Thursday, December 1 2022

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Creditcorp (New York stock market :BAP) is the leading financial services company in Peru with a presence in universal banking (Banco de Credito del Peru-BCP and Banco de Credito de Bolivia), microfinance (Mibanco and Encumbra), insurance and pensions (Grupo Pacifico and Prima AFP), as well as investment banking and wealth management (Credicorp Capital, Wealth Management at BCP and Atlantic Security Bank). The company’s recent quarterly earnings outperformance was primarily due to a strong performance in net interest income, driving net interest margin (NIM) expansion while managing the cost of risk lower. As a result, BAP saw its return on equity (ROE) reach a record 19.6% for the quarter, well above 16.9% in the second quarter of 2022.

While the company continues to benefit from higher interest rates (note that the Q3 portfolio has yet to fully reflect the rate impact), NIM’s expansion story still has legs, in my opinion. The stock currently offers good value at an undemanding P/E of around 9x despite underlying earnings momentum and the prospect of an economic recovery in Peru over the next year.

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NIM expansion grabs headlines Strong quarterly result

BAP’s latest quarterly momentum was strong across the board, but the key takeaway was NIM’s sizeable +40 bps QoQ expansion to 5.3% (vs. 4.9% in 2Q22). To recap, net interest income was up +10% QoQ (+22% YoY), benefiting from rising favorable rates and active yield management, and driving the NIM higher. Total average loan growth also impressed at +2% QoQ (+4% YoY), with business and consumer loan growth reaching +8% QoQ and +5% QoQ respectively.

Third Quarter Operating Metrics


There were less positives on the cost management side, with operating expenses up +4% QoQ (+9% YoY), mainly due to higher personnel costs (+12% year-on-year). Nevertheless, the outperformance of net interest income and other non-interest income (+33% year-on-year) led to an efficiency ratio of 42.8% (i.e. expenses non-interest as a % of revenue) – a significant improvement from 44.6% last quarter. Elsewhere, Grupo Pacifico’s insurance unit also impressed, with significantly improved underwriting results in the life business, supporting an industry-leading segment ROE of 30%. Year-to-date, BAP now shows an ROE of 17.7% at group level (19.6% in Q3 2022).

Higher provisions but asset quality remains under control

The only real blemish on the quarterly results, in my view, was the +27% QoQ increase in net loan loss provisions (albeit from a low base). It should be noted that the accelerated formation of new NPLs is concerning, given that it is well above the average of the last twelve months. Much of the write-offs came from the small and medium enterprise (SME) loan portfolio, although this was a one-time regulatory change allowing BAP to write off SMEs that had Reactiva loans (i.e. say a government loan guarantee program in Peru). Thus, I wouldn’t read the headline numbers or the lower coverage rate too closely this time around. Moreover, the result still implies a solid total cost of risk of 1.2% (1.4% excluding Reactiva), which is well below pre-COVID levels of 1.5-1.6%.

Repeated guidance on ROE could prove prudent

In the Q3 post-earnings call, management remained firm on its full-year ROE guidance of around 17.5% despite an improving fundamental outlook supported by better loan growth and more expansion. strength of the NIM. To recap, the company pegged its forecast for structural loan growth at 9-11% and its net interest margins in the range of 4.6-4.9%. Insurance will continue to be the best performer, but with medium-term ROE forecasts of 18-20% well below the 30% ROE in Q3 (but above pre-COVID levels), there remains lots of benefits here on better efficiency and more retail growth. Guidance on the cost of risk also looked a bit conservative at 1.5-1.6% by the end of 2023 (in line with pre-COVID levels).

Outlook 2022


The main long-term growth driver remains digital, in my view, with a BCP digital customer base already at 34% (i.e. customers with over 70% of transactions conducted through digital channels in past six months). Growth here will likely prove earnings accretive, given that the cost-to-revenue ratio of digital customers is about 13% lower than that of non-digital customers. From there, all eyes will be on its main app, Yape, which reached 6.9 million active users (up from 6 million in Q2) and remains on track to reach 10 million active users. by 2026.

Yape Insights


Discounted game on the Peruvian tariff cycle

There was nothing to complain about in BAP’s latest quarterly results, with the company ensuring NIM’s expansion and insurance growth while reducing the overall cost of risk. Given the prospect of higher interest rates in the coming quarters, this earnings momentum should continue for some time to come. While management also chooses to remain cautious on the NIM’s full-year guidance (unchanged at 4.6-4.9%), the strong underlying momentum points to another bearish and bullish quarter ahead. . The medium-term ROE target also remains at 18%, but the impact of short-term loan repricing and additional efficiencies could lead to upward revisions across the board. The stock has rightly rallied since the start of the year, but at ~9x the P/E prior there is still plenty of upside potential due to potential valuation reassessment and tailwinds upcoming rate/macro.


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