Risk Agencies Highlight Concentration Concerns

Recent reports from risk rating agencies like Moody’s and Pacific Credit Rating shed light on the operational risks associated with Chinese banks in Peru. These institutions, including the Industrial and Commercial Bank of China (ICBC) and the Bank of China (BOC), are facing increased scrutiny due to their unique business models and market strategies.

Moody’s, in its assessment of ICBC, noted that “the loan portfolio retreated 4.28% (in 2024) compared to the previous year due to high competition in the corporate segment, causing the bank not to participate in reduced profit (Spread) operations.” This suggests that ICBC is becoming more selective in its lending practices,possibly impacting its growth trajectory.

Pacific Credit Rating highlighted a different concern with BOC, stating that it maintains “an important concentration in the main clients and in the corporate banking segment.” This concentration raises questions about the bank’s resilience to economic shocks and its ability to diversify its portfolio.

The potential impact of this concentration is further amplified by the existing competitive landscape. According to Pacific Credit Rating, “The niche to which boc is directed is mostly attended by the four largest financial institutions,” adding that “The entry of new competitors to the segment can affect the bank’s performance (BOC).” This underscores the challenges BOC faces in penetrating a market dominated by established players.

Strategic Financial Arms or Market Competitors?

Industry experts are divided on whether Chinese banks in Peru are genuine market competitors or simply extensions of Chinese economic interests. Enrique Castellanos, a professor at the University of the Pacific, offers a compelling viewpoint: “These Chinese banks are rare animals. they will not enter to do business and capture market, but its function is to be a financial arm, a support for the growth of chinese companies (in Peru) “. This viewpoint suggests that these banks prioritize supporting chinese ventures over traditional profit-driven banking.

Enrique Díaz, president of the consultant MC & F and IFEL, echoes this sentiment, stating, “It is known how Chinese economic groups enter a country, enter with investments (such as the port of Chancay), and the financial arm is a natural extension.” this perspective paints a picture of a coordinated strategy where financial institutions play a supporting role in broader economic initiatives.

This strategy, while potentially beneficial for Chinese companies, could also introduce new competitive dynamics.as Díaz notes, “With the Chinese entering action and with the connection that exists between them, they have actually added a competition factor that there was not before”. This added competition could reshape the Peruvian banking sector, potentially impacting local institutions and consumers.

The Corporate Banking Battleground

The Peruvian corporate banking sector is highly concentrated, with the four largest banks controlling a important share of the market.According to data from the Superintendencia de Banca, Seguros y AFP (SBS) as of December 2024, these top banks account for 86.05% of corporate credits.

Castellanos emphasizes this concentration: “Peru’s corporate banking is almost monopolized by the first four banks.Then, entering these big corporations cost the other companies, such as Chinese banks, but also Santander or Citibank.” This dominance poses a significant barrier to entry for new players, nonetheless of their origin.

Moody’s report on Banco Santander supports this notion of intense competition, noting that “The credits showed a reduction of 12.05% to December 31, 2024, a reflection of the lower economic dynamism, the greatest competition in the sector, together with some prepaids received from important operations.” This indicates that even established banks are feeling the pressure in the current environment.

Díaz highlights the complexity of corporate banking, stating, “Not any institution can make corporate banking; it is a item that has been the focus of the largest banks because it is normally oriented to complex operations, which need a more sophisticated financial structuring, and are of great size.” These large-scale, complex transactions, often involving tens of millions of dollars, require specialized expertise and resources.

Financing the Future: Customer Concentration and Beyond

Chinese banks in Peru primarily finance companies involved in major projects and industries. Castellanos points to examples like the Chancay port, Chinalco, Shougang hierro Peru, and Luz del Sur. These companies represent significant investments and strategic interests.

Pacific Credit Rating’s assessment of BOC reveals a high degree of customer concentration. As of december 2024, the bank had 22 clients, with the top three accounting for 46.2% of direct credits. This level of concentration exposes the bank to potential risks if any of these major clients face financial difficulties.

Despite these challenges, Díaz suggests that Chinese banks could explore opportunities in the medium-sized segment, where companies are actively pursuing expansion projects. This segment offers a potential avenue for growth and diversification.

Deposit Dependency: A Double-Edged Sword

The funding structure of Chinese banks in Peru relies heavily on deposits, particularly from a small number of large depositors. Moody’s notes that, for ICBC, term deposits represent 62% of its funding base. Furthermore, the top 20 depositors account for 92.99% of total deposits, raising concerns about liquidity risk.

BOC’s deposit concentration is even more pronounced. According to Pacific Credit Rating, 98.5% of deposits at the end of last year came from the top 10 depositors, with the top three accounting for 92%. This extreme concentration “evidences a risk of liquidity given the high concentration in the funding through deposits.”

Castellanos believes that the financial backing of Chinese banks extends beyond local deposits: “I understand that the anchorage (of the Chinese banks), is from the Chinese government and its institutions, although they can have some funding of the same Chinese companies (which operate in the country). But they do not make emissions in the local capital market (to capture financing) and do not capture deposits of the public.” This suggests that these banks have access to a broader range of funding sources than traditional Peruvian banks.

Díaz explains the rationale behind this deposit-heavy approach: “By financing, the bank probably wants support, and those guarantees are sometimes liquid, that is, deposits.” These deposits serve as collateral and provide a stable source of funding.

Díaz also highlights the international reach of Chinese banks, noting that they can access credit lines abroad as another source of resources.This global network provides them with additional flexibility and financial strength.