus, Morgan Stanley expects Peru’s central bank to keep the monetary policy rate on hold at 1.25% despite the continued drop in inflation as the bank waits for the effects of the past policy easing to filter through to the economy and the global recovery to lift expectations and domestic demand. Bulltick Capital, on the other hand, is going against market consensus and expects a 25bp cut, bringing the policy rate to 1.00%. Its forecast is based precisely on inflationary weakness. “The September 2009 inflation number came at -0.50% month over month, bringing annual inflation to 1.20% from 1.87% in August and from 6.53% year over year at the beginning of the year,” it says. “The central bank’s inflation target range is 1.00% to 3.00% and we expect the rate to end the year at its lower end, at 1.00% year over year, giving the bank further room to cut rates and maintain them low for long,” Bulltick adds.