SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 under the

Securities Exchange Act of 1934

 

For the month of August 2018

 

Commission File Number: 001-14014

 

CREDICORP LTD.

(Translation of registrant’s name into English)

 

Clarendon House

Church Street

Hamilton HM 11 Bermuda

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x Form 40-F ¨

 

 Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____

 

 Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____

 

 

 

 

 

 

The information in this Form 6-K (including any exhibit hereto) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act.

 

 

 

  

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: Aug 9th, 2018

 

 

CREDICORP LTD.

(Registrant)

 
       
  By: /s/ Miriam Bottger  
    Miriam Bottger  
    Authorized Representative  

 

 

 

 

Exhibit 99.1

 

 

 

 

 

Lima, Peru, August 08th, 2018 – Credicorp (NYSE: BAP) announced its unaudited results for the second quarter of 2018. These results are consolidated according to IFRS in Soles.

 

Second Quarter Results 2018

 

In 2Q18, Credicorp reported net income of S/ 977.8 million, which translated into an ROAE and ROAA of 18.1% and 2.3%, respectively. This level of net income represented a contraction of -5.8% QoQ and an increase of +6.3% YoY. Although the business dynamic continued to improve, as is evident in our main indicators, market volatility affected the value of investments and led to a QoQ contraction of approximately S/ 101.2 million in net gain on sales of securities. In Year-to-date (YTD) terms, net income at Credicorp totaled S/ 2,015.6 million, which represented an increase of +11.4% compared to 1H17’s level. These results translated into an ROAE and ROAA of 18.5% and 2.4%, respectively, which topped the 17.9% and 2.3% registered in 1H17.

 

The results in 2Q18 show:

 

• A slight QoQ contraction in interest-earning assets (IEAs), which was due primarily to a decrease in investments. Nevertheless, loans, the most profitable asset, continued to post improvements that led to growth of +2.2% QoQ and +9.7% YoY in quarter-end balances, and an increase of +2.4% QoQ and +9.2% YoY in average daily balances. Loan growth was led by Wholesale Banking, followed by Retail Banking, Mibanco and BCP Bolivia. In this context, average daily loan balances posted a +6.8% increase in 1H18 with respect to the average daily loan volume registered for the full year 2017, which represents an important improvement in the pace of loan expansion, in line with expectations.

 

• Total funding fell QoQ, which reflects the on-going reduction in BCRP instruments and, to a lesser extent, the slight contraction in total deposits in LC. Deposits continued to be Credicorp’s main funding source. In the YoY analysis, deposits reported the highest growth rate per funding source thus representing the most important source to replace BCRP instruments as they reach due date. All of the aforementioned had a positive impact on Credicorp’s funding cost, which has remained relatively stable since 2016 (+6 bps QoQ; -5 bps YoY; and -9 bps in YTD terms) despite a scenario marked by increases in international rates.

 

• All of the aforementioned was reflected in net interest income (NII), which grew +0.9 QoQ and +4.8% YoY. In this context, improvements in loan growth and the relative stability of the funding cost offset the decrease in interest income and dividends on investments. Accordingly, the net interest margin (NIM) recovered slightly, +13 bps QoQ and +3 bps YoY, which attenuated the contraction posted last quarter. All of the aforementioned led NIM to fall only -12 bps in 1H18 with regard to the level posted in 1H17.

 

• The improvement in risk quality of the loan book continued to be reflected in Credicorp’s cost of risk, which fell QoQ and YoY to situate at 1.22%. This level is similar to the level reported in 2010, when the loan mix registered a higher share of Wholesale Banking loans than today’s level, and prior to the acquisition of Mibanco. The continuous reduction in the cost of risk continues to be attributable to the improvement in the risk quality of the SME-Pyme, Mibanco, Consumer and Credit Card segments over the last three years; this is captured in advance by the forward-looking expected loss nature of the IFRS9 methodology. The YTD results show a level of cost of risk at 1.33%, 74 bps below the level posted in 1H17.

 

• The significant and on-going improvement in the risk quality, coupled with the stability of NIM, translated into an increase of +26 bps QoQ and +39 bps YoY in risk-adjusted NIM. As such, 1H18 posted significant recovery of +31 bps in the risk-adjusted NIM.

