Peru banks brace for uptick in nonperforming loans

Like their peers across the region, Peruvian banks are bracing for an uptick in nonperforming loan (NPL) ratios once repayment holidays end. 

Lenders in the Andean nation have already pressed the provisions button, lowering profitability to 0.2% of tangible assets during the second quarter, rating agency Moody’s said in a report. 

As of June, NPLs were steady at 2.6% of gross loans, a level unchanged since 2017.

As government aid and payment holidays start to end this half, credit quality metrics are forecast to deteriorate. SME and unsecured retail loans are seen as particularly vulnerable, with the former nevertheless benefiting from a government credit support scheme.

A shift away from consumer loans and into corporate and SME financing with state guarantee has been observed, Moody's said, adding this would limit asset quality deterioration. 

The week saw Canadian lender Scotiabank say that the bulk of its Latin America provisions were targeted at unsecured retail loan portfolios in Peru and Colombia.

“Nonperforming loan ratios will show increased asset risks once payment holidays end, particularly in loans to riskier SMEs and unsecured retail loans, as economic slowdown and unemployment reduce repayment capacity,” said Moody’s.

Banks, which benefit from funding via cheap core deposits, nevertheless remain solid and would likely receive government support in a stress event. 

Capital buffers “will remain adequate,” Moody’s said. 

Local banking association Asbanc said members had been making voluntary provisions and that the system was prepared for pandemic fallout, state news agency Andina reported. 

Moody’s has revised its outlook on the system to negative from stable, citing increased asset risk stemming from the crisis.

Peru is home to 15 commercial banks, a state bank and two development banks. There has been movement on the digital front, with the arrival of players such as prepaid cards Ligo and La Mágica. As yet no neobank (which piggybacks an established lender) or challenger bank (which has its own license) has entered the arena, although local press have reported rumblings on this front. With a large unbanked population, Peru is seen as ripe for the likes of a fully digital lender.

Peru’s economy has been battered by the coronavirus pandemic. The government expects GDP to contract 12% this year but grow 10% in 2021. Like across the region, thin green shoots of recovery are being seen as lockdowns are eased and key trading partners China and US strengthen. An improving economy would support credit quality. 

As part of its economic reactivation plan, the government is analyzing measures to combat high levels of labor informality, Andina reported economy minister María Antonieta Alva as saying.