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Micro Finance Sector in Emerging Capital Markets Peruvian Financial Entity - CMAC Caja Municipal de Huancayo Edmundo R. Lizarzaburu [email protected] Esan Graduate School of Business - Universidad Esan – Perú Kurt Burneo [email protected] CENTRUM Católica Graduate Business School. Pontificia Universidad Catolica del Perú Abstract This paper used public information and represents an analysis about how the capital markets will be consider as alternative for the micro finance entities in order to obtain better interest rates and new financial alternatives (diversify their capital structure) and develop their corporate governance (Bolaños E., et al., 2014). Peru has been one of the fastest growing Latin American countries in recent years. In microfinance, Peru has achieved considerable growth in recent years. According to the Interamerican Development Bank (IDB) and Coporación Andina de Fomento (CAF), Peru is the country with the best conditions for microfinance in Latin America and the Caribbean. This is reflected in part by a larger portfolio of microfinance loans and better business environment in the region (IDB, 2010). At the beginning the case reviewed the history of this industry for the period 2009 - 2013. This overview will facilitate the understanding of this industry, its development and the main participants in this sector, then the case by exploring the market structure, its nature, its characteristics and the supply and demand forces, including the competitors and the size of the Peruvian financial sector. Finally, the case focus in the process followed by the entity Caja Municipal de Huancayo in order to listed bonds and commercial liabilities in the Lima Stock Exchange, considering the regulation process and then, the results of the operation; this case review, will give a better understanding about this microfinance entities development process in a volatile macroeconomic context. Keywords Micro finance, Peruvian Financial Sector, Capital markets. 1. Introduction

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Page 1: Micro Finance Sector in Emerging Capital Markets Peruvian ...€¦ · Micro Finance Sector in Emerging Capital Markets Peruvian Financial Entity - CMAC Caja Municipal de Huancayo

Micro Finance Sector in Emerging Capital Markets

Peruvian Financial Entity - CMAC Caja Municipal de Huancayo

Edmundo R. Lizarzaburu

[email protected] Esan Graduate School of Business - Universidad Esan – Perú

Kurt Burneo

[email protected] CENTRUM Católica Graduate Business School. Pontificia Universidad Catolica del Perú

Abstract

This paper used public information and represents an analysis about how the capital markets will be

consider as alternative for the micro finance entities in order to obtain better interest rates and new

financial alternatives (diversify their capital structure) and develop their corporate governance

(Bolaños E., et al., 2014). Peru has been one of the fastest growing Latin American countries in

recent years. In microfinance, Peru has achieved considerable growth in recent years. According to

the Interamerican Development Bank (IDB) and Coporación Andina de Fomento (CAF), Peru is the

country with the best conditions for microfinance in Latin America and the Caribbean. This is

reflected in part by a larger portfolio of microfinance loans and better business environment in the

region (IDB, 2010). At the beginning the case reviewed the history of this industry for the period

2009 - 2013. This overview will facilitate the understanding of this industry, its development and the

main participants in this sector, then the case by exploring the market structure, its nature, its

characteristics and the supply and demand forces, including the competitors and the size of the

Peruvian financial sector. Finally, the case focus in the process followed by the entity Caja

Municipal de Huancayo in order to listed bonds and commercial liabilities in the Lima Stock

Exchange, considering the regulation process and then, the results of the operation; this case review,

will give a better understanding about this microfinance entities development process in a volatile

macroeconomic context.

Keywords

Micro finance, Peruvian Financial Sector, Capital markets.

1. Introduction

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Microfinance are those activities in which financial services and no financial resources are provided

to low-income population, which is excluded from the traditional financial system. The Advantages

of microfinance according to Alvarez-Moro (2013) are:

Allow the inclusion in the financial system of people with less income, traditionally marginalized

from that.

They allow people with limited financial means to undertake projects beyond their means,

allowing its development.

Aare specifically aimed at helping the most disadvantaged.

Involve business developments since the disbursement of the loans are for specific uses.

Borrowers entities that offer microcredits belong to the local community know their environment

and are close to support.

Microfinance provides a better alternative to more disadvantaged compared to the usurers and /

or informal lenders.

Besides, the same author indicates the following disadvantages:

High Leverage, people who get a microcredit and timely paid are recorded as customers with

good credit history. But then they use this information to obtain at the same time more

microloans in other entities.

Due to the competitive market, there are institutions that do not measure the borrowing capacity

of the client, in their eagerness to achieve goals placements.

The main proposed of the several products in microfinance (microcredit) does not meet the

purpose for which it is granted, for example investing in customer revenue source and, therefore,

have and generate more revenue.

No supplies the customer need, because the entrepreneur will pay only what their ability to pay

and not allow it requires growing.

Migration from traditional banking customers, due to lack of credit products and services.

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2. Economic Environment

Peru has registered a slight slowdown in the last months of 2013 due to a lower volume in their

exports, as response commodities prices declining ,strong supply contraction in the mining sector,

private investment contraction, among other factors. However, it remains as one of the fastest

growing countries with relative lower inflation in the region, because exchange rate appreciation, its

strong fiscal position and because its improved risk rating reflects high expectations to GDP

recovery, high level of international reserves, etc. (Banco Central de Reserva del Peru, 2013).