 

• Although non-financial income contracted QoQ and YoY due to the stop-loss registered on sales of securities, it is important to note the QoQ and YoY growth posted by fee income (+2.3% QoQ +6.2% YoY) and gains on foreign exchange transactions (+11.3% QoQ and +12.7% YoY), which represent the core items of non-financial income. The former increased due to the expansion of volumes in items such as drafts and transfers, payments and collections, and foreign trade. Growth in gains on FX transactions was also attributable to the increase in trade volumes in an environment of low volatility in the exchange rate. YTD, total non-financial income grew +2.2% in 1H18, which was also mainly due to the increase in fee income and in gains on FX transactions.

 

• The insurance underwriting result fell -2.9% QoQ due to an increase in the net loss ratio and a decrease in the net earned premium for life insurance, which was mitigated by an improvement in the performance of property and casualty lines. In the YoY analysis, the underwriting result dropped -11.0% due to increases in the net loss ratio, commissions, and underwriting expenses in Property & Casualty and Life insurance.

 

• The efficiency ratio increased +110 bps QoQ, which reflects the seasonality seen every 1Q when the ratio hits its yearly low. The YoY evolution, however, reveals relative stability (+10 bps) despite +6.3% YoY growth in operating expenses due to an improvement in operating income generation, which expanded +6.2% YoY increase in operating income. YTD, the efficiency ratio posted a deterioration of 50 bps in 1H18, which was primarily due to an increase in the acquisition cost of the insurance underwriting result.

 

 

 

Table of Contents

 

Credicorp (NYSE: BAP): Second Quarter Results 2018 3
Financial Overview 3
1. Interest-earning assets (IEA) 5
1.1. Evolution of IEA 5
1.2. Credicorp Loans 6
1.2.1. Loan evolution by business segment 6
1.2.2. Evolution of the level of dollarization by segment 9
1.2.3. Evolution of the level of dollarization by segment 9
1.2.4. BCRP de-dollarization plan at BCP Stand-alone 10
1.2.5. Market share in loans 11
2. Funding Sources 12
2.1. Funding Structure 12
2.2. Deposits 13
2.2.1. Deposits: dollarization level 14
2.2.2. Market share in Deposits 15
2.3. Other funding sources 15
2.4. Loan / Deposit (L/D) 16
2.5. Funding Cost 17
3. Portfolio quality and Provisions for loan losses 18
3.1. Provisions for loan losses 19
3.2. Portfolio Quality 19
3.2.1. Delinquency indicators by business line 20
4. Net Interest Income (NII) 25
4.1. Interest Income 25
4.2. Interest Expenses 26
4.3. Net Interest Margin (NIM) and Risk-Adjusted NIM 27
5. Non-Financial Income 30
5.1. Fee Income 31
5.1.1. By subsidiary 31
5.1.2. Banking Business 32
6. Insurance Underwriting Result 34
6.1. Net earned premiums 35
6.2. Net claims 36
6.3. Acquisition cost 36
7. Operating Expenses and Efficiency 38
7.1. Credicorp’s Administrative, General and Tax Expenses 39
7.2. Operating Expenses / Total Average Assets Ratio 39
7.3. Efficiency Ratio 40
8. Regulatory Capital 42
8.1. Regulatory Capital – BAP 42
8.2. Regulatory Capital – BCP Stand-alone based on Peru GAAP 43
9. Banking business’s Distribution channels 45
10. Economic Perspectives 48
10.1. Peru Economic Forecasts 48
10.2. Main Economic Variables 49
11. Appendix 53
11.1. Credicorp 53
11.2. BCP Consolidated 55
11.3. Mibanco 58
11.4. BCP Bolivia 59
11.5. Credicorp Capital 60
11.6. Atlantic Security Bank 61
11.7. Grupo Pacifico 63
11.8. Prima AFP 65
11.9. Table of calculations 66
11.10. Disclosure about the impact of IFRS 9 67

 

 

 

 

Credicorp (NYSE: BAP): Second Quarter Results 2018

 

Financial Overview

 

