Credicorp Ltd. Second Quarter 2012 Results Summary
Business Context and Reporting Period
Credicorp Ltd. (NYSE: BAP), the leading financial services holding company in Peru, reported unaudited consolidated results for the second quarter ended June 30, 2012. The company operates primarily through its subsidiaries: Banco de Crédito del Perú (BCP), Atlantic Security Bank (ASB), Pacifico Grupo Asegurador (PGA), and Prima AFP. Results are reported in nominal U.S. Dollars in accordance with IFRS.
Key Financial Metrics
- Net Income: US$171.9 million (2Q12), a 9.1% decrease from 1Q12 but a 3.4% increase year-over-year (1H12 total: US$361.1 million).
- Profitability: Return on Average Equity (ROAE) was 19.2% for the quarter (down from 22.0% in 1Q12); Return on Average Assets (ROAA) was 2.0%.
- Revenue: Net Interest Income (NII) grew 5.8% QoQ to US$393.9 million. Non-financial income expanded 5.4% QoQ to US$250.8 million.
- Loan Portfolio: Total loans grew 6.3% QoQ to US$19.2 billion, driven by retail banking expansion.
- Provisions: Net provisions for loan losses surged 59.2% QoQ to US$110.9 million due to conservative provisioning policies.
- Operating Expenses: Increased 8.7% QoQ to US$337.6 million, impacted by IT outsourcing and branch expansion.
- Asset Quality: Past Due Loan (PDL) ratio was 1.74%; PDL ratio at 90+ days remained stable at 1.16%. Coverage of PDLs stood at 186.8%.
- Capital: Net shareholders' equity increased 5.2% QoQ to US$3.68 billion.
Material Changes vs. Prior Period
- Earnings Decline: The 9.1% QoQ drop in net earnings was primarily driven by a 59.2% increase in loan loss provisions and an 8.7% rise in operating expenses, offsetting strong revenue growth.
- Provisioning Policy: Management adopted a conservative approach, increasing provisions to cover 95% of the high end of expected losses for new low-income retail segments, exceeding regulatory requirements by approximately US$19 million.
- Insurance Recovery: The insurance business (PGA) reported a US$39 million underwriting result, a four-fold improvement over 1Q12, as claims normalized.
- FX Impact: A translation loss of US$14.7 million (compared to a gain in 1Q12) contributed to the earnings decline due to the strengthening of the U.S. Dollar.
- BCP Performance: The primary subsidiary, BCP, saw its contribution drop 25% QoQ to US$124.2 million, despite strong loan growth, due to higher provisions and operating costs.
Guidance, Outlook, and Risks
- Management Commentary: Management emphasized that the earnings decline masks robust business expansion and strong market performance. The high provisioning is a strategic decision to manage risk while penetrating lower-income segments.
- Operational Changes: Significant one-off costs were incurred related to the outsourcing of IT operations (to TATA, Everis, and IBM) and the consolidation of new investment banking acquisitions (Correval and IM Trust).
- Risks:
- Credit Risk: Deterioration in the credit card segment and the learning curve associated with expanding into lower-income demographics.
- Regulatory: Potential changes in Bolivian banking laws regarding profit taxation and lending rates; ongoing reform of Peru's Private Pension System (SPP) which may impact fee structures for Prima AFP.
- Macroeconomic: Volatility in international markets (European sovereign crisis) affecting securities gains and exchange rates.
- Outlook: The company expects the second half of the year to be stronger in income generation. Management remains confident in the long-term growth story despite short-term earnings pressure from strategic investments and conservative risk management.
Investor Verification Checklist
- Verify the sustainability of the 6.3% loan growth rate in the retail segment against the rising PDL ratio (1.74%).
- Assess the long-term impact of the new conservative provisioning policy on future earnings volatility.
- Monitor the integration and cost-benefit realization of the IT outsourcing initiative and new investment banking acquisitions.
- Review the progress of the Peruvian Private Pension System (SPP) reform and its potential impact on Prima AFP's fee income.
- Track the normalization of the insurance underwriting result following the strong recovery in 2Q12.