BAP

Credicorp Ltd. Second Quarter 2009 Earnings Summary

Business Context and Reporting Period

Credicorp Ltd. (NYSE: BAP), the leading financial services holding company in Peru, reported un-audited consolidated results for the second quarter ended June 30, 2009. The results are presented in nominal U.S. Dollars in accordance with IFRS. The reporting period reflects the company's operations amidst a global recession, with the Peruvian economy absorbing significant market uncertainties. The group's primary subsidiaries include Banco de Crédito del Perú (BCP), Atlantic Security Holding Corporation (ASHC), El Pacífico-Peruano Suiza (PPS), and Prima AFP.

Key Financial Metrics

• Net Income: US$ 115.2 million (attributed to Credicorp), representing a 4.2% increase quarter-over-quarter (QoQ) and a 56.4% increase year-over-year (YoY).
• Earnings Per Share (EPS): US$ 1.44.
• Net Interest Income (NII): US$ 233.5 million, up 13.4% QoQ.
• Net Interest Margin (NIM): Improved to 5.12% from 4.72% in 1Q09.
• Return on Average Equity (ROAE): 25.6%.
• Return on Average Assets (ROAA): 2.2%.
• Efficiency Ratio: 40.7% (down from 44.0% in 1Q09).
• Past Due Loans (PDL) Ratio: 1.38% of total loans.
• Provision Coverage Ratio: 192.9%.
• Total Loans: US$ 10.6 billion, up 4.8% QoQ.
• Total Deposits: US$ 13.7 billion, up 2.9% QoQ.

Material Changes vs. Prior Period

• Loan Portfolio Dynamics: While USD-denominated loan demand remained sluggish (down 2.7% QoQ in average daily balances), the local currency (Nuevo Sol) portfolio grew 4.2% QoQ. The revaluation of the local currency contributed to an overall 4.8% QoQ growth in the total loan book in USD terms.
• Provisions: Total provisions for loan losses increased significantly by 107.0% QoQ to US$ 54.7 million, driven by a conservative coverage policy and growth in the retail segment. Despite this, the PDL ratio remained within management's comfort level.
• Operating Expenses: Reported operating expenses decreased 7.0% QoQ to US$ 205.8 million. This decline was primarily due to a reversal of an extraordinary loss related to the SAR stock option program, rather than a reduction in core personnel or administrative costs, which remained flat.
• Non-Financial Income: Declined 1.8% QoQ to US$ 170.5 million, largely due to lower gains on the sale of securities compared to the previous quarter, though fee income grew 3.7% QoQ.
• Subsidiary Performance:
  • BCP: Reported net income of US$ 88.5 million (down 11.4% QoQ) due to a US$ 12.3 million currency translation loss on dividends and higher taxes. Excluding these non-operating items, BCP's contribution was flat at approximately US$ 98 million.
  • PPS (Insurance): Reported a significant turnaround with US$ 9.7 million in earnings, up from US$ 5.2 million in 1Q09, driven by improved technical results and financial income.
  • BCP Bolivia: Earnings contribution dropped to US$ 6.8 million from US$ 8.5 million due to the challenging economic and political environment in Bolivia.

Outlook, Risks, and Management Commentary

Management indicated that the Peruvian economy is showing signs of recovery, with a turning point in credit demand evident in the second quarter. The Central Bank of Peru reduced its reference interest rate significantly (from 6.0% to 2.0% between March and July) to stimulate the economy. Credicorp expects public investment to be the main driver of growth for the remainder of 2009, while private sector dynamism remains limited.

Risks and Contingencies:

• Economic Uncertainty: Continued global recession impacts and potential adverse changes in the Peruvian political situation.
• Portfolio Quality: While no material deterioration was recorded, management is closely monitoring delinquencies, particularly in the retail segment, and has increased provisions to maintain a coverage ratio near 200%.
• Currency Volatility: The appreciation of the Nuevo Sol created accounting translation losses for BCP (though neutral at the consolidated level) and impacts the valuation of foreign currency assets and liabilities.

Key Facts for Investor Verification

• Adjusted BCP Performance: Verify the "real" contribution of BCP by excluding the US$ 12.3 million currency translation loss and non-deductible tax items, which masks the underlying operational stability.
• Provision Adequacy: Confirm that the 107% QoQ increase in provisions is sustainable and aligned with the 1.38% PDL ratio and 193% coverage ratio.
• Operating Cost Structure: Distinguish between the reported 7% drop in operating expenses (driven by one-time SAR option gains) and the flat core operating costs to assess true efficiency trends.
• Loan Growth Quality: Assess the sustainability of the 4.8% loan growth, noting it is partially driven by currency revaluation and local currency lending, while USD lending remains weak.
• Insurance Turnaround: Monitor the sustainability of the PPS insurance segment's recovery, which moved from a loss in 2Q08 to a US$ 9.7 million profit in 2Q09.