Business context and reporting period
Credicorp Ltd. filed this Form 20-F for the fiscal year ended December 31, 2019; it is an annual report, not a standalone 2019 fourth-quarter filing. Credicorp is a Bermuda holding company focused mainly on Peru, with banking, microfinance, insurance and pensions, and investment banking and wealth management businesses. Financial statements are prepared under IFRS as issued by the IASB and presented in Peruvian soles (S/). The filing was dated May 29, 2020, after Credicorp invoked SEC COVID-19 filing relief; pandemic restrictions in Peru delayed preparation.
Financial performance and position
Amounts below are in S/ millions unless stated otherwise. The 2019 consolidated financial statements received an unqualified audit opinion. Management reported effective internal control over financial reporting; the auditor identified expected credit losses and annuity mathematical reserves as critical audit matters.
| Metric | 2018 | 2019 | Change or context |
|---|---|---|---|
| External income | 18,025 | 19,699 | Up 9.3%; filing definition includes interest and similar income, commissions and net earned premiums |
| Net interest income | 8,489 | 9,091 | Up 7.1% |
| Net profit | 4,071 | 4,352 | Up 6.9% |
| Net profit attributable to Credicorp shareholders | 3,984 | 4,265 | Up 7.1%; basic EPS S/53.66 versus S/50.13 |
| Net interest margin | 5.30% | 5.42% | Up 12 basis points, per reported selected ratio |
| Cost of risk | 1.38% | 1.60% | Up 22 basis points |
| Total assets | 177,263 | 187,877 | Up 6.0% |
| Total loans | 110,759 | 115,610 | Up 4.4%; net loans after allowance were 110,486 |
| Total deposits | 104,551 | 112,005 | Up 7.1% |
| Total liabilities | 152,997 | 161,130 | Up 5.3% |
| Total equity | 24,266 | 26,746 | Up 10.2%; shareholder-attributable equity was 26,238 |
- Credit quality: Net provisions after recoveries were S/1,846 million, up 20.5%. The internal overdue ratio edged up to 2.86% from 2.82%; the non-performing loan ratio improved to 3.88% from 3.97%. Allowance for loan losses was S/5,508 million, or 4.43% of total loans.
- Profitability and efficiency: ROAE was 17.03%, down from 17.47%; ROAA was 2.34%, up from 2.29%. The reported operating efficiency ratio improved to 42.37% from 43.82%.
- Cash flow: Net cash from operating activities was S/6,934 million in 2019, versus an outflow of S/252 million in 2018. Investing activities provided S/726 million; financing activities used S/3,552 million. Cash and cash equivalents ended at S/25,974 million, up from S/22,161 million. The filing attributes the operating cash-flow swing in part to changes in loans, deposits and other balance-sheet items.
- Funding and liquidity: Deposits were the main funding source; deposits represented 78.8% of total funding, compared with 76.7% in 2018. Bonds and notes issued were S/14,946 million, down 3.3%; amounts due to banks and correspondents were S/8,842 million. BCP and Mibanco’s December 2019 average daily liquidity ratios were 29.40% in soles and 48.78% in foreign currency, above regulatory minima of 8% and 20%.
- Capital: Credicorp’s regulatory capital was S/25,732 million against S/21,622 million of requirements, a coverage ratio of 1.19 versus the required 1.00. The group BIS ratio was 16.65%. BCP Stand-alone reported a 14.47% BIS ratio and 12.35% CET1 ratio.
- Dividend: The 2019 dividend was S/30 per share, declared in February 2020 and paid May 8, 2020. The reported payout ratio was 55.91%; the dividend policy generally targets at least 25% of consolidated net profit, subject to conditions and Board discretion.
Material changes versus the prior comparable period
- Profit attributable to shareholders recovered from a 2.6% decline in 2018 to 7.1% growth in 2019. Higher net interest income, commissions and securities gains contributed; higher provisions, expenses and taxes partly offset growth.