Within its main macroeconomic indicators, it can be mentioned:

Gross Domestic Product

According to the Instituto Nacional de Estadística e Informatica (INEI), the national production

registered a growth of 5.02% for the year 2013, explained by these sectors: Fishing (12.66%),

Financial and Insurance (9.07%) and Construction (8.56%). As you can see, the GDP has been

reduced, due to the cooling of the Peruvian economy. The principal factors behind this result are

external (superprime raw materials price) and internal related to private sector expectations, as a

consequence related to commodities price fell.

Figure 1: Gross Domestic Product 2009 - 2013

Source: Annual Memorial - 2013 and INEI

Own Elaboration

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Inflation

According to the consumer price index in Metropolitan Lima, the monthly inflation was of 0.17% in

December 2013, while the accumulated throughout the year was 2.86%. In addition, this percentage

is located within the target range established by the Banco Central de Reserva del Peru, which

oscillates between 1% and 3%.

Figure 2: Inflation and inflation target: December 2009 - December 2013

Source: INEI

According to the Asociacion de Bancos (Asbanc), bancarization in Peru has increased from 20% to

28% in the past six years, thanks to the dynamism of the economic activity and government

iniciatives as the develop of Banco de la Nacion credit products (Multired Loans), introducing

competition in the financial market Burneo (2009). These, has enabled to strengthen the confidence

that people have in financial institutions. With regard to the stock market, a society that has been

affected as a result of the volatility in the price of commodities and in the exchange rate, was the

Bolsa de Valores de Lima which felt 23.63% in 2013.

However, it is expected that for the next year, it will come progresively around. Also, the growth and

development of mutual funds has been hampered by the negative environment that was experienced

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in the international markets and the local uncertainty, which affects the valuation of the investment

instruments at international level.

In terms of social development, despite the slow process in the economy, this has improved over the

years, thanks to various programs and strategies developed by the state.

Nevertheless, these measures have not yet been able to achieve the expected results, as you can see a

high rate of extreme poverty at national level. This has led to migration from the countryside to big

cities or urban areas as well as the transformation of commercial and labor relations, resulting in the

growth of the informal sector. At the end of 2013, according to the Instituto Nacional de Estadistica

e Informatica,(INEI), 19% of the Gross Domestic Product, valued in S/. 545 billion comes from the

informal sector and it is this same sector that generates 61% of employment throughout the country.

As a result of this informal demand and the difficulty in accessing credit, specialized institutions

were established in microfinance (Municipal and Rural Savings Banks and Credit) able to provide

credit to both small and micro enterprises (SMEs) as to individuals with low purchasing power. This

has led to increasing and improving the indexes of social and economic development in Peru.

SMALL AND MEDIUM ENTITIES (SMEs)

According to the International Labor Organization (ILO), the small and medium enterprises (SMEs)

represent an important source for the economic growth in developing countries, as it can generate up

to two-thirds of total jobs. In addition, through it they can access to markets, networks and financing;

additionally, another skills were developed by the SMEs in order to improve the resilience factor.

Other sectors, such as banking are aware of its importance and even consider it strategic for their

business. However, upon granting the funding to the SMEs, the informality is the main factor that

makes it more difficult. Unfortunately the entrepreneurs face high costs of registration, inefficient

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procedures as well as tedious regulations, which lead to continue operating in the informal sector.

(FOMIN, 2013).Also there are anothers factors that explain entrepreneurs difficults credit access, as

low scale operations and absence financial historial.

In the case of Peru, according to the Instituto Nacional de Estadistica e Informatica (INEI), SMEs

gathers near 98% of the business activity in the country, to 70% of the economically active

population and it represents about 50% of the GDP, further considering that informality is still an

unsolved problem. However with the promulgated Law Nº 30056, is where important changes were

made regarding the labor regime of micro and small companies, it is hoped that the informal sector

will be reduced (Official Journal El Peruano, 2013).

On the other hand, given the characteristics of SMEs, these always had problems with lack of

capital, due to the absence of direct or very expensive loans. In this context emerged the

microfinance credit specifically oriented to support SMEs, which involved the development of new

skillful credit techniques to evaluate the small entrepreneurs (The Economist Unit 2013).

3. Peruvian Financial System

According to the Superintendencia de Banca, Seguros y AFPs (SBS), the Peruvian financial system

at 2013, is composed of 64 financial institutions, which are regulated by the Superintendencia de

Banca y Seguros (SBS) and are divided as follows: 16 Multiple Banking, 12 Financial Companies,

13 Municipal Savings and Credit Banks, 9 Rural Savings Bank and Credit System, 9 Entities of

Microenterprise and Small Business Development, 2 Financial Leasing Companies or Leasing

Companies, 1 Factoring Company and 2 Administering Mortgage Companies.

