Credicorp Ltd. — FY2017 Form 20-F Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter earnings filing. Credicorp is a Bermuda holding company whose principal operations are in Peru, with businesses in banking, insurance, pension funds and investment banking across Peru and other Latin American markets. BCP represented 81.9% of group assets and 71.8% of net income attributable to Credicorp holders. Financial statements are prepared under IFRS in Peruvian soles (S/).
Financial performance and position
Unless noted otherwise, amounts are in S/ millions. The filing presents many figures in thousands; values below are converted to millions for readability.
| Metric | FY2017 / year-end | Comparison |
|---|---|---|
| Interest income | 11,030.7 | +2.4% year over year |
| Net interest income | 8,071.5 | +2.7% |
| Net interest income after loan-loss provision | 6,282.3 | 6,072.8 in 2016 |
| Commissions and fees | 2,911.4 | +5.0% |
| Net gains on securities sales | 741.8 | 336.8 in 2016 |
| Net premiums earned | 1,808.3 | +0.5% |
| Profit before tax | 5,574.9 | 4,891.4 in 2016 |
| Net profit | 4,181.6 | +15.8% |
| Net income attributable to Credicorp holders | 4,091.8 | +16.4%; S/3,514.6 in 2016 |
| Total assets | 170,472.3 | +9.0% |
| Total loans | 100,477.8 | +6.0%; net loans were 95,977.3 |
| Deposits | 96,717.7 | +13.0%; 97,170.4 including accrued interest payable |
| Total liabilities / total equity | 148,218.6 / 22,253.7 | Equity increased 10.6% |
| Operating cash flow | 9,301.3 | Cash inflow, versus outflows of 1,367.6 in 2016 and 1,315.6 in 2015 |
| Cash and cash equivalents | 23,212.2 | 16,633.2 in 2016 |
Profitability and asset quality: ROAE was 19.8% (19.6% in 2016) and ROAA was 2.5% (2.3%). The selected financial data reports NIM of 5.33%, down 13 basis points; a separate discussion using average monthly balances reports 5.40% versus 5.36% in 2016. Cost of risk improved to 1.78% from 1.88%. Internal overdue loans were 3.01% of loans, up from 2.77%; NPL ratio, including refinanced and restructured loans, rose to 3.92% from 3.66%. Allowance coverage of internal overdue loans declined to 149.0% from 160.6%.
Capital and liquidity: Credicorp’s BIS capital ratio was 15.92% in selected financial data; BCP standalone’s ratio was 15.05%, with CET1 of 11.83%. BCP and Mibanco’s December average daily liquidity ratios were 38.60% in soles and 41.92% in foreign currency, above stated regulatory minima of 8% and 20%. Total bonds and notes issued were S/16,242.3 million; the filing does not present a single, directly comparable group-wide debt ratio.
Material changes versus prior year
- Attributable net income rose 16.4%, while recurring net income was S/3,647.1 million, up 6.1%. Reported results included approximately S/444.7 million of after-tax non-recurring gains, principally S/281.0 million from BCI shares and S/164.0 million from ENEL shares.
- Net interest margin eased, and loan growth remained modest: year-end loans increased 6.0%, but average daily balances increased 1.9% (3.3% currency-adjusted). Wholesale Banking average daily balances declined 1.1%; retail lending increased 3.1%.
- Credit quality weakened on reported delinquency measures, although cost of risk improved. Management said real-estate collateral and lengthy foreclosure proceedings distort overdue-loan indicators; liquidation can take about five years on average.
- Deposits increased 13.0%, driven mainly by time deposits and savings deposits. Management cited the capital-repatriation tax amnesty and deposit-gathering initiatives.
- Cash from operating activities improved substantially, helped by a S/12,779.2 million increase in deposits and obligations; the cash-flow statement also shows increased loan and investment outflows.
- Pacifico Vida absorbed PPS effective August 1, 2017. The merger was intended to create operating synergies and strengthen the insurance business; no income-statement gain or loss was recognized.
Outlook, commentary, risks and unusual items
- Outlook: Management expected relatively low Peruvian economic growth in 2018 and described the environment as challenging for banking, particularly amid low loan growth and weak private investment. Priorities included strengthening retail credit risk management, digital banking, efficiency and customer experience; improving Mibanco profitability; and developing insurance and regional investment banking.
- Macroeconomic and political risks: Peru’s 2017 GDP growth was reported at 2.5%, affected by El Niño, the Lava Jato investigations and political uncertainty. The filing discusses the March 2018 resignation of President Pedro Pablo Kuczynski and the resulting uncertainty. It also identifies exposure to commodity prices, foreign exchange and interest rates, and economic conditions in Bolivia, Colombia and Chile.
- Credit, insurance and operational risks: Risks include loan deterioration and concentration, competitive pressure, catastrophe losses, inadequate insurance pricing or reserves, reinsurer counterparty failure, cybersecurity and operational disruption, fraud and regulatory change. El Niño-related claims in Pacifico’s property-and-casualty business were approximately US$119.2 million, of which 95% was ceded to reinsurers.
- Contingencies: ASB faced a Madoff Trustee claim of approximately US$120 million; the Bankruptcy Court dismissed the claim, but the Trustee appealed. A related Fairfield Liquidator action sought US$115.2 million and remained contested, with the court yet to rule after January 2018 oral argument. The filing states these actions concern essentially the same funds; management says ASB has substantial defenses. The filing says other ordinary-course legal proceedings are not expected to have a material adverse effect.
- IFRS 9: Adopted from January 1, 2018 without restating 2017. Management estimated an S/320.7 million increase in credit-loss provisions, partly offset by S/94.6 million deferred tax, reducing retained earnings by S/226.1 million. A further S/68.0 million investment provision was described as non-material.
- Dividends: Credicorp paid a special S/1,481.8 million dividend in November 2017. The board declared a further S/14.1726 per common share for FY2017, payable May 11, 2018. Policy targets cash dividends of at least 25% of consolidated net profits, subject to subsidiary distributions, capital needs, legal tests and board discretion.
- Audit: The auditor issued an unqualified opinion on the IFRS financial statements and concluded internal control over financial reporting was effective as of year-end 2017, with no material weakness identified.
Important facts for investors to verify
- Reconcile the two disclosed FY2017 NIM figures (5.33% and 5.40%) and their calculation bases.
- Assess the sustainability of earnings excluding the S/444.7 million after-tax non-recurring gains and the related asset-sale proceeds.
- Review changes in overdue/NPL ratios, coverage, provisions and the impact of collateral-related delays in loan write-offs.
- Confirm the actual opening IFRS 9 adjustments and subsequent credit-loss trends against the estimated January 2018 retained-earnings reduction.
- Track the status and potential exposure of the Madoff and Fairfield litigation, including that the stated claims relate to substantially the same funds.
- Verify dividend payment, capital and liquidity ratios, and whether subsidiary distributions and regulatory requirements support the stated dividend policy.