- Loan growth was led by retail banking, notably mortgages, consumer loans, credit cards and SME-Pyme. Higher-risk digital consumer lending and deterioration in some SME-Pyme and credit-card exposures increased credit costs.
- Credicorp acquired 77.46% of Colombian microfinance bank Bancompartir in December 2019 and completed its acquisition of Colombian investment adviser Ultraserfinco in November. It also acquired Culqi, Multicaja Prepago and Tenpo during 2019. Bancompartir contributed only from December in the consolidated results.
- IFRS 16 was adopted in 2019: at transition, the Group recognized approximately S/856 million of right-of-use assets and S/853 million of lease liabilities. Lease expense presentation changed, including depreciation of right-of-use assets.
- Credicorp changed the discount-rate method for annuity reserves to market rates in 2019. The change increased technical reserves by S/666.6 million, recognized in other comprehensive income/equity and not applied retrospectively.
Outlook, risks, contingencies and unusual items
- COVID-19 outlook: Management said the pandemic’s full financial impact was not reasonably quantifiable. It expected lower business activity and interest rates to pressure income, market volatility to affect investment values, and weaker economic conditions to increase expected credit losses. Further material provisions were possible. No COVID-related adjustment was recorded in the December 31, 2019 statements.
- Peru’s nationwide lockdown was extended through June 30, 2020. Management described customer payment relief, government-backed Reactiva Peru and FAE lending programs, and reductions in dividends at most subsidiaries to support capital. It reported adequate liquidity and capital at the first quarter of 2020.
- Management highlighted exposure to retail, tourism, transportation, restaurants, microfinance, residential real estate and other affected sectors. LATAM Airlines Group filed for U.S. Chapter 11 protection on May 25, 2020; Credicorp was reviewing the filing and its options. The Group had paid S/669 million for LATAM Pass miles under a contract, with miles to be delivered through 2024.
- Other material risks include Peruvian political and economic conditions, competition and margin pressure, loan deterioration, interest rates, currency movements, insurance claims and reserve estimates, regulatory changes, cybersecurity and operational continuity, and pension withdrawals or reform. The filing notes that roughly 91% of Credicorp income is generated by Peruvian subsidiaries.
- Legal and regulatory matters: ASB faces Madoff Trustee claims seeking approximately US$120 million and Fairfield Liquidator claims seeking US$115.2 million; the claims concern substantially the same investments and are pending. Management says ASB has substantial defenses. Peruvian regulators also initiated sanctioning proceedings concerning delayed disclosure of political contributions. Credicorp disclosed US$3.65 million of contributions to a 2011 presidential campaign and S/711,000 of 2016 contributions by subsidiaries; management did not expect material liability.
- Accounting and other unusual items: The 2019 allowance for credit losses and annuity reserves were critical audit matters involving significant estimation judgment. The audit excluded newly acquired Bancompartir and Ultraserfinco from the 2019 internal-control assessment; together they were small relative to Group assets. Management and the auditor reported no material weakness in the controls assessed.
Important facts for investors to verify
- Reconcile the reported net interest margin of 5.42% with the detailed average-balance calculation elsewhere in the filing, which reports 5.54%, and confirm the definitions used.
- Track post-2019 COVID-19 loan performance, payment deferrals, expected-loss provisions, deposit behavior and liquidity; the 2019 results predate the main pandemic disruption.
- Review credit deterioration and coverage by segment, especially consumer, credit cards and SME-Pyme, and assess whether reported overdue and non-performing ratios capture restructured or delayed accounts adequately.
- Assess capital and dividend capacity at the regulated subsidiaries, including the impact of reduced subsidiary dividends and pension-fund withdrawals on Credicorp’s holding-company cash flows.
- Follow the Madoff and Fairfield appeals and the Peruvian proceedings over political-contribution disclosures; confirm whether any liability or sanctions emerge.
- Verify the integration, purchase accounting and performance of Bancompartir, Ultraserfinco and other 2019 acquisitions, and monitor the LATAM Pass contract exposure following LATAM’s Chapter 11 filing.