Moody's maintains its positive outlook for Peru's banking system, in place since November 2017, to reflect expectations that economic growth and rising consumer demand will lead to a recovery in loan growth over the next 12-18 months.
According to the credit rating agency, the improving operating environment will help stabilize asset risk while solid profit will bolster capital buffers.
Economic growth, rising consumer demand, and investment are improving the operating environment.
"We expect real GDP to expand 3.9% this year and 4% in 2019. This will help increase the demand for loans
, leading banks to increase lending
by 11% annually this year and next, up from an average of 4% over the past two years," Moody's expressed.
Asset risk will stabilize as banks conservatively manage lending.
Despite accelerating loan growth, delinquencies will level off as banks
have tightened origination standards in response to the less favorable operating environment in prior years.
About 40% of Peru's loan book is comprised of low-risk corporate loans
, which will help offset a potential rise in delinquencies from individuals, as well as from small and medium-sized companies (SMEs).
Strong earnings will keep capital steady despite rising growth.
Rated banks' tangible capital will remain adequate with a TCE ratio of 12.9% by the end of 2019, enabling banks to
withstand potential loan loss problems.
Strong pricing power and loan growth will likely raise robust earnings as provisioning expenses remain manageable.
Rising fee income will also help improve profits, while strong cost controls and digitalization efforts benefit already good efficiency metrics.
Reliance on market funding will stay low even as liquidity narrows.
Market funds could rise slightly as loan growth increases, but cross-border debt will remain modest, limiting external refinancing risk.
Almost two-thirds of total funding comes from core deposits from large companies and retail customers, and banks have little dependence on less reliable institutional deposits.
A stable foreign exchange rate has lowered US dollar deposits to 42% of total deposits from 53% three years ago, reducing funding mismatches given the still high local currency loan-to-deposit ratio. Although liquidity will decline as loan growth accelerates, it will remain moderate.
"The government's willingness and ability to support banks will remain high," it concluded.