Credicorp .(BAP) - 2020 Q4 - Annual Report

PART I Key Information This section outlines Credicorp's key financial data, capitalization, and significant business risks, including macroeconomic and pandemic impacts Selected Financial Data This section summarizes Credicorp's consolidated financial data from 2016-2020, highlighting a significant 2020 net profit decline due to increased credit loss provisions and pandemic impacts Credicorp Ltd. Selected Financial Data (2016-2020, In thousands of Soles) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Income Statement Data | | | | | Net Interest Income | 8,489,105 | 9,091,751 | 8,571,342 | | Provision for credit losses, net | (1,531,708) | (1,845,936) | (5,920,508) | | Net profit attributable to Credicorp's equity holders | 3,983,865 | 4,265,304 | 346,894 | | Net basic earnings per common share (Soles) | 50.13 | 53.66 | 4.37 | | Financial Position Data (End of Period) | | | | | Total assets | 177,263,201 | 187,859,340 | 237,406,163 | | Total loans | 110,759,390 | 115,609,679 | 137,659,885 | | Total deposits | 103,984,124 | 111,324,194 | 141,660,321 | | Total equity | 24,266,076 | 26,746,310 | 25,445,647 | | Selected Ratios | | | | | Return on average equity (ROAE) | 17.47% | 17.03% | 1.36% | | Return on average total assets (ROAA) | 2.29% | 2.34% | 0.16% | | Net interest margin (NIM) | 5.30% | 5.42% | 4.32% | | Operating efficiency | 43.82% | 42.48% | 45.09% | Risk Factors This section details Credicorp's material business risks, including macroeconomic, regulatory, market, operational, and ESG factors, with a focus on Peruvian instability and pandemic impacts - The company's operations are highly exposed to Peruvian political, social, and economic conditions, with past instability including terrorism, military coups, and significant government intervention[34][35][36] - The COVID-19 pandemic has severely disrupted the economies where Credicorp operates, adversely affecting credit risk, loan demand, and liquidity management[90][91][93] - Regulatory changes pose a significant risk, including a new law granting the Peruvian Central Bank (BCRP) power to set interest rate ceilings and a potential reform of the Peruvian pension system[59][73][143] - The company faces increasing competition from highly liquid foreign-owned banks, local and foreign financial institutions, and non-banking competitors like fintech companies[85][86][88] - The planned discontinuation of LIBOR after 2021 presents a risk, although Credicorp's net exposure is considered non-material, the transition to alternative rates involves various risks[77][79][80] Information on the Company This section details Credicorp's history, corporate structure, and business operations across its four lines of business, emphasizing its regional presence and digital transformation History and development of the company This section outlines Credicorp's formation in 1995 and its strategic regional expansion through key acquisitions, particularly in microfinance and investment banking - Credicorp Ltd. was established in Bermuda on August 17, 1995, to act as a holding company for its financial services subsidiaries, primarily operating in Peru and other Latin American countries[130] - Key strategic expansions include creating a regional investment banking platform in 2012 by acquiring stakes in Correval S.A. (Colombia) and IM Trust S.A. (Chile), and a majority stake in Mibanco (Peru) in 2014[133] - In 2019, Credicorp expanded its microfinance operations into Colombia by acquiring a majority stake in Bancompartir S.A., which merged with Edyficar S.A.S (Encumbra) in October 2020 to form Mibanco - Banco de la Microempresa de Colombia S.A[140][141] Business Overview This section details Credicorp's four lines of business, strategic focus on digital innovation and ESG, and their operational and competitive landscape - Credicorp is organized into four main Lines of Business (LoBs): Universal Banking, Microfinance, Insurance & Pensions, and Investment Banking & Wealth Management, primarily focused on Peru with growing presence in Colombia, Chile, and Bolivia[145] - The company established Krealo, an open innovation arm, to build, invest in, or partner with fintech companies, driving digital and financial inclusion across Latin America with ventures like Culqi and Tenpo[152][153][154] - In 2020, Credicorp launched a comprehensive 2020-2025 Sustainability Program focused on creating a sustainable and inclusive economy, improving financial health, and empowering employees, aligning with UN Sustainable Development Goals[160][161][162] Contribution by Line of Business (2020) | Line of Business | External Income (%) | Net Interest Income (%) | Total Assets (%) | Net Profit Attributable (%) | | :--- | :--- | :--- | :--- | :--- | | Universal Banking | 62.8% | 75.0% | 81.4% | 153.3% | | Microfinance | 12.0% | 20.0% | 7.1% | -134.9% | | Insurance & Pensions | 19.6% | 6.0% | 7.3% | 98.0% | | Investment Banking & Wealth Management | 6.0% | 0.8% | 4.9% | 55.3% | Organizational Structure This section describes Credicorp Ltd.'s Bermuda-based holding company structure and its controlling interests in key subsidiaries across Latin America - Credicorp Ltd. is a Bermuda-exempted holding company that coordinates and manages the business plans of its subsidiaries[130] - As of year-end 2020, Credicorp holds