There are also non-regulated entities by the SBS, as is the case of NGO, which offer credit financing;

and the Cooperative Savings and Credit that are supervised by the Federacion Nacional de

Cooperativas de Ahorro y Credito del Peru.

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Table 1: Financial indicators of financial institutions to December 2013

Source: Class & Partners (December, 2013)

Regarding the financial institutions supervised by the SBS, these same are also regulated in their

respective areas of expertise, by the Superintendencia de Mercado de Valores - SMV and the Banco

Central de Reserva - BCR.

4. Peruvian Microfinance System

According to Microfinance Information Exchange - MIX, Peru is considered as the leader of

microfinance in Latin America and the Caribbean. Nowadays, the supply of financing for

microfinance is done by regulated and unregulated entities, with a range of approximately of 4.1

million customers (Equilibrium, 2014).

The microfinance system is composed of 51 financial institutions, which provide loans to sectors

such as the micro and small enterprises. These entities belong to different institutional segments of

the financial system such as Commercial Banks (Banking Companies), Financial Enterprises,

Municipal Savings Banks, Rural Savings Banks and Entities on Development of Small and

Microenterprise; the last four belonging to the Non-Banking business sector.

Currently, this system is characterized by a high level of competence, basically in the microfinance

sector, since it has large numbers of entities operating in the same market. This results in a credit

Dic. 2013 Assets Gross

amount Current CAR* Provisions Deposits Patrimony

Banks 261,317 169,555 164,371 5,184 6,823 170,320 25,397

Finance Company

12,240 9,731 9,108 623 768 4,813 1,883

CMAC 16,363 12,434 11,488 945 996 12,822 2,135

CRAC 2,394 1,651 1,511 140 118 1,782 246

EDYPME 1,200 1,016 960 56 65 0 282

Leasing 586 467 460 7 10 0 83

Factoring 11 11 11 0 0 0 3

Mortgages 485 454 450 4 13 0 106

TOTAL 294,596 195,319 188,359 6,959 8,793 189,737 30,135

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oversupply particularly in urban areas. There are several raisons to explain it: Scale and scope

economies, economic centralization, financial background etc. In recent years such has been the

extent of competition in this sector that various cases of mergers and acquisitions have been

presented and produced among entities with the sole purpose of increasing their profitability and

efficiency through expands economies of scale (Pacific Credit Rating, 2013).

Since the present research paper aims to introduce one of the most representative Municipal Savings

and Credit Bank, more emphasis will be given to the Non-Banking Business Sector.

Non-banking Companies

According to the Superintendencia de Banca y Seguros - SBS (December, 2013), the financial

cooperatives, municipal savings banks, rural savings banks as EDPYME, showed a reduced market

participation in terms of loans and deposits. However, these companies attend a significant number

of customers and both its major accounts as indicators have increased in comparison to the previous

year, with the exception of Rural Savings and Credit. The nonbanking companies provide funding to

almost 50% of customers of the financial system, principally the financial companies through the

massive and widespread use of consumption of credit cards.

Table 3: Non-banking companies: Major Accounts and Indicators

EF CM CRAC ED

Dec -12 Dec - 13 Dec - 12 Dec - 13 Dec - 12 Dec - 13 Dec – 12 Dec - 13

Direct Loans (S/. Million) 8212 9731 11255 12434 2062 1651 1052 1016

Deposits (S/. Million) 4292 4813 11047 12815 2096 1781 - -

N° Borrowers (Thousands) 1707 2049 1051 1103 277 160 248 261

Default (%) 4.48 5.21 5.19 5.82 5.32 6.69 4.79 4.78

Capital Ratio (%) 17.43 17.72 15.82 14.77 14.17 13.57 22.57 20.56

Net Profit/Patrimony (%) 21.56 13.47 14.61 12.82 7.08 1.21 5.75 4.99

Source: SBS (December, 2013)

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At the end of the year 2013, the financial companies were made up of 12 entities and explained

respectively the 4.9% and 2.3% of the credit and deposit balances in the financial system. As for the

credits granted by financial companies, these increased by 18.5%, an increase very similar registered

by the financial system: 18.7%. On the other hand, the credits destined to SMEs and consumer credit

managed participations of 62.7% and 33.8%. While the increase of the deposits was 12.1% as a

consequence of the fixed-term deposits.

As for the group of the municipal savings banks, it is constituted by 13 entities. During 2013, credits

and deposits continued to grow. The former grew 10.5% and the second one 16%. However, the

increase in credits and deposits of the Rural Savings Banks was contracted by 19.9% and 15%

respectively as a result of the merger by absorption of the CRAC Nuestra Gente with Financiera

Confianza.

The credit of the EDPYME also suffered a fall of 3.5% as a result not of a merger but of a

conversion (New Vision to a financial company).

In relation to the financial indicators for the year under review, a ratio that alarmed all the groups of

the non-banking companies was the delay in payment, which increased and reached a ratio of 6.69%,

with the exception of EDPYME that presented a slight decrease. The increase in the ratio above

mentioned, originated the deterioration of the portfolio quality as well as a decrease in the ratio of

provisions on the overdue portfolio, reaching levels of 151.6%, 137.8% and 106.5% for financial

companies, Municipal and Rural Savings Banks, respectively.

