Credicorp Ltd. Second Quarter 2011 Results 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, 2011. The results are presented in nominal U.S. Dollars in accordance with IFRS. The reporting period coincided with Peru's presidential elections, yet the company reported better-than-expected results driven by sustained economic activity and robust growth in retail and wholesale banking segments.
Key Financial Metrics
- Net Income: US$ 174.2 million attributed to Credicorp (US$ 178.2 million total net income), representing a 7.6% increase year-over-year (YoY) and a 4.8% increase quarter-over-quarter (QoQ) excluding extraordinary gains from the prior quarter.
- Profitability Ratios: Return on Average Equity (ROAE) was 24.2%; Return on Average Assets (ROAA) was 2.4%.
- Revenue: Net Interest Income (NII) was flat QoQ at US$ 310.5 million but up 20.1% YoY. Non-financial income decreased 2.7% QoQ to US$ 200.2 million due to the absence of extraordinary securities gains seen in 1Q11, though fee income grew 6.5% QoQ.
- Loan Portfolio: Total loans grew 10.4% QoQ (end-of-period balances) and 6.2% based on average daily balances, reaching US$ 16.2 billion.
- Asset Quality: Past Due Loans (PDL) ratio improved to 1.50% from 1.56% in 1Q11. The coverage ratio for PDLs stood at 194.0%.
- Provisions: Net provisions for loan losses increased 45.1% QoQ to US$ 60.3 million, primarily driven by portfolio expansion.
- Efficiency: The efficiency ratio remained stable at 40.6%.
- Capital: Net shareholders' equity increased 5.9% QoQ to US$ 2.97 billion.
Material Changes vs. Prior Period
- Operating Income: Reported operating income decreased 12.4% QoQ to US$ 208.7 million. This decline was driven by a 45% increase in loan loss provisions and higher operating expenses, which offset growth in fee income and FX gains.
- Translation Gains: A significant translation gain of US$ 12.6 million (up 1,134.9% QoQ) resulted from the appreciation of the Nuevo Sol and the company's asset-liability management strategy.
- Taxation: Income tax expense decreased 28.9% QoQ to US$ 43.2 million due to lower taxable income in local currency accounting and tax exemptions in the life insurance subsidiary (Pacifico Vida).
- Segment Performance:
- BCP (Banking): Contribution increased 5% QoQ to US$ 134.6 million; ROAE 27.7%.
- PPS (Insurance): Contribution surged 64% QoQ to US$ 25.1 million, driven by translation gains and tax benefits; ROAE 28%.
- ASB (Asset Management): Contribution fell 11% QoQ to US$ 11.5 million due to lower market rates and reduced investment gains.
- Prima AFP: Contribution decreased 3% QoQ to US$ 7.8 million due to higher local tax charges.
Outlook, Risks, and Management Commentary
Management expressed optimism regarding the stability of Peru's economic model despite political uncertainties. The company noted that the Peruvian economy demonstrated resilience during the election period, maintaining strong credit demand. The strategy remains focused on expanding business lines while controlling operating expenses to keep them below income growth.
Risks and Contingencies:
- Political Uncertainty: Potential impacts from the outcome of presidential elections and subsequent policy changes.
- Regulatory Changes: New guidelines for additional capital requirements (Basel II/III related) regarding concentration, market, and interest rate risks are expected to be implemented starting in 2012.
- Market Volatility: Global economic conditions and currency fluctuations continue to pose risks to investment portfolios and translation results.
Investor Verification Checklist
- Verify the sustainability of the 4.8% QoQ net income growth excluding the one-time US$ 8.9 million gain from 1Q11.
- Monitor the trend of the Past Due Loan (PDL) ratio, which improved to 1.50%, against the backdrop of a 45% increase in provisions.
- Assess the impact of the US$ 12.6 million translation gain on future earnings, given the volatility of the Nuevo Sol.
- Review the efficiency ratio stability at 40.6% amidst a 2.9% increase in operating expenses.
- Confirm the regulatory capital adequacy (BIS ratio of 13.5%) in anticipation of new capital requirement guidelines effective 2012.