Credicorp Ltd.  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun18 / Jun17 
Net interest income *   1,967,912    2,043,687    2,062,818    0.9%   4.8%  3,980,998    4,106,505    3.2%
Provision for loan losses, net of recoveries   (433,219)   (371,024)   (313,172)   -15.6%   -27.7%   (969,713)   (684,196)   -29.4%
Net interest income after provisions   1,534,693    1,672,663    1,749,646    4.6%   14.0%   3,011,285    3,422,309    13.6%
Non-financial income *   1,058,753    1,101,216    1,048,050    -4.8%   -1.0%   2,102,287    2,149,266    2.2%
Insurance services underwriting result   126,445    115,909    112,559    -2.9%   -11.0%   248,724    228,468    -8.1%
Total expenses   (1,453,187)   (1,439,744)   (1,523,840)   5.8%   4.9%   (2,860,298)   (2,963,584)   3.6%
Operating income   1,266,704    1,450,044    1,386,415    -4.4%   9.5%   2,501,998    2,836,459    13.4%
Income taxes   (324,771)   (385,392)   (388,011)   0.7%   19.5%   (650,439)   (773,403)   18.9%
Net income   941,933    1,064,652    998,404    -6.2%   6.0%   1,851,559    2,063,056    11.4%
Non-controlling interest   21,713    26,844    20,566    -23.4%   -5.3%   41,764    47,410    13.5%
Net income attributed to Credicorp   920,220    1,037,808    977,838    -5.8%   6.3%   1,809,795    2,015,646    11.4%
Net income / share (S/)   11.54    13.01    12.26    -5.8%   6.3%   22.69    25.27    11.4%
Total loans   93,670,216    100,570,511    102,766,633    2.2%   9.7%   93,670,216    102,766,633    9.7%
Deposits and obligations   92,039,132    98,193,105    97,544,235    -0.7%   6.0%   92,039,132    97,544,235    6.0%
Net equity   20,802,017    21,312,210    21,889,218    2.7%   5.2%   20,802,017    21,889,218    5.2%
Profitability                                        
Net interest margin *   5.25%   5.15%   5.28%   13 bps    3 bps    5.35%   5.23%   -12 bps 
Risk adjusted Net interest margin *   4.09%   4.22%   4.48%   26 bps    39 bps    4.05%   4.36%   31 bps 
Funding cost * (1)   2.37%   2.26%   2.32%   6 bps    -5 bps    2.38%   2.29%   -9 bps 
ROAE   18.2%   19.3%   18.1%   -120 bps    -10 bps    17.9%   18.5%   60 bps 
ROAA   2.3%   2.4%   2.3%   -10 bps    0 bps    2.3%   2.4%   10 bps 
Loan portfolio quality                                        
Delinquency ratio over 90 days   2.25%   2.19%   2.25%   6 bps    0 bps    2.25%   2.25%   0 bps 
Internal overdue ratio (2)   2.93%   2.98%   3.03%   5 bps    10 bps    2.93%   3.03%   10 bps 
NPL ratio (3)   3.92%   3.88%   4.09%   21 bps    17 bps    3.92%   4.09%   17 bps 
Cost of risk (4)   1.85%   1.48%   1.22%   -26 bps    -63 bps    2.07%   1.33%   -74 bps 
Coverage of internal overdue loans   157.3%   160.4%   154.8%   -560 bps    -250 bps    157.3%   154.8%   -250 bps 
Coverage of NPLs   117.7%   123.0%   114.8%   -820 bps    -290 bps    117.7%   114.8%   -290 bps 
Operating efficiency                                        
Efficiency ratio * (5)   43.8%   42.8%   43.9%   110 bps    10 bps    42.8%   43.3%   50 bps 
Operating expenses / Total average assets   3.63%   3.49%   3.69%   20 bps    6 bps    3.62%   3.61%   0 bps 
Insurance ratios                                        
Combined ratio of P&C (6)(7)   97.7%   105.1%   102.7%   -240 bps    500 bps    97.0%   103.9%   690 bps 
Loss ratio (7)   59.1%   57.6%   58.7%   110 bps    -40 bps    59.5%   58.1%   -140 bps 
Underwriting result / net earned premiums (7)   10.5%   8.5%   7.1%   -140 bps    -340 bps    10.5%   7.8%   -270 bps 
Capital adequacy - BCP Stand-alone (8)                                        
BIS ratio (9)   16.71%   15.91%   15.07%   -84 bps    -164 bps    16.71%   15.07%   -164 bps 
Tier 1 Ratio (10)   11.75%   11.75%   11.09%   -66 bps    -66 bps    11.75%   11.09%   -66 bps 
Common equity tier 1 ratio (11)   11.54%   11.22%   11.11%   -11 bps    -43 bps    11.54%   11.11%   -43 bps 
Employees   33,343    33,445    33,447    0.0%   0.3%   33,343    33,447    0.3%
Share Information                                        
Outstanding Shares   94,382    94,382    94,382    0.0%   0.0%   94,382    94,382    0.0%
Treasury Shares (12)   14,621    14,621    14,621    0.0%   0.0%   14,621    14,621    0.0%
Floating Shares   79,761    79,761    79,761    0.0%   0.0%   79,761    79,761    0.0%

 

* This account or ratio has been modified retroactively, as a result of the improvement in the presentation of Credicorp's accounting accounts. This improvement allowed to show the net gain in derivatives and the result by difference in exchange.