Regarding capital ratio, at the end of 2013, the group of financial companies reached a level of

17.72%, which represents a slight increase. While in the case of Municipal and Rural Savings Banks,

the ratio was reduced. In spite of this, it is still located in very acceptable levels required by law. For

EDPYME, the ratio exceeded 20 %. Finally, the indicator of profitability for the group of financial

companies registered a significant decline: -8.1% and in the case of Rural Savings Banks it was -

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5.9% over the previous year. However, in the case of Municipal Savings Banks and EDPYME, the

deterioration of this indicator was not very significant.

As mentioned before, it can be appreciated that both EDPYME and the Municipal Savings and

Credit Banks are the most significant in terms of non-banking companies.

Market Share

At the closure of fiscal year 2013, in the participation of microfinance institutions, financial

institutions as Mibanco, took first place with a participation of 15.55% over the total portfolio of

gross placements.

However, it reached a lower level than the registered one in 2012 (17.73%). The same thing

happened with Crediscotia, i.e. it recoiled from 12.75% to 10% in that same year (Equilibrium,

2014).

Also in Tables 4 and 5 shows the evolution of the Financiera Edyficar and Confianza, CMAC Piura,

CMAC Huancayo and CMAC Cusco, which recorded a growth rate higher than their industry

average placements shown. Among the institutions that presented the greatest progress we have

Crediscotia Financiera and Financiera Edyficar.

Table 4: Increase of the participation of the financial entities December 2012 - 2013

Financial 2012 2013

% Position % Position

Crediscotia Financiera 40.31 1 29.56 1Financiera Edyficar 22.65 2 26.97 2Financiera Confianza 6.12 4 13.64 3Financiera Crear 7.20 3 8.69 4Mitsui Auto Finance 3.53 6 4.78 5Financiera Efectiva 2.48 10 3.31 6Financiera Uno 1.52 12 3.12 7Financiera TFC 3.15 7 2.87 8Financiera Proempresa 2.58 9 2.74 9Financiera Universal 3.13 8 2.36 10Nueva Visión 2.16 11 1.97 11Amerika Financiera 5.17 5 0.00 -

Total 100.00 % 100.00 % Source: SBS (December, 2013)

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With respect to the evolution presented by the Municipal Savings Banks, Rural Savings Banks and

Edpymes, there were interesting changes during the year 2013.

In the case of the Municipal Savings Banks, the ones which obtained better positioning were CMAC

Huancayo and CMAC Cusco, since they exhibited a greater growth than the average observed. While

in the case of the Rural Savings Banks, CRAC Señor de Luren went from second to first place. This

is due to the output of CRAC Nuestra Gente, which was the share leader at year-end 2012.

Table 5: Increase of the participation of the Municipal Savings Banks December 2012 - 2013

Municipal Savings Banks

2012 2013

% Position % Position

CMAC Arequipa 23.66 1 23.94 1CMAC Piura 14.93 MM 2 15.68 2CMAC Huancayo 10.09 5 10.94 3CMAC Trujillo 11.39 3 10.83 4CMAC Cusco 9.96 6 10.45 5CMAC Sullana 1131 4 10.41 6CMAC Tacna 5.82 8 5.97 7CMAC Ica 5.84 7 5.66 8CMAC Mayna 2.91 9 2.67 9CMAC Paita 2.07 10 1.70 10CMAC Santa 1.56 11 1.36 11

CMAC Floor 0.46 12 0.38 12

Total 100.00 % 100.00 % Source: SBS (December, 2013)

Table 6: Increase of the participation of the Rural Savings Banks December 2012 – 2013

Rural Savings Banks 2012 2013

% Position % Position

CRAC Señor de Luren 30.92 2 46.55 1

CRAC Credinka 14.60 3 24.48 2

CRAC Los Andes 5.25 5 8.86 3

CRAC Prymera 5.60 4 8.07 4

CRAC Chavin 3.62 6 3.45 5

CRAC Cajamarca 2.50 7 3.07 6

CRAC Libertadores de 1.57 8 2.34 7

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Ayacucho

CRAC Sipan 1.51 9 1.95 8

CRAC Incasur 0.68 10 1.24 9

CRAC Nuestra Gente 33.75 1 0.00 -

Total 100.00 % 100.00 %

Source: SBS (December, 2013)

For the Edpymes, Raiz remained in the first place, while Mi Casita went from fourth to second place;

and Acceso Crediticio progressed from the seventh to the third place. Finally, in the financial

institutions, Financiera Efectiva occupied the best position, which went from tenth to sixth place.

In second place is Financiera Uno, who increased its participation of 1.52 % to 3.12 %.

