Credicorp Ltd. Third Quarter 2009 Earnings Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), Peru's leading financial services holding company, reported unaudited consolidated results for the third quarter ended September 30, 2009. The results are presented in nominal U.S. Dollars in accordance with IFRS. The reporting period reflects a Peruvian economy recovering from the global recession, characterized by subdued loan demand but improving asset quality and strong performance in non-banking subsidiaries.
Key Financial Metrics
| Metric | 3Q 2009 | 2Q 2009 | 3Q 2008 |
|---|---|---|---|
| Net Income (Attributed to Credicorp) | US$ 121.7 million | US$ 115.2 million | US$ 92.6 million |
| Earnings Per Share (EPS) | US$ 1.53 | US$ 1.44 | US$ 1.16 |
| Return on Average Equity (ROAE) | 24.0% | 25.6% | 20.7% |
| Return on Average Assets (ROAA) | 2.34% | 2.20% | 1.80% |
| Net Interest Margin (NIM) | 4.7% | 5.1% | 4.3% |
| Efficiency Ratio | 39.8% | 40.7% | 42.6% |
| Past Due Loans (PDL) Ratio | 1.55% | 1.38% | 0.78% |
| PDL Coverage Ratio | 191.7% | 192.9% | 297.5% |
| Total Loans | US$ 10.68 billion | US$ 10.60 billion | US$ 9.93 billion |
| Total Deposits | US$ 13.67 billion | US$ 13.71 billion | US$ 13.04 billion |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 5.6% quarter-over-quarter (QoQ) and 31.4% year-over-year (YoY). This growth was driven by lower loan loss provisions, improved insurance results, and translation gains, offsetting a decline in Net Interest Income (NII).
- Loan Portfolio: Total loans grew only 0.7% QoQ, primarily due to currency exchange movements rather than real lending growth. Demand for financing remained sluggish, particularly in the USD-denominated portfolio, while the local currency portfolio maintained dynamism.
- Net Interest Income: NII dropped 8.1% QoQ to US$ 214.5 million. This was caused by declining yields on investments and lower interest income from derivatives, leading to a NIM compression from 5.1% to 4.7%.
- Asset Quality: The PDL ratio rose to 1.55% from 1.38% in 2Q09, reflecting a deceleration in the growth of past due loans. Consequently, loan loss provisions decreased 30.1% QoQ to US$ 38.2 million.
- Non-Financial Income: Total non-financial income declined 4.6% QoQ due to significantly lower gains from the sale of securities (which were high in 1H09). However, traditional fee income rose 8.4% and FX transaction gains surged 52%.
Outlook, Management Commentary, and Risks
Management Commentary: Management highlighted that results were in line with expectations, driven by a stable banking business and sustained recovery in subsidiaries. The insurance business (PPS) was a bright spot, achieving a combined ratio of 89.7%. Atlantic Security Holding Corporation (ASHC) reported a strong recovery in asset management income and unrealized gains. BCP Bolivia performed well despite the local economic environment.
Outlook: The company anticipates continued economic recovery in Peru, with GDP expected to grow around 1.5% in 2009 and 4.5% in 2010. The Nuevo Sol is expected to remain strong, with moderate appreciation projected. Loan growth is expected to remain subdued in the short term as the economy stabilizes.
Risks and Contingencies:
- Economic Sensitivity: Adverse changes in the Peruvian economy, including inflation, growth rates, and currency devaluation.
- Political Risk: Potential reversal of market-oriented reforms or failure of economic recovery measures.
- Market Conditions: Increased competition and decreased demand for financial services.
- Regulatory Changes: BCP transitioned to Basel II capital adequacy calculations in July 2009, resulting in a BIS ratio of 14.5% (not directly comparable to the Basel I ratio of 13.5% in 2Q09).
Key Facts for Investor Verification
- Loan Growth Quality: Verify the distinction between currency-driven loan growth (0.7% QoQ) versus real volume growth, as the filing attributes the increase largely to exchange rate movements.
- Provisioning Adequacy: Monitor the PDL coverage ratio (191.7%) and the trend in past due loans (1.55%) to ensure provisions remain sufficient as the economic recovery progresses.
- Non-Recurring Income: Assess the sustainability of earnings given the drop in gains from the sale of securities, which were a significant contributor in the first half of 2009.
- Insurance Performance: Confirm the sustainability of the improved combined ratio (89.7%) in the PPS segment, which significantly boosted overall results.
- Capital Adequacy: Note the shift to Basel II standards; the reported 14.5% BIS ratio is calculated under new methodology and should be compared carefully against future Basel II reports.