Moody's maintains stable outlook for Peru's banking system

Moody's Investors Service is maintaining its stable outlook for Peru's banking system, on the expectation that the country's banks will maintain sound fundamentals amid moderate economic growth in 2015 and 2016, according to "Banking System Outlook: Peru," published on 24 June 2015.

"The Peruvian banks continue to generate healthy earnings, owing to strong loan demand, stable low-cost core funding and effective control of asset quality and operating costs," says Jeanne Del Casino, a Moody's Vice President and Senior Credit Officer, adding that, "liquidity and capital buffers also remain strong."

Moody's expects Peru's economic growth to recover from a slowdown in 2014 and, given the country's expansionary fiscal and monetary policies, is forecasting growth of 3% to 4% in 2015 and 4.5% in 2016. At the same time, private consumption continues to grow, while a large pipeline of government-promoted mining and public infrastructure projects will boost confidence and growth in the second half of 2015 and into 2016, which will compensate somewhat for a decline in investment in other sectors.

The main risk to the banks' asset quality is a rise in credit delinquencies by consumers and small and medium-sized enterprises, the two sectors that are the most vulnerable to economic downturns. However, strict origination standards and a shift towards higher-quality loans will mitigate these pressures and dampen the rise in non-performing loans.

In addition, financial dollarization -- which remains significant at around 50% of deposits and 40% of loans -- continues to decline as a result of regulations designed to curb banks' use of foreign currency. A sharp cut in local currency reserve requirements has also stimulated local-currency lending, which will support profitability while limiting credit risk from currency mismatches.

Still, given the widespread use of the dollar, the central bank's capacity to act as a lender of last resort remains limited. Hence, Moody's assumes that only the country's systemically important banks are likely to receive government support in the event of stress.