Table 7: Increase of the participation of the Edpymes December 2012 – 2013

Edpymes 2012 2013

% Position % Position Raiz 43.61 1 48.84 1 Mi Casita 7.62 4 1120 2 Acceso Crediticio 4.95 7 8.90 3 Solidaridad 8.05 3 8.79 4 Alternativa 5.65 6 7.64 5 Inversiones La Cruz 6.40 5 6.86 6 Pro Negocios 3.38 8 4.80 7 Credivisión 2.33 9 2.21 8 Credijet 0.70 10 0.75 9 Nueva Visión 17.31 2 0.00 -

Total 100.00 % 100.00 % Source: SBS (December, 2013)

5. Municipal Savings and Credit Banks – The Case

The Municipal Savings and Credit Banks were created by the Decree Law 23039 in the year 1981.

They are supervised by the Superintendencia de Banca y Seguros y el Banco Central de Reserva;

they are subject to the disposition of reserve rates and other mandatory standards, and are members

of the Deposit Insurance Fund (CMAC Huancayo, Memory 2013). Products offered by the various

CMAC are diverse yet common amongst them, being one of the most common among them pledge

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consumer credits and leasing credit, the later represents a type of credit that is not yet implemented in

all the CMAC that operate on a national level. On the other hand, a factor that customers stand out

on Municipal Savings Banks and which in turn represents its main strength, is the subject of the fees

offered by fixed-term deposits (compared with others financial products), since being relatively high

they are attractive and profitable for entrepreneurs (CENTRUM, 2013).

Furthermore, within the Municipal Savings Banks, the issue of financial analysis is focused on the

placements, which at June 30th of 2014 recorded an increase of 9.4% as well as the number of

debtors, the latter recorded an increase of 6.2%. This situation has led that the average credit per

debtor is placed in 11.129 soles, whereas in the year 2013 it was 11.167 soles. This increase in

placements enables to reflect the confidence of the depositors and the competitiveness that exists

between these Banks. All this contributes to the economic development of the country. (Equilibrium,

2014). By the way, there is empirical evidence about direct relationship between descentralized

bancarization and regional gross domestic product Burneo (2009)

Table 8: Number of placements of the Municipal Savings Banks at the national level – Dec 2013 - June 2014

Ranking Institutions

Placements

Jun – 14 Dec - 13 (Thousands of S/.)

1 1 CMAC Arequipa 2,891,987

2 2 CMAC Piura 1,940,056

3 3 CMAC Huancayo 1,390,685

4 4 CMAC Cusco 1,339,932

5 5 CMAC Sullana 1,333,123

6 6 CMAC Trujillo 1,307,340

7 7 CMAC Tacna 726.343

8 8 CMAC Ica 654.807

9 9 CMAC Mayna 307.153

10 10 CMAC Paita 189.748

11 11 CMAC Santa 162.882

Total CMACs 12,244,056 Source: SBS &Equilibrium (2014)

The CMAC Huancayo started its operations since 1988 and it has been established as a financial

instrument of economic development. It presents an administrative and economic autonomy

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supervised by the following entities; Superintendencia de Banca, Seguros y Administradoras

Privadas de Fondos de Pensiones y la Contraloria General de la Republica.

Among its main market competitors, are the Municipal Savings and Credit Bank of Arequipa, which

focuses on the financing to small and medium-sized enterprises, while the Municipal Savings Bank

of Huancayo is directed to the Micro and Small Business.

In addition, it has among its main strategic objectives: to strengthen the patrimony and optimize

anchoring, achieve sustainable growth and increase its profitability. While the goals oriented to the

perspective of the clients are to increase the deepening and the expansion in key markets; and to

strengthen the brand of Huancayo Rural Saving Account. For the characteristics related to use of

these financial resources, the financial effects could be relevants until first semester 2014.

Over the years, the CMAC Huancayo has established itself in the microfinance sector, coming to be

considered as one of the most representative funds and with better management.

According to the figures of the SBS over the first semester of 2014, CMAC Huancayo is mentioned

as one of the institutions of the non-banking system with higher growth, considering also that it has

the highest balance both in gross placements and deposits, in comparison to previous years.

Table 9: CMAC Huancayo - Analysis of Management (In million S/.)

BALANCE SHEETDec - 2012 Dec - 2013 Jun – 2014

Assets 1281 1637 1714 Gross Loans 1092 1311 1390 Deposits 1048 1313 1418 Net assets 159 186 217 PORTFOLIO QUALITY Default portfolio to gross loans (1) 3.40 % 3.42 % 3.89 % Provisions on overdue portfolio 165.44 % 163.31 % 152.72 % Provisions on high-risk portfolio (2) 138.09 % 132.89 % 129.23 % PROFITABILITY Net Profit (Thousands of soles) 37.460 42.745 16.986 Return on Patrimony (ROE) 18.97 % 18.68 % 14.48 % Return on assets (ROA) 4.15 % 3.75 % 2.74 % LEVERAGE Liabilities on Patrimony 16.70 % 15.41 % 15.26 % CAPITALIZATION (Number of Times) Assets to Patrimony 11.97 % 10.78 % 11.04 %

