If Peru’s economy really has turned the corner and now starts to grow apace, after marking time for four years because of political crises and external shocks, its banks can have no complaints if they are not ready to pick up the slack.

The excess of liquidity in the banking system is the factor most commonly pointed out by bankers. Deposits have grown but loan portfolios have been stagnant, since lending opportunities remain scarce: once-bitten banks are twice shy about extending credit to any other than the most cast-iron risks.

“Banks were scared. They took a lot of hits in consumer loans and real estate,” says Pedro-Pablo Kuczynski, Peru’s economy and finance minister.

Most institutions have had to make heavy provisions for non-performing loans because of the stalling economy, which dented their profits. The financial sector superintendency, the SBS, intervened in two banks, NBK and Nuevo Mundo. The first merged with another small bank and the second was liquidated.

But having had enough time to address the issue, the banks -there remain 15 private-sector banks in the system, with 70% of deposits in the three leading institutions – seem to be managing to get on top of their problem loans. Provisions for loan losses rose from 101% at the end of 2000 to 114% at the end of last year, according to Raimundo Morales, general manager of Banco de Crédito del Perú (BCP), the country’s largest bank.

Benedicto Cigüeñas, BCP’s central manager for planning and finance, says: “There has been a big improvement in asset quality. Solvency has improved across the system.”

In a recent conference call with investors Morales said his own institution had seen the past-due loan ratio of its Peruvian portfolio (BCP also has a Bolivian subsidiary) improve strongly, declining from 9.4% in December 2000 to 8.1% a year later.

However Juan Carlos García, manager of Banco Wiese Sudameris’s economic studies division, says there are worries in the sector over a Congressional initiative aimed at protecting consumer rights that could make it more difficult for banks to collect on non-performing consumer loans.

What banks also say is needed now is for confidence to return to the economy. Rejecting criticism that the banks’ reluctance to lend is holding back a recovery, García says credit follows economic activity in normal times, not the other way around. “We cannot go to a businessman and tell him to build a factory. It is his decision,” he says. Cigüeñas echoes the dilemma. “We would love to be lending. We don’t know what to do with the money,” he says.

Abundant Liquidity
So is the economy recovering? Jorge Flores, executive vice president of Interbank, Peru’s fourth-largest bank by assets, says: “There is abundant liquidity for certain sectors and for the strongest companies. But there is no consumer credit, and the mortgage market is quite restricted, although the banks are starting to reactivate mortgage products.” Flores hopes government plans to provide mortgage guarantees “will provide a substantial stimulus to the lower-middle and lower-cost sections of the market. We hope that will create a virtuous circle and it will extend to other segments of the market.”



The government’s aggressive privatization and concession plans are also creating hopes that the economy will receive a fresh influx of capital and investment.

Banco Wiese Sudameris, the country’s second-largest bank, believes economic recovery – and its own planned launch of new products and services – will help it achieve 3% overall growth and a 7% rise in lending in 2002, after a restructuring in 2001 that led to a $16 million loss.

At BCP, Morales is telling investors the bank is “not overly optimistic” about a surge in domestic loan demand. He anticipates a 3% growth in lending. “At least until now we are not seeing any major new investments in the economy, or any substantial increase in domestic economic activity, which will be the drivers eventually for the growth in loan demand,” he says.

So in 2002 the main driver of BCP’s earnings is expected simply to be reduced provisioning. “In 1998, 1999 and 2000 the provisioning level absorbed around 50% of the net interest margin. Last year it was around 38%. We are anticipating that in 2002 it will absorb around 28% of the net interest margin. Even though the provisioning levels are reduced, they are still, in terms of a percentage of the net interest margin, fairly substantial compared to international banks and far above what would be standard practice in an economy that was growing under normal conditions,” Morales told investors.

“We do not see a substantial increase in loan demand, and as the liquidity is fairly high in this market, we anticipate margins are going to be reduced somewhat during the course of the year.”

Competing for Clients
Companies that are good credit risks are courted assiduously. Eduardo de las Casas, country treasurer and corporate finance head at Citigroup in Peru, say, “Among the top companies it is a buyers’ market. They are getting really low rates.” Flores at Interbank says he is concentrating on what he calls “proven corporate” mid-sized companies, since lending to the top corporate names has become such a competitive, cutthroat business. “Margins are very thin. It did not justify the effort,” he says.

Banks also appear to be increasingly instrumental in helping clients take advantage of liquidity and longer-term financing in Peru’s capital markets. Many investors complain about the market’s lack of depth and liqudity. However, pension funds, whose investments are held overwhelmingly in domestic assets, and insurance companies are showing a strong demand for long-dated local paper to match their obligations.

De las Casas at Citigroup, for example, says Citi recently helped structure the first project finance bond in Peru, for a consortium that had been granted rights to develop a drinking water project. The bond was issued in series of up to 12-year maturities. Citi also helped put out a local bond issue as part of the financing for construction of the Transmantaro power line. Banco de Crédito has issued 10-year mortgage bonds.

“It shows there are projects that can be financed in the Peruvian capital market,” says De las Casas. “The main investors for this kind of thing are the pension funds and the life insurance companies. [This] is an instrument they want.” The pension funds now hold around $3.7 billion in assets for their 2.7 million affiliates, and earned a return of 11% last year. Their assets are growing by around $40 million a month.

“That brings a need for investment instruments,” says De las Casas. “What we are seeing is that anything up to around $200 million can be financed locally. I wouldn’t think about going to the international markets unless it was something more than that.”

Minister Kuczynski says the government is keen to push forward new capital markets legislation. “There is a whole slew of little things that should gradually unfreeze the bolsa here, especially on the fixed income side,” he says. The government is now making a conscious effort to generate a domestic currency yield curve at the shorter end with a sovereign bond program. Kuczynski says the year’s program will be limited to around $300 million or $400 million so as not to “monopolize liquidity.”

Other innovations are appearing. In January, the third-biggest bank, BBVA Continental, sold 37 million soles of March 2003 sovereign bonds. Their yield is linked to the euro’s progress against the dollar. The bonds were presented as a way for pension funds, which took most of the issue, to invest indirectly in a euro-denominated asset.