direct and indirect majority ownership in key subsidiaries including BCP (97.71%), Mibanco (99.92%), Grupo Pacifico (98.81%), and Credicorp Capital (100.00%)[130] Operating and Financial Review and Prospects This section analyzes Credicorp's 2020 financial performance, significantly impacted by the COVID-19 pandemic, detailing profit decline, loan growth, and liquidity management Operating Results This section details Credicorp's 2020 operating results, showing a significant net profit decline driven by increased credit loss provisions despite loan growth from government stimulus - Credicorp's 2020 net profit attributable to equity holders was S/346.9 million, a significant decrease from S/4,265.3 million in 2019, resulting in an ROAE of 1.36% and an ROAA of 0.16%[561] - The primary driver of the profit decline was a 220.7% increase in provisions for credit losses, totaling S/5,920.5 million for 2020, leading to a cost of risk of 4.30%[563] - Total loans grew by 19.1% in 2020, largely due to participation in government-backed programs like Reactiva Peru (S/24.3 billion) and FAE-Mype (S/353.5 million) aimed at mitigating the economic impact of COVID-19[562][695] - Net interest income decreased by 5.7% to S/8,571.3 million, and the Net Interest Margin (NIM) fell by 110 basis points to 4.32%, affected by lower interest rates on government program loans and a less profitable asset mix[563] Liquidity and Capital Resources This section assesses Credicorp's liquidity and capital resources, highlighting strong regulatory capital ratios, a diversified deposit base, and effective liquidity risk management Credicorp Ltd. Regulatory Capital (in millions of Soles) | Item | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Total Regulatory Capital (A) | 25,064 | 25,733 | 28,969 | | Total Regulatory Capital Requirements (B) | 20,437 | 21,622 | 20,995 | | Regulatory Capital Ratio (A) / (B) | 1.23 | 1.19 | 1.38 | BCP Stand-alone & Mibanco Capital Ratios (as of Dec 31, 2020) | Ratio | BCP Stand-alone | Mibanco | | :--- | :--- | :--- | | Tier 1 ratio | 10.41% | 17.67% | | CET1 ratio | 11.40% | 17.70% | | BIS ratio | 14.93% | 19.82% | - Net cash flow from operating activities increased significantly to S/12,687 million in 2020 from S/6,934 million in 2019, mainly due to strong growth in deposits and payables from repurchase agreements related to government programs[861][862] Trend Information This section discusses future trends and uncertainties for Credicorp, including Peru's GDP growth, ongoing pandemic impacts, regulatory changes, and political instability - Peru's GDP is expected to grow 8-10% in 2021, but this is subject to uncertainties from the COVID-19 pandemic's evolution and the effectiveness of the vaccine rollout[883][884] - Significant regulatory risk exists from a new law (March 2021) allowing the BCRP to set interest rate ceilings on loans, which could impact margins, and an integral reform of the Peruvian pension system is also under evaluation[886][887] - The 2021 general elections in Peru are marked by high political uncertainty, with no candidate having strong voter preference, which could affect investment, consumption, and overall economic stability[888] Directors, Senior Management and Employees This section details Credicorp's Board of Directors, senior management, employee count, compensation, and significant shareholder information - As of December 31, 2020, Credicorp's Board of Directors consists of nine members, chaired by Luis Enrique Romero Belismelis, with the senior management team led by CEO Walter Bayly[897][898][915] Compensation for Directors and Senior Management (in thousands of Soles) | Category | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Director's compensation | 5,665 | 6,766 | 6,106 | | Senior Management Compensation | 61,431 | 59,375 | 55,152 | | Total | 67,096 | 66,141 | 61,258 | - As of December 31, 2020, Credicorp and its subsidiaries had a total of 36,806 employees, with the largest numbers employed by BCP Stand-alone (16,770) and Mibanco (10,781)[964][965] - Luis Enrique Romero Belismelis and his family are major shareholders, beneficially owning 12,212,591 common shares, representing 12.94% of the company's stock as of December 31, 2020[967][968] Major Shareholders and Related Party Transactions This section identifies Credicorp's major shareholders and details related party transactions, including loans, investments, and deposits, conducted on market terms - As of February 2, 2021, the two major shareholders of Credicorp were Atlantic Security Holding Corporation (15.49%) and the Romero family (12.94%)[971][972] Transactions with Related Companies (in thousands of Soles) | Transaction Type | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Direct loans | 2,594,712 | 1,657,206 | 1,909,516 | | Investments | 775,397 | 935,286 | 1,165,661 | | Deposits | (425,938) | (751,990) | (1,582,412) | - Direct loans to employees, directors, senior management, and their families amounted to S/1.1 billion as of December 31, 2020, granted in the ordinary course of business on market terms[982] Financial Information This section confirms the inclusion of financial statements, discloses ongoing legal proceedings, government investigations, and the company's dividend policy - Credicorp's subsidiary, ASB, is involved in litigation with the Madoff Trustee, who