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OPERATIONAL Operating expenses on total revenues (4) 45.69 % 43.92 % 45.72 % Operating expenses over total assets 12.14 % 10.41 % 11.29 % Operating expenses on average gross portfolio 12.21 % 10.48 % 11.37 % Exchange Rate 2.8 2.8 2.9 (1) Gross portfolio: current credits, past due, refinanced and judicial (2) Delayed portfolio: overdue loans and judicial collection (3) High-risk portfolio: overdue loans, judicial and refined collection (4) Operating costs: personnel costs, tax and contributions, provisions and other general expenses. * Annual Results

Source: Equilibrium - Rating (2014) Class & Asociados S.A. (2014) Own elaboration

Likewise some of these analysis indicators of management may be explained in detail in order to

gain a better perspective on the evolution and growth that the Huancayo Rural Saving Account has

had with the passing of the years.

Composition and Structure

Up to December of 2013, The Municipal Savings Bank of Huancayo presents a placement of Credits

to small and microenterprises of the order of 53.38% (S/. 695 Million) of its placements, the

consumer credit reached 26.94% (S/. 350.7 Million) of the total portfolio, while the Mortgage Credit

reached 10.91% (S/. 142 Million) and the Credit to finance the Medium Enterprises was 7.61% (S/.

99.1 Million) of its credit portfolio.

Patrimony

To December of 2013, the Total Liabilities and Patrimony represents a 17.72%, i.e. an amount of S/.

227.3 Million, compared to December 2012 whose amount was S/. 193 Million. The sustained

growth of the patrimony of the CMAC Huancayo comes from the capitalization of utilities.

Profitability

Taking into consideration the information of 2014, to June 30th of that year, the gross financial

margin of CMAC Huancayo decreased slightly in relative terms because there was a greater financial

burden in relation to its income, due to the higher growth of its deposits in relation to its placements.

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Thus, the financial incomes of the Savings Bank have presented a positive slope until reaching 18.54

% thanks to its higher interest income and credit fees. However, the high financial costs affected the

growth of the above mentioned financial margin. It should be noted that the Savings Bank has made

various efforts to counteract the greater growth of deposits over placements. For this, the measures

taken are: adjust deposit rates and seek long-term deposits (Equilibrium, 2014).

Table 10: Profitability ratios Dec. 2013 - Jun 2014

Profitability Ratios 2013 Jun - 2014 Sector

Net Profit 16.24 % 11.41 % 8.56 % Gross Financial Margin 75.12 % 74.19 % 75.22 % ROE 18.68 % 14.48 % 13.25 %

ROA 3.75 % 2.74 % 1.73 % Source: SBS & Equilibrium (2014)

Liquidity

With respect to the funds available in the Huancayo Rural Savings Account, these totaled S/. 326

Million in the first half of 2014, that is to say, there was an increase of 2.38 % compared to the

previous fiscal year 2013. This increase is due to the increase in the cash account, banks, and

correspondents; and also to the requirements established by the BCRP as to the legal reserve, the

deposits in other banks and the financial institutions.

CMAC Huancayo

Another factor worth mentioning is the source of Anchoring that the Huancayo Municipal Savings

Bank counts on, which focuses on:

The acquisition of deposits from the public. What is sought is to diversify with measures, as the

forthcoming placement of Negotiable Certificates of Deposit. Also, these acquisitions have as

main feature the need for high interest rates.

Lines of credit granted by the public sector, and that allow institutions to access to more reduced

terms and interest rates. However the risk of change is accentuated given that most of the credit

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lines are denominated in foreign currency (ME), while the placements are made predominantly in

national currency (MN), the risk will increase when there is exchange rate volatility and high

probability to sudden pass to revaluation or devaluation (as occurred at the 2014 end, against

BCRP´s efforts to reduce it)i, at the same time, the interest rate risk is accentuated, given that the

majority of the lines are hired at variable rates and the placements are at a fixed rate.

The issuance of Certificates of deposit. Its entry into the capital market has the possibility to

attract investors and large corporations; however it has a very high cost of operation.

As a result of the growth of their placements, the leverage of the CMAC Huancayo has

increased and their profitability has been declining as a consequence of i) The incursion of the

commercial banking, which has led to the decline in active interest rates, (ii) The structure of less

flexible liabilities dependent upon fixed term savings whose cost pressure the margins

downward, iii) The higher expenditure in provisions product of the deterioration generated in the

portfolio by the client over-indebtedness and, (iv) The increase in operating expenses due to the

aggressive growth and penetration strategy implemented by the municipal savings banks as a

response to the growing competition. Equilibrium, Ranking Report - CMAC Huancayo, 2013).

