Credicorp Ltd. 3Q 2007 Earnings Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), the leading financial services holding company in Peru, reported unaudited consolidated results for the third quarter ended September 30, 2007. The results are presented in nominal U.S. Dollars in accordance with IFRS. The reporting period was significantly impacted by a magnitude 8.0 earthquake in southern Peru on August 15, 2007, which adversely affected the insurance subsidiary, El Pacífico Peruano Suiza (PPS).
Key Financial Metrics
- Net Income: US$ 90.3 million (attributed to Credicorp), representing a 75.9% increase year-over-year (YoY) and 3.3% quarter-over-quarter (QoQ).
- Earnings Per Share: US$ 1.13.
- Return on Average Equity (ROAE): 23.02% for the quarter (up from 16.3% YoY).
- Net Interest Margin (NIM): 5.2% (down from 5.5% in 2Q07 due to funding costs).
- Loan Portfolio: Total loans reached US$ 7.51 billion, growing 6.8% QoQ and 34.3% YoY.
- Asset Quality: Past Due Loans (PDL) ratio improved to 0.91% (from 0.96% in 2Q07 and 1.56% in 3Q06). Coverage ratio stood at 299.4%.
- Efficiency Ratio: Improved to 40.8% (from 42.2% in 2Q07).
- Shareholders' Equity: US$ 1.60 billion.
Material Changes vs. Prior Period
- Revenue Growth: Net interest income grew 1.1% QoQ to US$ 161.1 million, while non-financial income rose 4.6% QoQ to US$ 112.9 million. Fee income specifically surged 13.4% QoQ.
- Translation Gains: A significant positive translation result of US$ 13.8 million (vs. US$ 1.7 million in 2Q07) was recorded due to the appreciation of the Peruvian Nuevo Sol against the U.S. Dollar.
- Insurance Impact: The PPS subsidiary reported a negative contribution of US$ 2.96 million due to earthquake-related claims (approx. US$ 44 million total claims, with US$ 8 million net cost after reinsurance). This contrasts with a positive contribution of US$ 5.13 million in 2Q07.
- BCP Performance: The primary banking subsidiary, Banco de Crédito del Perú (BCP), reported net income of US$ 90.7 million (up 10.6% QoQ), contributing US$ 88.2 million to the group.
- Provisions: Net provisions increased to US$ 7.9 million (from US$ 6.1 million in 2Q07) in line with loan growth, though recoveries remained strong at US$ 8.2 million.
Outlook, Risks, and Management Commentary
- Expansion Strategy: Management highlighted an aggressive network expansion, with branches increasing to 254 and "Agentes BCP" reaching 1,017. This expansion is projected to continue, potentially pressuring operating costs and the efficiency ratio in the near future.
- Market Conditions: The Peruvian economy showed strong growth (projected >7% for 2007), driven by private investment and domestic demand. However, international market volatility reduced gains from the sale of securities.
- Risks: Key risks include adverse changes in the Peruvian economy (inflation, currency devaluation), political instability, and increased competition. The earthquake highlighted the exposure of the insurance segment to catastrophic events, though reinsurance mitigated the impact.
- De-dollarization: The process of de-dollarization continued, with loans in Nuevos Soles comprising 29% of the portfolio (up 3% QoQ) and deposits in local currency rising to 45.6%.
Investor Verification Checklist
- Verify the sustainability of the 23.02% ROAE given the one-time translation gains and the expected rise in operating costs from network expansion.
- Monitor the insurance subsidiary (PPS) recovery trajectory and the adequacy of reinsurance coverage for future catastrophic events.
- Assess the impact of rising funding costs on Net Interest Margin, which dropped to 5.2% despite strong loan growth.
- Confirm the "real" deposit growth rate, as reported figures include US$ 500 million in structured securitized bonds booked as deposits.
- Track the performance of the pension fund subsidiary (Prima AFP) following its sales force reduction and cost-cutting measures.