seeks to recover approximately US$120 million related to redemptions from Fairfield Sentry Limited, for which a provision has been deemed prudent[986][987] - Peruvian authorities have initiated sanctioning processes against Credicorp and its subsidiaries for failing to disclose political campaign contributions made in 2011 and 2016, though Credicorp believes these do not pose a significant risk of material liability[990][992][993] - The company's dividend policy targets a payout of at least 25% of consolidated net profits, but no dividend was declared for fiscal year 2020 due to COVID-19 uncertainty[995][998] The Offer and Listing This section details the trading of Credicorp's common shares on the NYSE and BVL under ticker BAP, including market regulation - Credicorp's common shares are traded on the New York Stock Exchange (NYSE) and the Bolsa de Valores de Lima (BVL) under the ticker symbol BAP[1000] Additional Information This section provides supplementary corporate information, including Credicorp's Bye-laws, exchange controls, and taxation implications for the company and its shareholders - Credicorp is an exempted company incorporated in Bermuda, with its primary objects being to act as a holding and investment company[1012][1013] - There are no exchange controls in Peru or Bermuda that restrict the company's ability to transfer funds or pay dividends to foreign shareholders[1032][1033] - Under Peruvian law, capital gains from an indirect transfer of shares of a Peruvian-domiciled entity by a non-domiciled entity can be subject to Peruvian income tax if certain ownership and value thresholds are met[1038][1039] Quantitative and Qualitative Disclosures about Risk Management This section details Credicorp's comprehensive risk management framework, covering credit, market, liquidity, operational, and strategic risks, and their mitigation strategies - The Group's risk management is governed by a framework approved by the Board of Directors, which establishes a risk appetite based on core metrics (solvency, liquidity, profit) and specific metrics for various risk types[1071][1088] - Credit risk is managed using a three-stage impairment model based on Expected Credit Losses (ECL) as per IFRS 9, incorporating parameters like Probability of Default (PD), Loss Given Default (LGD), Exposure at Default (EAD), and forward-looking macroeconomic scenarios[1096][1097] Consolidated Value at Risk (VaR) by Risk Type (in thousands of Soles) | Risk Type | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Interest rate risk | 9,527 | 9,274 | 163,982 | | Price risk | 4,476 | 7,809 | 55,748 | | Diversification effect | (3,587) | (6,245) | (84,977) | | Consolidated VaR | 10,426 | 11,301 | 135,461 | - Interest rate risk in the banking book is monitored through sensitivity analysis, where a +/- 100 basis point parallel shift in interest rates would impact the financial margin by +/- S/39.3 million for Peruvian Sol and +/- S/95.9 million for US Dollar positions as of year-end 2020[1152][1155] Controls and Procedures This section confirms the effectiveness of Credicorp's disclosure controls and internal control over financial reporting as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[1170] - Based on the COSO 2013 framework, management assessed the internal control over financial reporting as effective as of December 31, 2020, with no material weaknesses identified[1173] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[1174][1177] Corporate Governance This section outlines Credicorp's corporate governance practices, including its code of ethics, audit committee, accountant fees, and differences from NYSE standards - The Board of Directors has determined that Ms. Patricia Lizarraga Guthertz is the Audit Committee Financial Expert[1193] - Credicorp has adopted a code of ethics that applies to all directors, officers, and employees, which is available on the company's website[1194] Principal Accountant Fees (in thousands of Soles) | Fee Category | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Audit | 15,556 | 17,223 | 21,106 | | Audit – Related | 20 | 66 | - | | Tax | 57 | 520 | 410 | | All Other | 266 | 928 | 489 | | Total | 15,899 | 18,737 | 22,005 | - As a foreign private issuer incorporated in Bermuda, Credicorp's corporate governance practices differ from NYSE standards for U.S. companies, particularly regarding director independence and board committee composition[1212][1225] PART II Defaults, Dividend Arrearages and Delinquencies This section confirms that Credicorp and its subsidiaries have no history of debt defaults, rescheduling, or dividend arrearages - Neither Credicorp nor its subsidiaries have ever defaulted on debt or been forced to reschedule obligations[1168] PART III Financial Statements This section confirms the inclusion of Credicorp's consolidated financial statements and the independent auditor's report in the Annual Report - The audited consolidated financial statements for Credicorp Ltd. and its subsidiaries are filed as part of this Annual Report[1234] Exhibits This section lists all exhibits filed with the Annual Report, including corporate documents and required CEO/CFO certifications - The report includes several exhibits, such as the company's Bye-laws, a list of subsidiaries, and required CEO/CFO certifications under the Sarbanes-Oxley Act[1236]