Credicorp Ltd. Q3 2015 Financial Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), a diversified financial services group based in Peru, reported unaudited consolidated results for the third quarter ended September 30, 2015. The results are presented in Nuevos Soles (S/.) in accordance with IFRS. The reporting period reflects operations across banking (BCP, Mibanco, BCP Bolivia, ASB), insurance (Grupo Pacifico), pension funds (Prima AFP), and asset management (Credicorp Capital).
Key Financial Metrics
| Metric | 3Q 2015 | 2Q 2015 | 3Q 2014 |
|---|---|---|---|
| Net Income (Attributed to Credicorp) | S/. 807.1 million | S/. 749.3 million | S/. 645.4 million |
| Recurring Net Income | S/. 746.0 million | S/. 742.5 million | S/. 696.8 million |
| Net Interest Income (NII) | S/. 1,866.9 million | S/. 1,837.2 million | S/. 1,686.2 million |
| Net Interest Margin (NIM) | 5.49% | 5.70% | 5.75% |
| Cost of Risk | 2.02% | 2.07% | 2.29% |
| Efficiency Ratio | 41.7% | 42.3% | 41.5% |
| Return on Average Equity (ROAE) | 21.6% | 20.7% | 19.7% |
| Total Loans | S/. 87,842.7 million | S/. 83,503.2 million | S/. 75,680.6 million |
| Total Deposits | S/. 86,426.7 million | S/. 80,910.6 million | S/. 74,863.2 million |
| Non-Performing Loan (NPL) Ratio | 3.40% | 3.56% | 3.26% |
| Regulatory Capital Ratio (BAP) | 1.15x | 1.19x | 1.13x |
Material Changes vs. Prior Period
- Profitability: Net income attributed to Credicorp increased 7.7% quarter-over-quarter (QoQ) and 25.1% year-over-year (YoY). Recurring net income grew 0.5% QoQ and 7.1% YoY, driven by solid loan growth and improved operating efficiency.
- Loan Growth: Total loans expanded 5.2% QoQ and 16.1% YoY. Real loan growth was 4.6% QoQ. Wholesale Banking led expansion (+3.5% QoQ), followed by Retail Banking (+2.9% QoQ). Mibanco showed initial recovery in loan origination.
- Net Interest Margin: NIM decreased 21 basis points (bps) QoQ to 5.49%. The decline was attributed to increased use of Central Bank (BCRP) instruments inflating interest-earning assets, higher loan disbursements late in the quarter, expansion into lower-margin segments, and a slight rise in funding costs.
- Portfolio Quality: The Cost of Risk improved to 2.02%, the lowest level in two years. The NPL ratio decreased 16 bps QoQ to 3.40%, and the Past-Due Loan (PDL) ratio fell 15 bps to 2.57%. Coverage ratios for PDLs and NPLs improved to 162.8% and 123.2%, respectively.
- Non-Financial Income: Increased 3.0% QoQ, primarily due to a 17.6% rise in gains on foreign exchange transactions, offsetting a 2.0% decline in fee income.
- Insurance: Underwriting results improved 4.1% QoQ due to lower acquisition costs and higher net earned premiums in life insurance, despite higher claims in Property & Casualty.
Outlook, Risks, and Management Commentary
- Economic Outlook: Management forecasts Peru's GDP growth for 2015 at 2.5% - 3.0%, with 2016 expected to grow around 3.2% driven by mining operations (Las Bambas, Cerro Verde). Risks include the potential impact of an El Niño phenomenon, which could reduce growth to 1.2% in 2016 if severe.
- Monetary Policy: The Central Bank of Peru (BCRP) is expected to gradually raise the reference rate from 3.5% to 4.0% by July 2016 to manage inflation expectations.
- De-dollarization: BCP Stand-alone is exceeding BCRP targets for reducing foreign currency (FC) loans. The FC loan portfolio subject to the plan contracted 25% by September 2015 against a 10% target for December 2015.
- Capitalization: Credicorp maintains a comfortable capital position at 1.15 times the regulatory requirement. BCP Stand-alone's Common Equity Tier 1 (CET1) ratio improved to 9.00% QoQ, aided by retained earnings and a correction in the calculation methodology regarding deferred taxes.
- Operational Efficiency: The efficiency ratio improved 60 bps QoQ to 41.7%, driven by lower salary and employee benefit expenses and higher operating income.
Investor Verification Checklist
- Recurring vs. Non-Recurring Income: Verify the composition of the S/. 61.1 million non-recurring income in 3Q15, which significantly boosted reported net income compared to recurring metrics.
- NIM Compression Drivers: Assess the sustainability of the NIM decline (21 bps QoQ) and the impact of BCRP instrument usage on future margins.
- De-dollarization Progress: Confirm the continued reduction of foreign currency loan exposure and its effect on interest rate risk and funding costs.
- Mibanco Integration: Monitor the pace of loan growth and portfolio quality improvement at Mibanco following the acquisition and clean-up process.
- El Niño Exposure: Evaluate the potential impact of the El Niño weather phenomenon on the Peruvian economy, specifically the fishing and agricultural sectors, and subsequent credit quality.