NEW YORK--(BUSINESS WIRE)--Efforts by Peru's central bank to reduce foreign currency reserve requirements in an effort to strengthen the levels of local currency-denominated loans will not meaningfully boost the credit profiles of Peru's banks, says Fitch Ratings.
Recently, Banco Central de Reserva del Peru (BCRP), Peru's central bank, approved several measures to foster the reduction on the dollarization levels by lowering cash reserve requirements for deposits in local currency while increasing those for dollar deposits. The central bank also created incentives to reduce US dollar loan portfolios by at least 10% by the end of 2015. Acknowledging that the expected soles-denominated loan growth is not matched by a similar growth in soles deposits, the BCRP is making available repo mechanisms for US dollar-denominated assets as a way to bolster liquidity levels in soles.
High dollarization levels have been a structural feature of Peruvian banks for years. Dollarization has generally trended lower over the past decade and a half, dropping to 45% of loans as of the third quarter of 2014, down from 83% at year-end 2000. Deposits followed a similar trend, but tend to swing to dollars in periods of crisis (2008-2009) or when there is a clear expectation that the dollar will appreciate (2013-2014). The latter effect is in part driven by the importance of pension funds deposits in the banking system, which tend to seek a gain in value rather than yield.
Recently however, the banking system has been building up an asymmetry on the liquidity levels on both local and foreign currencies. Deposit dollarization declined to about 40% at March 2013, but increased to 48% at November 2014 as the US dollar appreciated, thus creating ample liquidity in dollars to the detriment of liquidity in local currency. This is in part limiting the growth of banks' local currency loan portfolios.
While regulators have been proactive in promoting the usage of local currency, they have been careful to create incentives rather than penalties. Peru's strong external balance, low indebtedness and ample foreign reserves -- as well as banks' sound credit policies -- mitigate the dollarization risk. BCRP's recent moves aim to provide local currency liquidity and incentives to use it; these are means to achieve its higher objective of reducing dollarization while bolstering credit and economic growth.
BCRP's measures create additional incentives for banks to lend in soles -- recent local currency depreciation feeds demand for loans in soles -- but do little to change depositors' behavior. Dollar deposits accounted for 48% of total deposits at November 2014, but generated only 13% of the deposit funding costs. About 58% of dollar-denominated deposits are in the form of very low-cost demand deposits (mostly held by corporations and pension funds). Banks can hardly lower interest rates more to discourage such deposits that should be transactional in nature.
In Fitch's opinion, previous experiences that used the cash reserve requirement as way to curve loan growth had mixed results in 2009-2010. Under a scenario of faster conversion of loans into soles without a similar rise in local currency deposits, pressures on local currency liquidity can rise to levels that would present a burden for the industry. BCRP's intervention is a good step forward, but not a long-term solution, in our view.
For Fitch's last comment on Peruvian Banks, please see, "2015 Outlook: Andean Banks," available at fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
2015 Outlook: Andean Banks (Colombia, Ecuador, Peru and Venezuela)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=822148
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