CREDICORP LTD annual report, Q4 FY2020

Business context and reporting period

Credicorp Ltd. filed its audited annual report on Form 20-F for the fiscal year ended December 31, 2020. This is a full-year filing, not a standalone fourth-quarter report; quarterly Q4 results are not clearly provided in the filing text. Credicorp is a Bermuda-incorporated financial holding company operating primarily in Peru through Universal Banking, Microfinance, Insurance and Pensions, and Investment Banking and Wealth Management. Financial statements are prepared under IFRS in Peruvian soles (S/).

Financial performance and position

Unless otherwise stated, amounts are in S/ millions. Figures are consolidated and audited.

Total assets were S/237,406 million, up 26.4%. Total loans, net of unearned income, were S/137,660 million, up 19.1%; loans net of allowance were S/127,761 million. Deposits excluding interest payable were S/141,660 million, up 27.3%; management also reports S/142,366 million including interest payable. Shareholders’ equity attributable to Credicorp was S/24,946 million, down 4.9%, and total equity was S/25,446 million.

Cash and cash equivalents at year-end were S/36,734 million. Cash flow from operating activities was S/12,687 million, investing activities used S/1,873 million, and financing activities used S/2,088 million. Year-end bonds and notes issued totaled S/16,319 million; payables from repurchase agreements and securities lending were S/27,924 million, substantially higher than 2019, reflecting liquidity facilities associated with government programs. Due to banks and correspondents totaled S/5,978 million.

Credit quality weakened: internal overdue loans were S/4,686 million and 3.40% of loans, versus 2.86% in 2019; non-performing loans were 4.62% of loans, versus 3.88%. The allowance for loan losses rose to S/10,436 million from S/5,508 million. Coverage was 211.26% of internal overdue loans and 155.76% of non-performing loans.

Credicorp’s BIS regulatory-capital ratio was 16.44%. BCP Stand-alone’s CET1 ratio declined to 11.40% from 12.35%, while Mibanco’s rose to 17.70% from 15.70%. The Group reported average December liquidity ratios for BCP Stand-alone and Mibanco of 48.55% in soles and 48.96% in foreign currency, above stated regulatory minima of 8% and 20%, respectively.

Material changes versus the prior year

• Net profit attributable to shareholders fell 91.9%, driven by the steep increase in credit-loss provisions, lower net interest income, reduced fee activity, and weaker insurance underwriting.
• Loans and deposits expanded strongly, supported in part by Reactiva Peru and FAE-Mype government programs; government-backed lending generally carried low rates.
• BCP’s gross allowance for loan losses increased 89.5% to S/10,436 million. Management attributed this to COVID-19-related borrower deterioration, forward-looking assumptions, and model adjustments.
• Credicorp’s funding mix shifted toward demand and savings deposits. Core deposits rose to S/112,336 million, and non-interest-bearing deposits increased significantly.
• Insurance claims increased, especially in life insurance, while reduced mobility lowered some property and casualty claims. Prima AFP’s funds under management fell 8.2% to S/49.8 billion, reflecting permitted pension withdrawals.
• Credicorp’s total equity declined despite positive other comprehensive income, principally reflecting the earnings collapse and S/2,393 million of dividends paid during 2020 for prior-year results.

Outlook, commentary, risks and unusual items

Management described 2020 as the most challenging environment in Credicorp’s 25-year history. It cited the pandemic, low interest rates, government relief programs, lower transaction volumes, and a sharp economic contraction. Peru’s GDP contracted 11.1% in 2020; Credicorp’s outlook section expected 8%–10% growth in 2021, while its credit-risk scenario discussion used a 9.0% base projection. These are economic projections, not formal Credicorp earnings guidance. The filing cautions that new COVID-19 waves, vaccination delays, political uncertainty and regulatory changes could disrupt recovery.

• Credit and earnings: Reprogrammed loans, expired grace periods, borrower stress, model assumptions and slower recoveries could lead to further credit deterioration and provisions. The filing says reprogramming affected about 15% of consolidated loans.
• Regulation: A March 2021 Peruvian law authorized the central bank to set interest-rate ceilings every six months for specified consumer, SME and credit-card lending, and introduced limits on certain fees. Effects were still being evaluated. Proposed pension-system reform and withdrawals could also affect Prima AFP’s assets and fee income.
• Political and macroeconomic exposure: Peru’s presidential election, fragmented Congress, possible interventionist policies, commodity prices, exchange rates and economic conditions in Bolivia, Colombia, Chile and Panama pose risks.
• Other risks: Competition, cybersecurity and operational disruption, market and interest-rate volatility, foreign-exchange movements, natural disasters, reinsurance counterparty risk and potential funding pressures are identified as material risks. Credicorp reported net LIBOR exposure of approximately 0.5% of assets and 0.2% of liabilities at year-end 2020.
• Unusual items: Credicorp recorded S/64.0 million of gross goodwill impairment related to Mibanco Colombia. Pandemic-related donations were S/128.9 million in 2020. A S/110 million income-tax benefit contrasted with tax expense in prior years.
• Contingencies and governance: ASB faces a Madoff Trustee claim of about US$120 million and a Fairfield Liquidator claim of US$115.2 million, relating substantially to the same redemptions; both matters remained pending. Management said it considered a provision prudent for the Madoff matter, but the filing text does not provide a clear provision amount. Peruvian authorities also pursued disclosure-related sanctions over political contributions. Credicorp disclosed US$3.65 million in contributions to a 2011 presidential campaign; the SMV fines were appealed. BCP separately paid a US$482,000 SBS fine.
• Dividends and subsequent events: No dividend for 2020 had been declared as of the filing date; the Board deferred its decision amid uncertainty. In March 2021 BCP issued US$500 million of subordinated notes due 2031 at a 3.25% coupon and announced redemption of older subordinated bonds, with a one-off 2021 charge expected and prospective interest savings anticipated.

The independent auditor issued an unqualified opinion on the IFRS financial statements and found internal control over financial reporting effective, with no material weakness reported by management. The audit identified expected credit-loss estimates and annuity mathematical reserves as critical audit matters.

Important facts for investors to verify

• Reconcile the reported 2020 net interest margin of 4.32% with the 4.27% figure in the detailed statistical disclosure, including the differing calculation methods.
• Review the composition, staging and assumptions behind the S/10,436 million allowance, including government-guaranteed loans, reprogrammed exposures and subsequent payment performance.
• Confirm the status and any provision or potential exposure for the Madoff and Fairfield proceedings, and the appealed SMV sanctions related to campaign-contribution disclosures.
• Assess the effect of Peru’s interest-rate caps, fee rules and pension proposals on margins, loan origination, Prima AFP assets and dividend capacity.
• Verify capital and liquidity after the subsequent BCP bond redemption and issuance, and whether Credicorp declares a 2020-results dividend.