Billionaire Bankers Torch Bondholders With $19 Peru Loans

The billionaire Romero family’s strategy to lure more first-time banking customers among lower-income Peruvians is coming at a cost to its creditors.

The yield on 2027 bonds issued by Romero’s Banco de Credito del Peru rose 0.41 percentage point to 5.02 percent in the two months since reporting quarterly earnings that missed analyst estimates on higher loan-loss provisions and expenses. That’s the biggest increase among major Peruvian banks and three times the average jump in yields for emerging-market financial bonds tracked by Bank of America Corp in the same span.

The Romero family, which tapped Latin America’s fastest economic growth in the past decade to build Banco de Credito into Peru’s biggest lender, wants to double the number of branches in five years to capitalize on surging demand for microfinance with loans of as little as 50 soles ($19) that carry interest rates of as high as 25 percent. Banco de Credito’s push for new clients in a nation where only a quarter of the population has bank accounts has caused non-performing loans to increase at double the pace as total lending.

“Their asset-quality decline is the result of expanding more into retail and microfinance,” Diego Alcazar, a banking analyst at Fitch Ratings, said by telephone March 22. “Quality will continue to deteriorate as past-due loan ratios in those segments are higher.”

‘Cost Expansion’

The percentage of Banco de Credito’s loans that are past due rose to 1.78 in the fourth quarter from 1.53 a year ago, higher than the industry average of 1.75.

While Banco de Credito’s non-performing loans jumped 44 percent in the fourth quarter from a year ago, Scotiabank Peru SA, the third-largest bank, reported a 17 percent rise. The fastest-growing segment was microfinance at 47 percent.

The unit of Lima-based Credicorp Ltd. plans to reach 760 branches by 2018 from 365 last year, Chief Financial Officer Alvaro Correa said in a Feb. 5 conference call.

The bank is pursuing “business expansion on all fronts with the increase in costs this entails,” Correa said at the time. “The main challenges have been risk management and increased provisioning for cost expansion.”

Banco de Credito contributed 11.4 percent less to its parent company’s earnings in the quarter after Credicorp last year split off its investment banking arm into a separate division, merging it with the IM Trust and Correval brokerages.

‘Rising Costs’

“The bank has an issue with rising costs as they invest in systems and new branches,” Luis Manuel Ordonez, an analyst at Inteligo SAB, said in a telephone interview. “This could have an impact on its performance.”

The yield on BCP’s 2027 dollar notes, rated BBB by Fitch, rose to 5.02 percent today from 4.61 percent on Jan. 25, a day after the bank reported earnings. That included a 0.4 percentage point surge in the five days after the parent company’s Feb. 5 conference call.

In the same two-month period, the yield on Credit Suisse Group AG’s index of Latin American bank bonds rose to 4.46 percent from 4.17 percent while Bank of America’s global banking index increase to 3.98 percent from 3.84 percent.

The bank’s closest competitors, a unit of Banco Bilbao Vizcaya Argentaria and Banco Internacional del Peru, saw yields rise 26 and 25 basis points in the same period, respectively.

Bond Sale

Besides banking, the Romero group owns stakes in food manufacturer Alicorp SA and port operators Tisur and Ransa, as well as investments in gasoline stations, ethanol, palm oil, shipping, fishing, telecommunications and real estate.

As of Feb. 13, 2012, the family owned 14.2 percent of Credicorp, according to a filing with the U.S. Securities and Exchange Commission. The family also has 7.8 percent of Alicorp’s voting shares, according to the company’s website.

Banco de Credito, which increased profit 10-fold over the past decade, plans to sell bonds in Chile, Colombia and Asia this year to sustain loan growth, Chief Executive Officer Walter Bayly said in a Nov. 13 interview. Infrastructure projects, plant expansions and mortgage demand will fuel lending growth this year, Bayly said at the time. Corporate loans make up a quarter of Banco de Credito’s lending.

Banco de Credito had 53.6 billion soles of outstanding loans at the end of 2012, equivalent to 37 percent of all bank credit. Total lending in Peru rose 13 percent to 144.2 billion soles, according to the Banking Association.

‘Significant Flows’

“The capacity this group has to assign considerable funds to these investments is greater” than its rivals, Hugo Cussato, director at Lima-based rating firm Apoyo & Asociados Internacionales, said by telephone. “This is an investment in operating capacity that in coming years will start to generate significant flows.”

The 2027 notes have slumped because of their subordinated status after rating firms downgraded subordinated debt issued by some financial companies globally on a change in methodology, CFO Correa said in an e-mailed response to questions.

“It has absolutely nothing to do with expansion plans, profitability or past-due loans,” he said.

Banco de Credito today sold $350 million in senior notes due 2023, according to data compiled by Bloomberg.

Peru, forecast by the central bank to grow a region-beating 6.3 percent this year, earned a BBB rating in 2011 from Standard & Poor’s and Baa2 from Moody’s last year, the second-lowest investment grade levels.

Record Investment

The Andean country, the world’s third-largest copper and zinc producer and No. 1 in fishmeal, has lined up a record $53 billion in mining investment commitments and $20 billion in energy projects over the next decade, according to the Energy & Mines Ministry.

Peru’s currency strengthened 0.2 percent to 2.583 per U.S. dollar today. The yield on Peru’s benchmark 7.84 percent sol-denominated bond due in August 2020 fell one basis point to 3.79 percent. The yield on its 7.35 percent dollar bond due July 2025 was unchanged at 3.35 percent.

The extra yield investors demand to own Peruvian dollar bonds instead of U.S. Treasuries dropped five basis points to 142 basis points, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Peruvian debt against nonpayment for five years with credit-default swaps fell 1 basis point to 94 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value if the issuer fails to comply with debt agreements.

‘Still Optimism’

Banco de Credito will see lending slow after the central bank increased reserve requirements for banks seven times over the past year in a bid to temper the sol’s gains, said Javier Frisancho, a trader at Lima-based Kallpa Securities SAB. CFO Correa forecast last month loan growth of 16.3 percent this year after a 23.1 percent expansion in 2012.

“There’s still optimism for the growth outlook,” Frisancho said in a telephone interview. “But there will be somewhat of a deceleration.”