BAP

Credicorp Ltd. Q3 2005 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 consolidated results for the quarter and nine months ended September 30, 2005. The company operates through major subsidiaries including Banco de Crédito del Perú (BCP), Atlantic Security Holding Corporation (ASHC), and El Pacífico-Peruano Suiza (PPS). The reporting period reflects a strong economic recovery in Peru, characterized by GDP growth and improved loan quality.

Key Financial Metrics

Note: Negative provisions indicate a net benefit from recoveries exceeding new provisions.

Material Changes vs. Prior Period

• Earnings Growth: Net income attributable to shareholders increased 44.4% year-over-year in Q3 and 43.5% for the nine-month period. This was driven by higher Net Interest Margins (NIM), loan volume growth, and increased non-interest income.
• Loan Quality Improvement: The past-due loan ratio improved significantly from 4.8% in September 2004 to 2.5% in September 2005. Consequently, recoveries of previously charged-off loans exceeded provision requirements, resulting in a net positive impact of $4.9 million in Q3 and $9.9 million year-to-date.
• Efficiency Gains: The efficiency ratio (operating expenses to total income) improved from 48.72% in the prior year to 42.28% year-to-date.
• Insurance Segment Decline: The insurance business (PPS) saw a drop in earnings contribution to $2.7 million in Q3 (down from $3.6 million in Q3 2004) due to higher claims and the impact of prior-year merger accounting adjustments.
• Translation Losses: Results were partially offset by a translation loss of $5.7 million in Q3 due to the devaluation of the Peruvian Nuevo Sol.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes the recovery to a conservative loan provisioning policy applied during the previous crisis, which has now yielded low provision requirements and significant recoveries. The strategy to develop retail and transactional banking has successfully driven fee income growth.
• New Ventures: The newly launched pension fund business (Prima AFP) is performing better than expected regarding portfolio growth, though it is currently incurring operating losses (approx. $3.1 million in Q3) as it builds its client base.
• Stock Options: Strong stock appreciation led to an extraordinary provision for the Stock Options Plan, impacting operating expenses.
• Risks and Contingencies:
  • Currency Risk: Continued devaluation of the Nuevo Sol creates translation losses on consolidated results.
  • Insurance Claims: The insurance segment faces volatility in claims ratios, particularly in health and property lines.
  • Regulatory Changes: The suspension of inflation-adjusted accounting in Peru (effective Jan 1, 2005) has transitioned reporting to IFRS, altering historical comparability.

Key Facts for Investor Verification

• Loan Quality Sustainability: Verify if the 2.5% past-due ratio and 172.4% coverage ratio are sustainable given the economic cycle.
• Insurance Segment Turnaround: Monitor PPS's combined ratio and claims trends to determine if the earnings decline is a temporary anomaly or a structural issue.
• Prima AFP Profitability: Track the timeline for the pension fund subsidiary to reach break-even, as it is currently a drag on earnings.
• Currency Exposure: Assess the impact of further Nuevo Sol devaluation on future translation results and the company's hedging strategies.
• Fee Income Growth: Confirm the continued growth in non-interest income, specifically from credit/debit cards and fund transfers, as a driver of margin expansion.