Credicorp Ltd. Third Quarter 2011 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 third quarter ended September 30, 2011. The results are presented in nominal U.S. Dollars in accordance with IFRS. The reporting period followed a dynamic first half of the year, though the quarter was impacted by political uncertainty during the Peruvian presidential elections and volatility in international markets.
Key Financial Metrics
- Net Income: US$ 170.9 million (attributable to Credicorp), representing a 9.4% increase year-over-year (YoY) but a 1.9% decrease quarter-over-quarter (QoQ).
- Operating Income: US$ 240.5 million, up 15.2% QoQ and 12.4% YoY.
- Return on Average Equity (ROAE): 22.6% (24.2% in 2Q11).
- Return on Average Assets (ROAA): 2.3%.
- Net Interest Margin (NIM): 5.0% (up from 4.7% in 2Q11).
- Efficiency Ratio: 40.6%.
- Loan Portfolio: Total loans reached US$ 16.4 billion (1.2% QoQ growth; 22.3% YoY growth). Average daily balances expanded 5.8% QoQ.
- Asset Quality: Past Due Loans (PDL) ratio remained stable at 1.54%. Coverage ratio exceeded 190%.
- Provisions: Net provisions for loan losses totaled US$ 42.7 million, a significant decrease from US$ 60.3 million in 2Q11.
- Year-to-Date (YTD) Net Income: US$ 520.1 million, a 17.7% increase compared to the same period in 2010.
Material Changes vs. Prior Period
While operating results demonstrated strong growth, net income declined slightly QoQ primarily due to non-operating factors:
- Currency Impact: A 0.9% depreciation of the Nuevo Sol against the U.S. Dollar resulted in a translation loss of approximately US$ 7.2 million and higher effective tax rates.
- Subsidiary Performance:
- BCP (Banking): Contributed US$ 140.4 million (up 4.3% QoQ), driven by strong loan expansion and improved NIM, absorbing the currency headwinds.
- Atlantic Security Bank (ASB): Contribution dropped 35.7% QoQ to US$ 7.4 million due to market volatility, lower interest rates, and reduced gains on securities.
- PPS (Insurance): Contribution fell 47.0% QoQ to US$ 13.3 million due to higher claims, increased commissions, and lower financial income.
- Prima AFP: Net income declined 2.7% QoQ to US$ 7.6 million due to translation losses and higher taxes, despite stable operating income.
- Expense Growth: Operating expenses grew at a controlled pace of 2.9% QoQ.
Outlook, Risks, and Management Commentary
Management highlighted that the strong operating result reflects the underlying strength of the business, particularly in the Peruvian market, which is not fully reflected in the bottom line due to currency translation effects. The outlook remains positive for the Peruvian economy, with growth expected to be driven by internal demand, though risks persist regarding the international economic scenario (European crisis, U.S. credit rating downgrade) and exchange rate volatility.
Key Risks and Contingencies:
- Foreign Exchange Volatility: Continued fluctuations in the Nuevo Sol could impact translation results and tax provisions.
- International Market Conditions: Ongoing global uncertainty affects ASB's investment portfolio and derivative valuations.
- Insurance Claims: Higher claims severity in the health and life insurance sectors impacted PPS results.
- Regulatory Changes: Implementation of Basel III capital requirements is underway, with BCP aiming for full compliance by mid-2012.
Investor Verification Checklist
- Verify the sustainability of the 5.0% Net Interest Margin given the competitive landscape and potential interest rate shifts.
- Monitor the impact of the Nuevo Sol exchange rate on future translation results and effective tax rates.
- Assess the trajectory of loan growth in the Retail Banking segment, which led expansion in 3Q11.
- Review the recovery potential of ASB and PPS contributions in light of stabilizing international markets and claims ratios.
- Confirm the adequacy of loan loss provisions given the stable PDL ratio of 1.54% and coverage above 190%.