Table 11: CMAC Huancayo - Structure

Structure

% On the Total Assets In millions S/. In %

Jun-13 Dec-13 Jun-13 Dec-13

Obligations to deadlines 497 536 35.18 % 33.36 %

Savings Obligations 209 243 14.83 % 15.17 %

Total obligations to the

public 1008 1.169 71.33 % 72.74 %

Dep Financial System 247 72 0.17 0.04

Arrears 99 104 7.03 % 6.48 %

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Net Worth 200 227 14.20 % 14.13 %

Total Assets 1.413 1.608 100% 100%

Source: SBS & Equilibrium - organiser of Risks (2014)

Own Elaboration

Certificates of Deposit

In 2012 CMAC Huancayo took the decision to issue certificates of deposits1, setting a maximum

amount in circulation of S/. 45 000 000. This would serve as a positioning strategy towards investors

and the market in general and as a means that would allow diversifying its supply resources, all the

companies who wants to list a fixed income must receive an evaluation from a rating agency

(Cisneros D, et al., 2012). Besides, they can evaluate their potential risk following Basel II and III

(Lizarzaburu E. et al 2012).

The table 12 showed summarized the whole information of the program:

Table 12: CMAC Huancayo - Characteristics of First and Third Issuance of Certificates of Deposits (2012)

Caja Municipal de Huancayo - Issuance of Certificates of Deposit Issuer Municipal Savings and Credit Bank of Huancayo S.A.

Program First Program of corporate bonds and Negotiable certificates of deposit of Municipal Savings and Credit Bank of Huancayo S.A.

Amount of the Program Up to a maximum amount in circulation of S/.45,000,000

Instrument to place Negotiable Certificates of Deposits of CMAC Huancayo S.A. - first issuance. Negotiable Certificates of Deposit - Third issue - Serie A.

Classification of risk EQL2.pe/CLA-2 Amount released S/.10,000,000 (First and Third Issue) Respondent Amount S/.20,000,000 (First and Third Issue) Currency Nuevos Soles (First and Third Issue)

Placement Price The Negotiable Certificates of Deposit will be placed below the same.

Interest Rate Fixed, zero coupon (discount) Term 360 Calendar days

Redemption The principal of the Negotiable Certificates of Deposit will be amortized over a single payment on the Expiration Date of the Negotiable Certificates of Deposit.

Date of issuance April 30, 2013

                                                            1 Resolución de Intendencia General SMVNo034‐2012‐SMV/11.1, de fecha 13 de abril de 2012 

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Expiration Date April 25, 2014 Guarantees Generic Warranty on the patrimony of the Issuer Structurer Banco Internacional del Peru - Interbank Investment Banking Inteligo Sociedad Agente de Bolsa S.A.

Source: BVL (2013)

The auctions results and comparison

The commitment to issue certificates by the CMAC Huancayo, occurred in a context where as

another entity in the same sector had issued debt in terms of less than 360 days (CMAC Arequipa)

and where the SBS had already generated its vector price2 and allowed investor to comparing the

performance of various fixed income instruments, but mostly made the “mark to market”.

Using the information provided by the SBS in its vector Price, the following table 13 shows the rates

of the certificates and other instruments from not only by CMAC Arequipa, but also by some of its

competitors:

Table 14: Information of Instruments in Capital Market – April 30 2013.

Nemónico ISIN Emisor F. Emisión F.

Vencimiento Moneda

P.

Limpio

(%)

TIR

%

CMHU1CD1U PEP16890Q023 CMAC Huancayo 30/04/2013 25/04/2014 PEN 95.153 5.094

CMHU1CD3A PEP16890Q031 CMAC Huancayo 30/04/2013 25/04/2014 PEN 95.153 5.094

CSCOT4CD1C PEP16920Q127 CREDISCOTIA 19/04/2013 14/04/2014 PEN 99.998 3.813

CMAQP1CD2A PEP13150Q025 CMAC Arequipa 25/03/2013 24/03/2014 PEN 100.109 4.489

CSCOT4CD1B PEP16920Q119 CREDISCOTIA 04/03/2013 27/02/2014 PEN 100.044 3.747

CMHU1CD2U PEP16890Q015 CMAC Huancayo 14/02/2013 09/02/2014 PEN 96.124 5.120

CSCOT1BC4A PEP16920M043 CREDISCOTIA 28/01/2013 28/01/2017 PEN 100.82 4.456

CSCOT4CD1A PEP16920Q101 CREDISCOTIA 25/01/2013 20/01/2014 PEN 100.088 3.826

MIBAN3BC4A PEP13300M116 MIBANCO 21/12/2012 21/12/2017 PEN 102.53 4.152

EDYFI1BS4A PEP16980D038 EDYFICAR 12/12/2012 12/12/2022 PEN 101.082 6.033

CMSUL1CD1B PEP16925Q027 CMAC Sullana 22/10/2012 17/10/2013 PEN 97.508 5.490

CMSUL1CD1A PEP16925Q019 CMAC Sullana 15/08/2012 10/08/2013 PEN 98.478 5.561

                                                            2 http://www.sbs.gob.pe/principal/categoria/nueva‐version/2361/c‐2361 

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CSCOT1BS1A PEP16920D018 CREDISCOTIA 31/07/2012 31/07/2027 PEN 108.079 6.534

