Credicorp Ltd. Q1 2016 Financial Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), a diversified financial services group headquartered in Bermuda with primary operations in Peru, reported unaudited consolidated results for the first quarter of 2016 (ended March 31, 2016). The results are reported in Peruvian Soles (S/) in accordance with IFRS. The group's portfolio includes banking (BCP, Mibanco, BCP Bolivia, ASB), insurance (Grupo Pacifico), pension funds (Prima AFP), and investment management (Credicorp Capital).
Key Financial Metrics
| Metric | 1Q 2016 | 4Q 2015 | 1Q 2015 |
|---|---|---|---|
| Net Income (Attributed to Credicorp) | S/ 795.6 million | S/ 731.1 million | S/ 804.7 million |
| Recurring Net Income | S/ 823.3 million | S/ 769.6 million | S/ 696.2 million |
| Net Interest Income (NII) | S/ 1,946.7 million | S/ 1,975.4 million | S/ 1,785.4 million |
| Net Interest Margin (NIM) | 5.33% | 5.55% | 5.73% |
| Cost of Risk | 1.98% | 2.23% | 2.46% |
| Efficiency Ratio | 42.2% | 44.4% | 41.8% |
| Return on Average Equity (ROAE) | 19.4% | 18.7% | 22.8% |
| Total Loans | S/ 91,501 million | S/ 90,328 million | S/ 81,621 million |
| Total Deposits | S/ 92,758 million | S/ 90,593 million | S/ 79,143 million |
| Non-Performing Loan (NPL) Ratio | 3.53% | 3.41% | 3.40% |
| Regulatory Capital Ratio (BIS) | 15.00% | 14.34% | 14.55% |
Material Changes vs. Prior Periods
- Profitability: Reported net income attributed to Credicorp increased 8.8% quarter-over-quarter (QoQ) but declined 1.1% year-over-year (YoY). However, recurring net income grew 7.0% QoQ and 18.3% YoY, excluding a S/ 27.6 million translation loss and non-recurring items.
- Loan Growth: Total loans expanded 1.3% QoQ and 12.1% YoY. FX-adjusted loan growth was 2.3% QoQ and 9.2% YoY, driven by Corporate Banking, SME-Business, and Mortgage segments.
- Net Interest Margin: NIM contracted 22 basis points (bps) QoQ and 40 bps YoY to 5.33%. This was primarily due to higher interest expenses on deposits, loan expansion in lower-margin segments (Wholesale and Mortgage), and a strategic reduction in interest rates to improve risk profiles.
- Asset Quality: The cost of risk improved significantly, falling to 1.98% (down 25 bps QoQ and 48 bps YoY) due to low growth in gross provisions and increased reversals, particularly at Mibanco. However, the NPL ratio rose slightly to 3.53% (+12 bps QoQ) due to an increase in internal overdue loans.
- Non-Financial Income: Declined 3.3% QoQ and 13.2% YoY, driven by lower gains on foreign exchange transactions and fee income seasonality.
- Insurance: The underwriting result fell 11.5% QoQ due to higher acquisition costs in Property & Casualty (P&C) and Life lines, though it increased 23.6% YoY.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful de-dollarization of the loan portfolio (39.7% in FC vs. 46.6% in 1Q15) and the improvement in the cost of risk. The efficiency ratio improved 220 bps QoQ due to significant reductions in operating expenses, offsetting a slight decrease in operating income.
Economic Outlook: The Peruvian economy grew 4.0% YoY in 1Q16, with a two-speed dynamic between primary (7.9%) and non-primary (2.9%) sectors. Inflation decreased to 4.3% annually. The Central Reserve Bank of Peru (BCRP) maintained the reference rate at 4.25%.
Risks and Contingencies:
- Macroeconomic: Adverse changes in the Peruvian economy, including inflation, currency devaluation, and political instability.
- Portfolio Quality: Delinquency ratios are distorted by high levels of collateral (commercial real estate) in SME and Mortgage segments, which delays charge-offs despite adequate provisions.
- Market Conditions: Increased competition and decreased demand for financial services.
Key Facts for Investor Verification
- Recurring vs. Reported Income: Verify the distinction between reported net income (impacted by translation losses) and recurring net income, which shows stronger underlying growth (+18.3% YoY).
- De-dollarization Progress: Confirm the continued reduction in foreign currency loan exposure (39.7% of total loans) and its impact on interest rate risk.
- Cost of Risk Trajectory: Monitor the sustainability of the declining cost of risk (1.98%) amidst a rising NPL ratio (3.53%) and the specific impact of reversals at Mibanco.
- Margin Pressure: Assess the long-term impact of the NIM contraction (5.33%) driven by strategic rate reductions and expansion into lower-margin segments.
- Capital Adequacy: Note the strong capitalization levels with a BIS ratio of 15.00%, well above regulatory requirements.