Credicorp Ltd. Form 6-K Summary: Credit Rating Affirmation
Business Context and Reporting Period
This Form 6-K, filed on April 7, 2022, discloses a material event regarding the credit ratings of Credicorp Ltd. and its primary subsidiary, Banco de Credito del Peru (BCP). Credicorp is the largest financial holding company in Peru, operating an integrated platform of banking, insurance, pension, and asset management businesses across Peru and Bolivia. BCP is the largest bank in the Peruvian financial system.
Key Financial Metrics and Rating Drivers
Fitch Ratings affirmed the Long-Term Issuer Default Ratings (IDRs) for both Credicorp Ltd. and BCP at 'BBB' with a Stable Outlook. Key financial metrics cited in the rating analysis include:
- Market Share (BCP): 30.3% of loans and 29.9% of deposits in Peru as of Year-End (YE) 2021.
- Asset Quality (BCP): Provisioned Delinquent Loans (PDL) greater than 90 days increased slightly to 3.06% at YE 2021 from 2.96% at YE 2020. Loan impairment charges returned to pre-pandemic levels at 1.44% of average gross loans.
- Reserve Coverage (BCP): Consolidated reserve coverage stood at 199.8% at YE 2021, remaining high and sufficient to cover expected losses.
- Capitalization (BCP): The Fully Core Capital (FCC) ratio was 12.48% and the regulatory capital ratio was 14.9% as of December 2021, well above the minimum required ratio of 9.47%.
- Liquidity (BCP): Loan-to-deposit ratio was 101.9% at YE 2021. Customer deposits are well-diversified, with demand and savings deposits comprising approximately 80% of the base.
- Profitability (Credicorp Consolidated): Return on Average Equity (ROAE) was 14.26% and Return on Average Assets (ROAA) was 1.50% at YE 2021. Operating profit to risk-weighted assets for BCP increased to 2.71% at YE 2021 from 0.67% in 2020.
- Holding Company Leverage: Credicorp's double leverage ratio was 101.8% at YE 2021.
Material Changes and Rating Actions
The primary material event is the affirmation of the 'BBB' rating with a Stable Outlook for both entities. Notable changes in the rating methodology include:
- Withdrawal of Support Ratings: Fitch withdrew BCP's Support Rating and Support Rating Floor as they are no longer relevant under updated criteria published in November 2021.
- New Government Support Rating: Fitch assigned a Government Support Rating (GSR) of 'bbb-' to BCP, reflecting its systemic importance and the likelihood of government support.
- Asset Quality Deterioration: Asset quality ratios were impacted by the maturity of loans related to the "Reactiva" government program after the grace period ended in June 2021, leading to a slight increase in delinquencies.
- Profitability Recovery: Net income for BCP approached 2019 levels, aided by lower loan impairment charges and liability management, though operational expenses increased due to digitalization strategies.
Outlook, Risks, and Management Commentary
Fitch maintains a Stable Outlook, viewing BCP's core financial metrics as having sufficient headroom to maintain current ratings even under moderately weaker economic conditions. However, the outlook is constrained by limited geographic diversification outside Peru and material exposure to foreign currency.
Key Risks and Sensitivities:
- Downgrade Triggers: A material deterioration in the local operating environment, negative sovereign rating action, or a sustained decline in BCP's operating profit to RWA ratio below 2.5% and FCC ratio below 10% for four consecutive quarters.
- Political Uncertainty: Ratings could be pressured by economic disruption resulting from political turmoil in Peru.
- Holding Company Risks: Credicorp's ratings could be negatively affected by a material increase in double-leverage metrics above 1.2x or a weakening of liquidity management and dividend flows from subsidiaries.
- Upgrade Potential: Limited upside potential exists given the sovereign rating ceiling and the challenging operating environment.
Investor Verification Checklist
- Verify the impact of the "Reactiva" program loan maturities on future delinquency trends beyond YE 2021.
- Monitor the trajectory of BCP's operating profit to risk-weighted assets ratio to ensure it recovers toward pre-pandemic levels (approx. 3.70%).
- Assess the stability of dividend flows from BCP to Credicorp, which are critical for the holding company's liquidity.
- Track political developments in Peru that could disrupt economic activity or affect the sovereign rating.
- Review the evolution of the loan-to-deposit ratio as loan growth recovers in non-government program segments.