BAP

Credicorp Ltd. Q3 2008 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, 2008. The filing covers operations across its primary subsidiaries: Banco de Crédito del Perú (BCP), Atlantic Security Holding Corporation (ASHC), El Pacífico-Peruano Suiza (PPS), and Prima AFP. Results are presented in nominal U.S. Dollars in accordance with IFRS.

Key Financial Metrics

• Net Income: US$ 92.6 million for 3Q08 (up 25.7% QoQ; up 2.5% YoY). Year-to-date (YTD) net income reached US$ 344.3 million (up 34.1% YoY).
• Earnings Per Share: US$ 1.16 for 3Q08.
• Return on Average Equity (ROAE): 20.7% for 3Q08; 25.7% annualized YTD.
• Net Interest Margin (NIM): 4.3% for 3Q08 (down from 4.8% in 2Q08).
• Loan Portfolio: Total loans grew 6.9% QoQ and 32.8% YoY to US$ 9.93 billion.
• Asset Quality: Past Due Loans (PDL) ratio remained strong at 0.78% with a coverage ratio of 297.5%.
• Efficiency Ratio: 42.6% for 3Q08 (deteriorated from 37.3% in 2Q08 due to lower operating income and higher expenses).
• Translation Results: Positive US$ 7.0 million (a significant improvement from a US$ 61.5 million loss in 2Q08).

Material Changes vs. Prior Period

• Revenue Composition: Net Interest Income declined 7.6% QoQ to US$ 200.4 million. This was driven by a shift to lower-yielding liquid assets (due to increased Central Bank reserve requirements) and a defensive shift from Soles to Dollars to reduce currency exposure. Lending rates actually increased, but were offset by lower yields on non-lending assets.
• Non-Financial Income: Declined 7.0% QoQ to US$ 130.9 million, impacted by US$ 6.6 million in losses on securities sales and reduced FX transaction income following a period of high volatility. Fee income remained robust, growing 5.9% QoQ.
• Provisioning: Net provisions for loan losses increased 81.0% QoQ to US$ 16.7 million, reflecting a conservative provisioning policy and loan growth, despite stable asset quality.
• Operating Expenses: Increased 11.2% QoQ to US$ 213.8 million, primarily due to network expansion (310 branches by end of September) and higher personnel costs.

Segment Performance and Outlook

• BCP (Banking): Contributed US$ 90.7 million (up 19% QoQ). Loan growth remained strong across all segments (Retail +6.3%, Middle Market +9.6%, Corporate +5.6%). The bank maintained high liquidity and a conservative investment portfolio, insulating it from the worst of the international financial crisis.
• BCP Bolivia: Reported strong growth with US$ 11.0 million earnings (up 56% YoY), maintaining a 13.5% market share.
• ASHC (Asset Management): Earnings dropped 19% QoQ to US$ 4.2 million due to increased provisions for investment portfolio losses (US$ 5.1 million recognized) and unrealized losses of US$ 22 million impacting equity.
• PPS (Insurance): Remained the primary drag on results, contributing a loss of US$ 3.6 million. While the Life segment (PV) was profitable, the Property & Casualty (P&C) segment continued to suffer from high claim rates, particularly in the Fire and Health lines.
• Prima AFP: Reported US$ 1.7 million earnings, depressed by currency translation effects but showing strong underlying operational growth. YTD results were above projections.
• Outlook: Management expects the Peruvian economy to continue growing, though at a slower pace in 2009 due to higher interest rates and reduced disposable income. The company emphasizes its strong capitalization (12.25% BIS ratio for BCP), high liquidity, and diversified revenue streams as buffers against the global financial crisis.

Investor Verification Checklist

• Insurance Turnaround: Verify the progress of PPS's restructuring plan to reduce the combined ratio and achieve profitability in the P&C segment.
• NIM Trajectory: Monitor if the Net Interest Margin stabilizes as the impact of higher Central Bank reserve requirements and asset re-composition fully settles.
• Asset Quality Trends: Track the PDL ratio and coverage ratios closely, given the increase in provisioning and the potential lag effects of the global economic slowdown on loan performance.
• FX Exposure: Confirm the effectiveness of the company's hedging strategies and asset-liability management in mitigating future currency translation volatility.
• Cost Discipline: Assess whether the efficiency ratio improves in subsequent quarters as the benefits of network expansion materialize against the backdrop of rising operating costs.