Moody's: Peruvian banks' profitability to remain solid backed by growing revenues

According to the credit rating agency, profits will benefit from their fee-based business and controlled credit costs and operating expenses, too.

"Large banks' strong pricing power, combined with risk discipline through the economic cycle, have led to high, sustainable profitability. We foresee the net income to tangible assets ratio deteriorating slightly to 1.9% by year-end 2020 given rising competition and tighter margins; nevertheless, the ratio will remain strong and among the highest in the region," it said. 

As of March 2019, profits were largely bolstered by interest income from loans, although income from securities, foreign exchange and derivatives, and growing fee income also contributed to banks' bottom line. Fee income rose to 16% of total income from 12% in 2016, a positive development, though well below that of other systems. 

Likewise, banks' ample net interest margin of 5.4% reflects their diversified lending mix with large exposure to high yielding local currency loan mix and competitive funding costs derived from a predominantly core deposit funding base.

While the 2.75% monetary policy rate has been flat since March 2018, the average spread in Peruvian Soles rose mildly to 12.1% in March 2019 from 11.8% in June 2018.

Furthermore, margins on these loans remain considerably higher than the spreads in US Dollars, which remained stable at about 6.9% in the same period, and largely explained the fact that 82% of banks' net income is driven by the local currency business. 

Moreover, large banks have been focusing on lowering their funding cost through different liability management strategies to enhance their interest margins. Relatively low international rates in US Dollars press down foreign currency margins.

"In addition, declining credit costs, which accounted for 32% of pre-provision income in the first quarter 2019, down from 34% in calendar year 2017, helped profitability trends. We expect credit costs to remain relatively stable at 1.9% through the end of 2020," Moody's expressed.

Banks' already low cost-to-income ratio has fallen steadily in recent years to 41.8% as of March 2019 from around 44% in 2016. While this ratio clearly benefits from banks' strong revenue generation capacity, operating expenses are a low 2.9% percent of tangible assets. 

Furthermore, this ratio has remained relatively stable in recent years, even as banks continued to grow, comparing favorably within the region —just second after Chile, where the ratio is 2.1%. Managed operating expenses, in line with digital transformation at large banks continues to support improved efficiency metrics and banks' profitability.

"Peruvian banks aim to reduce costs by increasing use of technology through both mobile banking and digital wallets. Digitalization requires significant investments, but as the financial system becomes more digitalized over the next few years and access to financial services becomes easier – and as Peru's middle class continue to grow – we expect growing financial inclusion and increased demand for financial products and services. This will help drive revenue growth," it concluded. 

(END) NDP/DTK/MVB