Peruvian lenders to weather policy uncertainty

According to report, Peru’s most recent political turmoil will enhance the possibility of negative risks to the nation’s banking system. Political polarisation and uncertainty will put additional strain on business confidence, investment activity, and economic development, which could lead to lower asset quality and lower banking system profitability than currently anticipated. Peruvian banks currently have enough headroom to absorb a decline in fundamental financial metrics.

Banks in Peru are at risk from the negative sensitivity to the Sovereign rating in addition to the general macroeconomic effects of the ongoing political unrest. The report states that a majority of the sizeable Peruvian banks are restricted by the country ceiling or sovereign rating of Peru. Due to a decline in political stability and governmental effectiveness, analysts have lowered Peru’s Rating Outlook to Negative in October of last year. Analysts also noted that ongoing instability has heightened downside risks to Peru’s rating.

Recent political developments confirm predictions that the business climate will worsen for Peruvian banks in 2023. The banking industry is likely to be under pressure from sluggish economic and credit growth, increasing borrowing rates, and prolonged political unpredictability. In 2023, the less favourable economic and political climate will probably restrain the expansion of loans and assets.

The sector’s 90-day nonperforming loan ratios, which are anticipated to be constant or slightly worsen yoy in 2023, will see an increased downside risk as a result of this as well as rising loan refinancing at higher rates amid the expiration of government programmes related to the pandemic.

Large Peruvian banks profit from diverse, affordable deposit funding, which supports credit during challenging times. Importantly, it is anticipated that in 2023, the system’s gross loan-to-deposit ratio will remain constant at 110%, consistent with pre-pandemic historical norms. With Basel III standards’ gradual implementation starting in 2023, banks are not anticipated to experience considerable capitalisation pressure because capitalisation is anticipated to remain appropriate and compatible with present ratings given remaining good levels of loan loss reserve coverage.

Banks continue to have a sizeable exposure to foreign currency assets despite a strong de-dollarisation trend in recent years. Additionally, some dollarisation on the liabilities side persists as a result of the ongoing economic and political unrest.