Outlook of the Peruvian banking sector
Juan Luis Avendaño C
Miranda & Amado
Lima
Juan Luis Avendaño C (Bio)
The new government of President Humala, who took office in July 2011, faces the challenge of maintaining the good marks in macroeconomic performance while keeping up with a number of electoral promises which could stress the country's fiscal discipline. The first appointments on key sectors of the government are giving a clear indication of economic stability and discipline and a good outlook for the Peruvian banking sector.
The country has $47 billion reserves (more than four times country's term debt), a 2011 projected annual inflation below 2.5% and GDP growth of 6%. Credit demand is at its highest, deposits are at record levels and banks' capitalisation is well above the required 10% are at a 13.4% average (regulatory capital against total adjusted assets).
Its banking legal framework fully adapts to Basel II standards and is already incorporating some Basel III features. A new framework on capital markets was introduced on July 2011 and is expected to attract new issuers and more investors.
There are 63 financial institutions, 15 which are commercial banks and the rest are mostly microfinance entities. There are 14 insurance companies, four private pension-fund managers and about ten other fund management companies.
Penetration of banking services is still very low in Peru, so there is a vast unexplored territory waiting to be conquered. In a country of more than 30 million people, only 25% of the annual GDP is financed through banks and there are less than 150,000 home mortgages. Savings are growing aggressively since the early 90's when a private pension fund system was created, thereby creating opportunities to finance domestic industrial production, services and exports.
Still, a $35 billion deficit on public infrastructure is waiting to be financed with a mix of local savings and government, multilateral and foreign commercial lending. Other opportunities we foresee are in the development of domestic securities and derivatives markets, including the possibility to integrate the Peruvian, Chilean and Colombian stock exchanges and create the second largest exchange in South America.
Therefore, Peruvian banks are getting ready to grow aggressively in the next few years. Actually, we are already witnessing a dynamic M&A activity through which banks are acquiring smaller entities to gain access to the fast growing microfinance sector.
Peruvian banks are important players in the local securities market, through which they are able to finance their longer term needs. They are regular issuers of short term and mid term notes, which include senior unsecured debt, subordinated debt and some type of covered bonds. The largest banks are also starting to diversify their liabilities by issuing debt in the global markets through global offerings under the US Rule 144A and Regulation S, including complex securities such as Tier I hybrids, Tier II subordinated bonds and DPR securitisation bonds. Also, a new law regulating covered bonds was issued in May 2011.
Although most of their lending efforts are targeted locally, Peruvian banks have also started to diversify by lending overseas through club deals and syndication. This is clearly something new for them and it should keep growing as they develop an expertise.
Foreign banks are also identifying opportunities in Peru, either by setting up local operations, acquiring Peruvian assets or just by intermediating Peruvian risk on a cross border basis through lending, structured securities and derivatives, and either meeting the demand for credit or for investment products.
A stable, strong and open regulatory environment, has allowed foreign banks to set up operations in Peru. Of the 15 commercial banks in operation in the country, 10 are majority-owned by foreign institutions. Most of them have commenced operations in Peru in the last ten years, either by acquiring an on-going operation (Scotiabank) or by starting a new operation (Santander, HSBC and Deutsche Bank). Other global banks have had a local presence for a longer time (Citibank and BBVA). Even though banking regulations and supervision is strict, foreign banks have found it easy to adapt to Peruvian regulatory rules given their similarity to internal standards.
In addition, the Peruvian Constitution and a long-standing legal framework guarantee:
i) equal treatment for foreign investments;
ii) prohibition of discriminatory treatment;
iii) non-participation of the Peruvian State in the financial system;
iv) free-market interest rates, fees and charges; and,
v) freedom to hold and dispose of foreign currency, and to exchange currencies at market rates.
Foreign banks that are not established locally are also doing business with Peru. Cross-border lending to Peruvian companies is facilitated because there are no limitations or restrictions for Peruvian companies to obtain foreign funding or credits, to pay in foreign currency or to hold assets offshore. In addition, the appetite from foreign banks is creating an interesting market for loan syndication, which is forcing local arrangers to incorporate syndication mechanisms into their loan documentation, including syndication of financial leasings. Syndication is also favoured by collateral structures that benefit from flexible legal arrangements that grant strong enforcement rights. Traditionally, foreign banks have provided financing to large Peruvian commodity exporters using export receivable collateral structures but now there are other types of Peruvian companies which are regularly obtaining unsecured loans from foreign commercial banks.
Finally, foreign banks offering derivative products in Peru can also benefit from a recent amendment to the Banking Statute, by which Peru is now - at least partially – a netting country. Accordingly, since July 2009 regular Isda (International Swaps & Derivatives Association) netting provisions are enforceable against insolvent Peruvian banks.
Conditions are set for the years ahead, in which we will probably see more M&A, lending, securities offerings activities involving Peruvian banks and corporations.