MIBAN3BC1B PEP13300M108 MIBANCO 25/07/2012 25/07/2017 PEN 105.657 3.336

EDYFI2BC2A PEP16980M047 EDYFICAR 02/07/2012 02/01/2016 PEN 104.025 3.874

MIBAN3BC1A PEP13300M090 MIBANCO 28/05/2012 28/05/2017 PEN 104.907 3.531

MIBAN3BC2A PEP13300M082 MIBANCO 25/04/2012 25/04/2015 PEN 103.726 2.782

EDYFI2BC1A PEP16980M039 EDYFICAR 20/04/2012 20/04/2015 PEN 104.806 2.922

CSCOT1BC2C PEP16920M035 CREDISCOTIA 12/03/2012 12/03/2015 PEN 105.302 2.575

EDYFI1BS2A PEP16980D020 EDYFICAR 09/12/2011 09/12/2021 PEN 113.852 6.032

CSCOT1BC2B PEP16920M027 CREDISCOTIA 07/12/2011 07/12/2014 PEN 105.763 2.550

EDYFI1BS1A PEP16980D012 EDYFICAR 14/10/2011 14/10/2021 PEN 114.708 5.917

CSCOT1BC2A PEP16920M019 CREDISCOTIA 07/04/2011 07/04/2014 PEN 104.677 2.603

Source: http://www.sbs.gob.pe/app/pu/CCID/Paginas/vp_rentafija.aspx

The main aspect here, is how relevant the capital market is in order to provide not only cheaper

funds, but also if helps to diversify them. CMAC Huancayo issued certificates in 2103, first in

February and then in April of the same year, these certificates were overbooked, the market demand

was three times compared to supply Caja huancayo (2014).

Obviously, several factors explain these successful results, for the macroeconomic side, a lot of

liquidity was functional to certificates placement in a context with few issuers, in addition there was

an opportunity window in the offer moment, in adition the real interest rate was negative in the

money market. Respect the microeconomic side, the solid financial indicators and adequates

economic perspectives were key factors.

Conclusions

At a general level, at the end of year 2013, the main financial indicators of the banking system

maintained a positive trend, in spite of the slowdown in the economy; this remained in line with the

performance of the economic and productive activity of the country. This trend could also be seen in

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the Municipal Credit and Savings Bank of Huancayo. Obviously, solid financial indicators,

interesting economic firm perspective, oversupply liquidity in the capital market with a few issuers,

were the principal factors that explain, the successfully certificate placement compared to other

issuers. As consequence of generated new demands credits agents, and an improvement in financial

conditions, could to define a better economic context, which has benefited the private sector

(companies) and thousands of families mainly to entrepreneurs.

In addition, as result to the adequate regulation by the Superintendencia de Banca y Seguros AFP -

SBS; and to the efficient and responsible management of the intermediation skills of banking

companies, is that today we have a solid, robust, and capable of facing international crises and

turbulence banking industry, which in turn is properly capitalized, highly competitive and attractive

both for foreign entities such as foreign investors. The acces to capital markets, was functional to

develop potential synergies inside the CMAC Huancayo, several improved financial indicators show

the effect, that in quantitative terms i.e. arising liquidity is possible to measure until one year and half

after; but more durable effects as reputation or improved empowerment are related with the medium

and long term. Besides in future the entity could explore the MILA market (Bolaños E.L., et al.,

2015)

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http://governancefocus.blogspot.com/ ASBANC - Association of Bank of Peru (June, 2014). Department of Economic Studies. SME

financing IS STRATEGIC FOR THE LATIN AMERICAN BANKING. Nº 107, Year 4. Benavides, A. , Chavez, I. , Ramos, C. & Yauri, M. (March, 2013). Strategic Planning of the

Microfinance Sector Municipal Boxes in Arequipa. Pontificia Universidad Católica del Perú - Graduate School.

Bolaños, E. L., Berggrun, L., & Burneo, K. (2014) CORPORATE GOVERNANCE IN EMERGING

MARKETS AND ITS IMPACT ON FINANCE PERFORMANCE. CORPORATE OWNERSHIP & CONTROL, 625.

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Latin America (MILA) Stock market indicators: Chile, Colombia, and Peru. Journal of Economics, Finance and Administrative Science, 20(39), 74-83.

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Burneo K. Bancarizacion Publica y Crecimiento Economico Regional en el Peru. Editorial VDM.

Saasbrucken. Alemania. 2009 Lima Stock Exchange (s.f ). First Program of corporate bonds and certificates of deposit Negotiable

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microfinanzas 2013. New York: Fondo Multilateral de Inversiones (Fomin), miembro del Grupo del Banco Interamericano de Desarrollo, CAF, Centro para la Inclusión Financiera en Acción y Citi Microfinance. Recuperado de http://www.redcamif.org/uploads/tx_rtgfiles/Microscopio_Global_sobre_el_entorno_de_negocios_para_las_microfinanzas_2013.pdf

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                                                            i The balance sheet effect, occure when in an exchange rate arising context, a majority liabilities  borrowers are 

nominated in foreign currency   but their incomes are nominated in local currency.