Credicorp Ltd. Q2 2016 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the unaudited consolidated results for Credicorp Ltd. (NYSE: BAP) for the second quarter ended June 30, 2016. Results are reported in Peruvian Soles (S/) in accordance with IFRS. The period was characterized by a slowdown in loan growth due to economic uncertainty surrounding Peruvian presidential elections and a deliberate strategy to improve portfolio risk quality.
Key Financial Metrics
| Metric | 2Q 2016 | 1Q 2016 | 2Q 2015 |
|---|---|---|---|
| Net Income (Total) | S/ 897.4 million | S/ 819.6 million | S/ 769.3 million |
| Recurring Net Income | S/ 769.0 million | S/ 823.3 million | S/ 742.5 million |
| Net Interest Income (NII) | S/ 1,904.2 million | S/ 1,946.7 million | S/ 1,837.2 million |
| Non-Financial Income | S/ 1,084.7 million | S/ 917.6 million | S/ 889.7 million |
| Net Interest Margin (NIM) | 5.19% | 5.33% | 5.70% |
| Cost of Risk | 2.11% | 1.98% | 2.07% |
| Efficiency Ratio | 43.9% | 42.2% | 44.0% |
| Return on Average Equity (ROAE) | 20.4% | 19.4% | 20.7% |
| Recurring ROAE | 18.0% | 20.2% | 20.6% |
| Total Loans | S/ 91,655 million | S/ 91,501 million | S/ 83,503 million |
| Total Deposits | S/ 89,937 million | S/ 92,758 million | S/ 80,911 million |
| Loan-to-Deposit Ratio | 101.9% | 98.6% | 103.2% |
Material Changes vs. Prior Period
- Profitability: Total net income increased 9.5% QoQ and 16.7% YoY, driven largely by S/ 105.2 million in non-recurring income from the sale of 50% of the investment in BCI. Excluding this, recurring net income fell 6.6% QoQ but rose 3.2% YoY.
- Loan Growth: Total loans grew only 0.2% QoQ (virtually flat) due to contractions in the Middle-Market, ASB, and SME-Business segments, offset by growth in Corporate Banking and Mibanco. YoY loan growth was 9.8%.
- Margins: NIM contracted 14 bps QoQ to 5.19% due to higher interest expenses and a shift toward lower-margin, higher-quality loan segments. NIM after provisions dropped 22 bps QoQ.
- Asset Quality: The cost of risk increased 13 bps QoQ to 2.11%. The internal overdue ratio rose to 2.85% and the NPL ratio to 3.67%. Management noted an operating error of S/ 32 million in the Wholesale Banking segment; excluding this, the internal overdue ratio would have been 2.82%.
- Insurance: The insurance underwriting result improved 13.3% QoQ, with the combined ratio falling to 88.8% due to lower acquisition costs.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites a lack of recovery in investment and consumption levels compared to pre-2014, exacerbated by uncertainty from the Peruvian presidential elections. GDP growth is forecast at 3.7% for 2016.
- Strategic Focus: The company is prioritizing portfolio quality over aggressive loan growth, leading to slower expansion in Wholesale and Consumer segments. This strategy involves accepting lower margins to reduce risk.
- Capital Position: Credicorp maintains a comfortable capitalization level at 1.30 times the regulatory requirement. BCP Stand-Alone's Common Equity Tier 1 (CET1) ratio improved to 10.20% due to net income generation and the transfer of BCP Bolivia to a holding company.
- Risks: Key risks include adverse changes in the Peruvian economy (inflation, growth, currency), political instability, and increased competition in the banking sector.
Investor Verification Checklist
- Recurring Earnings: Verify the sustainability of earnings by analyzing the S/ 769.0 million recurring net income figure, excluding the one-time S/ 105.2 million gain from the BCI share sale.
- Loan Growth Drivers: Assess the impact of the 0.2% QoQ loan growth stagnation on future interest income, particularly in the Wholesale Banking segment.
- Asset Quality Trends: Monitor the cost of risk (2.11%) and NPL ratio (3.67%) to ensure the increase is not a precursor to a broader deterioration in the Consumer and Credit Card portfolios.
- Margin Pressure: Evaluate the 14 bps QoQ NIM contraction to determine if it is a temporary result of mix changes or a structural shift due to competitive pricing.
- Operating Error Impact: Confirm the adjustment regarding the S/ 32 million operating error in the Wholesale Banking overdue loans to understand the true baseline for delinquency.