Peru banks need many years to reach Basel II
LIMA - It will take a few more years for Peruvian banks to move fully on to the new, risk-based Basel capital accord than it will for banks in the larger and more sophisticated markets of Latin America, such as Chile and Mexico.
Upgrades in Peru's regulatory framework are still under development. And, it will also take time before banking supervisors and banks' staffs are properly trained and can familiarise themselves with the new regulatory guidelines, concludes Moody's credit rating agency in a report published in February.
Some progress has been made in the way that leading banks allocate capital. They have invested in better technology. Nevertheless, the risk management, risk culture and regulatory framework in Peru, and some other small financial systems in Latin America, still lag behind the regional leaders, the report says.
However, the rating agency notes successes in some areas. The Peruvian banking system is gradually improving its profitability and asset quality. After five years of contraction in lending, improvements in asset quality are now evident, and the banking system is adequately reserved. Non-performing loans as a proportion of total loans in the system fell to 4.6% from 5.8% during the first nine months of 2004, thanks to better monitoring, and enhanced bad debt workouts, as well as more active restructuring of such debts and a policy of writing them off.
Besides vigorous efforts to clean bad loans off the banks' balance sheets, the industry looks set to benefit from better macroeconomic conditions. Growth in Peru's economy is thought to have been around 4.5%. Substantial provisioning against bad loans, and other adjustments, has left banks prepared for growth, reckons Moody's. They are in an improved position to boost lending.
Profitability in the banking system remains scanty, but is slowly recovering. This unimpressive trend in the banks' financial results has only made it possible to lift the system's capital adequacy slightly, although capital adequacy could finally begin to strengthen if lending does gain momentum.
Moody's main worry is the degree of dollarisation in Peru. As long as this continues, the credit rating of individual banks will be constrained, it says.
The Peruvian banking system remains highly vulnerable to foreign exchange risk because some 67.7% of the system's assets and 61% of deposits are dollar-denominated. A government's ability to bail out its banks is limited when dollarisation of the system is this high. Dollarisation is also hitting the profitability of Peruvian banks because dollar loans carry much thinner spreads than loans made in the local currency.
