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Despite slower growth, Peru's banking majors post stronger YTD total returns

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Despite slower growth, Peru's banking majors post stronger YTD total returns

Total returns among Peru's major listed banks have well outpacedthe broader Latin American bank index in the year-to-date period amid hopes thata newly installed government will help to bolster the country's economic prospects.

Since the start of 2016, the South American country's four largestlisted banks — BBVA Banco ContinentalSA, Intercorp FinancialServices Inc., Banco deCrédito del Perú and ScotiabankPerú SAA — have posted total returns ranging from roughly 48% to 69%,which compares to a 2.34% negative return seen in the SNL Latin America Bank indexover that same period.

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The stronger returns come despite mixed earnings trends amongthe bank group as credit quality issues have mounted over the course of the year.Both BBVA Continental and Intercorp posted lower profits for the first half of theyear compared to the prior half, while Scotiabank Perú and Banco de Crédito haveshown slight improvements.

But while earnings results have varied, credit quality has deterioratedacross the board, with nonperforming loans rising as a proportion of total loansfor all four of the banks since the start of the year. Delinquency rates acrossthe Peruvian banking sector have risenby about 22 basis points year over year to 2.91% in August, according to data recentlyreleased by Asbanc. The banking association blamed the increase largely on slowinginternal demand thanks to a rising unemployment rate.

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Even though the banks' results have been largely unspectacular,prospects for both Peru's banking sector and its broader economy are expected toturn positive.

In a peer review published earlier in the year, Fitch Ratingspredicted that Peru'smajor banks were likely to see a decline in earnings. But the rating agency expectsthe banks to still perform well against peers, citing their resilient and well-diversifiedrevenue streams amid the region's weaker economic conditions.

To be sure, Peru's banking sector has seen steady growth overthe past several years, as SNL data show. Total assets have jumped by more than83% over the past five years to 421.5 billion soles, while the sector's cost-to-incomeratios have steadily improved since 2013.

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One of the benefits for the banking sector, according to Fitch,is the country's early adoption of Basel III standards, which have been in placesince 2012. "Financial regulation in Peru is among the strongest in the region,"the rating agency touted.

At the end of September, Fitch affirmed its sovereign ratings on Peru, pointing to the country'smacroeconomic and financial stability. While the country faces several constraints— including high commodity dependence, a low government revenue base and financialdollarization — they are offset by strong fiscal and external balance sheets, therating agency said.

Similarly, S&P Global Ratings pointed to Peru's track recordof "pragmatic and predictable policies" when it affirmed the country's credit ratings in August, while Moody'shighlighted the country's history of economic stability, market-friendly policiesand prudent fiscal management in affirming its own ratings on the country in October.

And while Moody's noted that a weak political structure, plaguedby corruption, inefficiency and a weak judicial system, are constraints for Peru,there is hope that a new government following the election of President Pedro Pablo Kuczynski could help mitigatethose issues.

Shortly after Kuczynski's victory, Moody's that the new government would serveas a boost to Peru's banking industry, as the new leader's plans to increase infrastructurespending and lessen economic informality will bring about added demand for bothconsumer and corporate loans.

More broadly, Peru's economy is expected to show some markedimprovements heading into 2017. According to EIU data, Peru's GDP should continueto rise, topping 521.90 billion soles in 2017, while its unemployment rate shouldrecover following an uptick in 2016.

The country's inflation rate is also expected to continue toslow next year. In September, Peru's central bank, Banco Central de Reserva del Perú, noted that inflation expectationshave continued "reverse gradually"over the course of 2016, hitting 2.94% in August. The central bank expects inflationto continue to slow over the next year, and hit 2% by the end of 2017.

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S&P Global Ratingsand S&P Global Market Intelligence are owned by S&P Global Inc.

As of Oct. 11, US$1 wasequivalent to 3.40 Peruvian soles.

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Click here to view country level information for Peru.

Click here to view SNL's Argentine banking profile data dispatch and here for a Venezuelan report of the same nature.

Click here to view SNL's profile of individual banks and view key information in both tabular and graphical format for your selected company.