Moody's: Peru's benchmark rate cut is credit positive for banks

10:09 | New York (U.S.), Aug. 14.

Central Bank of Peru (BCR) —on 8 August— cut its key interest rate 25 basis points to 2.5% from 2.75%. Peru's first rate cut in 16 months comes amid indications of lower-than-expected domestic demand, lower inflationary pressure, and local and global uncertainties, Moody's Investors Service informed.

Despite a negative effect on Peruvian banks' net interest margins and profitability, the rate cut is credit positive because it will help increase loan demand, offsetting lower-than-expected economic expansion for this year.

"We expect loan growth to continue expanding at around 6%-7% this year, which is slower than our original expectation of 10% in June. After flat loan growth in the first half of 2019 (largely due to a decelerating corporate loan demand but partly offset by rising consumer lending), we expect banks' loan portfolios to pick up in the second half, with lower rates driving demand for personal loans, credit cards, auto loans, and mortgages," it expressed.

"We also expect that Peru's high employment, improving households' wages and a rising middle class will continue to boost consumption and fuel consumer loan growth," it added. 

Likewise, corporate and small and medium-size companies (SMEs) lending together comprised around 60% of total banking system loans as of June 2019, and its performance is more correlated to the country's macroeconomic performance than the consumer lending business.

"Despite slower corporate loan growth, consumer loans expanded almost 11% in June 2019, 170 basis points above a year before. Credit cards, mortgages, and auto loans drove the consumer loan growth, which we expect will continue at a similar pace in the second half because of low interest rates and relatively strong household purchasing power," it stated

Moreover, relatively low interest rates and declining real estate prices will help boost mortgage lending. Therefore, Moody's expects 2019 loan growth to modestly increase in 2019 compared to 2018.

Signals of a turnaround from sluggish economic activity at the beginning of the year suggest better economic prospects in the second half of this year. Consumer confidence, after coming down to 92 in June, rose in July to 95. 


Published: 8/14/2019