Moody's Investors Service's outlook for Peru's (A3 stable) banking system is stable, unchanged since June 2019, but it is updating its view of the evolving credit conditions based on the economic disruption produced by the coronavirus outbreak.
"A deceleration in economic growth, declining internal demand, a worsening labor market, and lower interest rates will all hamper banks' asset risk and profitability. However, capital is strong and the
comprehensive Government response should mitigate lasting negative effects," it stated.
According to the provider of credit ratings, growth expectations have been cut for 2020, uncertainty looms this year, but a
stronger recovery is expected.
"We expect the effects of the coronavirus outbreak to lead to a milder GDP decline in Peru than in other parts of the region. We also anticipate a stronger rebound in 2021 because of a favorable base effect that will help the economy grow above potential even if activity remains soft," it said.
Nonetheless, economic pressure will curb demand for loans and other banking products, therefore, Moody's expects bank lending to be sustained mainly by the substantial credit facilities announced by the authorities to support the economy amid the lockdown.
On the other hand, it affirmed that asset risk will increase as slower economic activity and rising unemployment lead to delinquencies, but Government aid and diversified lending books will mitigate fallout.
"Some traditionally lower risk corporate loans may face strain, adding to pressure from already riskier assets in consumer lending, mortgages and loans to small and midsize companies (SMEs)," the agency stated.
Meanwhile, it said reduced exposure to US dollar denominated loans to local currency earners helps to preserve banks' asset quality. "The banks' ample reserve coverage will help mitigate potential higher provisioning triggered by from the unfavorable operating conditions."
According to Moody's, rated banks' tangible capital will remain adequate in line with a tangible common equity (TCE) ratio of 13.1% as of year-end 2019, well above the regulatory minimums, which will enable banks to withstand loan loss problems. Capital will be preserved as loan growth moderate, although internal earnings generation may decline.
In addition, it remarks that strong pricing power, manageable expense control, and provisioning will support profits, but lower rates will compress margins.
"Despite a contraction in loan volumes, earnings diversification will also bolster profitability. Strong cost controls and digitalization efforts will continue to benefit banks' efficiency metrics. Nevertheless, challenging operating conditions will limit earnings generation," it pointed out.
Moreover, Moody's referred to the favorable funding profile, with a strong deposit base, and less reliance on US dollar deposits.
It noted that banks are primarily funded by core deposits from large companies and retail customers, with limited dependence on less reliable institutional depositors.
"A relatively stable foreign exchange rate has helped to reduce deposit dollarization, despite increasing repo transactions to weather the crisis. Liquidity support measures aimed at maintaining credit flows will help banks," it added.
Finally, Moody's stated that the Government's willingness and ability to support banks will remain high.
"Our assumption of Government support remains unchanged, reflecting the financial dollarization in Peru that limits the authorities' capacity to act as a true lender of last resort," it concluded.
(END) NDP/RMB/MVB
Published: 4/28/2020