Peru's banking system has been among Latin America's strongest performers in recent years, with loan growth consistently in the double digits and profitability levels above those seen in neighboring markets. Strong loan growth has been underpinned by the country's booming economy, expanding companies and emergence of a burgeoning middle class.

Banks have also consistently delivered impressive growth and entered into previously unexplored market segments such as mortgage, lower-income consumers and microenterprise without a significant reduction in asset quality levels, demonstrating an improvement in credit discipline.

The deceleration in economic growth last year undoubtedly had some effect on the financial system, as business and consumer confidence alike suffered. However, low levels of credit penetration in Peru have allowed banks to maintain loan growth at rates of between two to four times GDP in the last decade. Furthermore, economic growth is set to bounce back in the second half of this year, and loan growth in the country has already shown signs of acceleration following a moderate slowdown towards the end of 2014.

Despite its strong metrics, Peru's financial system continues to face a range of challenges. Banks must continue to reduce dollarization of both loans and deposits, and while access to financial services has improved greatly in Peru in recent years, financial inclusion in the country continues to lag behind levels seen in neighboring markets such as Colombia and Chile. Furthermore, the loan market remains highly concentrated among a small number of players, posing a challenge for new players looking to take advantage of the high levels of profitability and low levels of penetration in Peru.

This report discusses recent developments and expectations for Peru's banking system in areas such as growth and asset quality, profitability, sector concentration and M&A, and financial inclusion.

Figure: Peru GDP and Inflation


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