Credicorp Ltd. 4Q and Full Year 2008 Earnings Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), Peru's leading financial services holding company, reported un-audited results for the fourth quarter and full year ended December 31, 2008. The reporting period coincided with the peak of the global financial crisis, significantly impacting investment portfolios and currency valuations. Results are presented in nominal U.S. Dollars in accordance with IFRS.
Key Financial Metrics
| Metric | 4Q 2008 | 4Q 2007 | Full Year 2008 | Full Year 2007 |
|---|---|---|---|---|
| Net Income (Attributed to Credicorp) | $13.5 million | $94.0 million | $357.7 million | $350.7 million |
| Net Income Per Share | $0.17 | $1.18 | $4.49 | $4.40 |
| Net Interest Income | $214.2 million | $174.8 million | $822.9 million | $634.0 million |
| Non-Financial Income | $159.4 million | $122.0 million | $592.5 million | $454.2 million |
| Total Loans | $10.55 billion | $8.25 billion | $10.55 billion | $8.25 billion |
| Total Deposits | $13.78 billion | $11.35 billion | $13.78 billion | $11.35 billion |
| Net Shareholders' Equity | $1.69 billion | $1.68 billion | $1.69 billion | $1.68 billion |
| Return on Average Equity (ROAE) | 3.1% | 22.9% | 22.3% | 22.9% |
| Efficiency Ratio | 46.4% | 46.2% | 41.7% | 43.0% |
| Past Due Loans (PDL) Ratio | 0.79% | 0.75% | 0.79% | 0.75% |
| Coverage Ratio (PDL) | 270.7% | 343.2% | 270.7% | 343.2% |
Material Changes vs. Prior Period
- Quarterly Earnings Collapse: 4Q08 net income dropped 85% quarter-over-quarter and 86% year-over-year. This decline was driven by non-recurring charges totaling approximately $84.3 million, comprising a $40.8 million impairment of unrealized losses on proprietary investments and a $43.5 million provision for the alleged Madoff fraud.
- Full Year Resilience: Despite the Q4 shock, full-year 2008 net income grew 2% compared to 2007, demonstrating the strength of the core banking business.
- Loan Growth: The loan portfolio grew 28.4% year-over-year, with corporate loans leading at 11.6% QoQ growth. However, growth slowed in December.
- Net Interest Margin (NIM): NIM improved to 4.9% in 4Q08 from 4.3% in 3Q08, aided by eased reserve requirements and a shift in deposit mix toward lower-cost demand accounts.
- Translation Losses: A $32 million translation loss occurred in 4Q08 due to the revaluation of the U.S. dollar against the Peruvian Nuevo Sol.
Guidance, Outlook, and Risks
- Management Commentary: Management characterizes the impact of the financial crisis as "moderate" relative to the severity of global events. Operating results before non-recurring items were in line with aggressive projections. The company expects the impaired securities (mostly AAA fixed income) to offer upside as markets normalize.
- Madoff Provision: The $43.5 million provision is intended to cover all potential losses and contingencies related to the Atlantic Blue Chip Fund and direct exposure. Management views this as a one-off event.
- Currency Strategy: Credicorp is actively reducing its Nuevos Soles holdings to eliminate earnings volatility from currency translation, a process expected to be nearly complete by the end of 1Q09.
- Outlook: The Peruvian economy is expected to slow in 2009 due to the global recession, but domestic demand remains a key support. The company anticipates continued strong performance in its core banking segments.
- Risks: Key risks include adverse changes in the Peruvian economy (inflation, growth, currency devaluation), political instability, and continued volatility in international financial markets affecting investment portfolios.
Investor Verification Checklist
- Non-Recurring Charges: Verify the composition and recoverability of the $84.3 million in non-recurring charges (Madoff provision and investment impairments).
- Core Operating Performance: Analyze earnings excluding the $84.3 million charges to assess the true trajectory of the core banking business (reported as $97.8 million for 4Q08).
- Loan Quality Trends: Monitor the Past Due Loan (PDL) ratio and coverage ratio closely, as the slowdown in loan growth in December may signal future credit quality pressures.
- Currency Exposure: Confirm the reduction of Nuevos Soles exposure to mitigate future translation losses.
- Subsidiary Performance: Review the divergent performance of subsidiaries: strong growth in BCP (Banking) vs. significant losses in ASHC (Asset Management) and PPS (Insurance) due to market valuations.