(1) The funding costs differs from previously reported due to a methodology change in the denominator, which no longer includes the following accounts: acceptances outstanding, reserves for property and casualty claims, reserve for unearned premiums, reinsurance payable and other liabilities.

(2) Internal overdue loans: includes overdue loans and loans under legal collection, according to our internal policy for overdue loans. Internal Overdue Ratio: Internal Overdue Loans / Total Loans.

(3) Non-performing loans (NPL): Internal overdue loans + Refinanced loans. NPL ratio: NPLs / Total loans.

(4) Cost of risk: Annualized provision for loan losses / Total loans.

(5) Efficiency ratio = [Total Expenses + Acquisition Cost - Other expenses] / [Net Interest Income + Fee Income + Net Gain on Foreign Exchange Transactions + Net Gain from Subsidiaries + Net Premiums Earned].

(6) Combined ratio= (Net claims / Net earned premiums) + [(Acquisition cost + Operating expenses) / Net earned premiums]. Does not include Life insurance business.

(7) Considers Grupo Pacifico's figures before eliminations for consolidation to Credicorp.

(8) All Capital ratios are for BCP Stand-alone and based on Peru GAAP.

(9) Regulatory Capital / Risk-weighted assets (legal minimum = 10% since July 2011).

(10) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + (0.5 x Unrealized profit and net income in subsidiaries) - Goodwill - (0.5 x Investment in subsidiaries) + Perpetual subordinated debt (maximum amount that can be included is 17.65% of Capital + Reserves + Accumulated earnings with capitalization agreement + Unrealized profit and net income in subsidiaries - Goodwill).

(11) Common Equity Tier I = Capital + Reserves – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability) + retained earnings + unrealized gains.

Adjusted Risk-Weighted Assets = Risk-weighted assets - (RWA Intangible assets, excluding goodwill, + RWA Deferred tax assets generated as a result of temporary differences in income tax, in excess of 10% of CET1, + RWA Deferred tax assets generated as a result of past losses).

(12) These shares are held by Atlantic Security Holding Corporation (ASHC).

 

  3

 

 

Credicorp and subsidiaries

 

Earnings contribution *  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Banco de Credito BCP (1)   721,572    860,241    827,596    -3.8%   14.7%   1,413,735    1,687,837    19.4%
Mibanco (2)   83,487    120,811    122,151    1.1%   46.3%   147,245    242,962    65.0%
BCB   26,670    18,480    21,544    16.6%   -19.2%   46,264    40,024    -13.5%
Grupo Pacifico (3)   77,791    77,295    69,075    -10.6%   -11.2%   157,981    146,370    -7.3%
Prima AFP   38,545    35,257    32,382    -8.2%   -16.0%   80,256    67,639    -15.7%
Credicorp Capital   26,486    21,074    11,128    -47.2%   -58.0%   41,000    32,202    -21.5%
Atlantic Security Bank   43,344    30,699    29,106    -5.2%   -32.8%   83,664    59,805    -28.5%
Others (4)   (14,188)   (5,238)   (12,993)   148.1%   -8.4%   (13,105)   (18,231)   39.1%
Net income attributed to Credicorp   920,220    1,037,808    977,838    -5.8%   6.3%   1,809,795    2,015,646    11.4%

 

* Contributions to Credicorp reflect the eliminations for consolidation purposes (e.g. eliminations for transactions among Credicorp’s subsidiaries or between Credicorp and its subsidiaries).

(1) Banco de Credito BCP includes BCP Stand-alone and subsidiaries such as Mibanco.

(2) The figure is lower than the net income of Mibanco because Credicorp owns 97.73% of Mibanco (directly and indirectly).

(3) The contribution is higher than Grupo Pacifico’s net income because Credicorp owns 65.20% directly, and 33.59% through Grupo Credito.

(4) Includes Grupo Credito (excluding its share in subsidiaries listed in the table), Atlantic Security Holding Corporation and others of Credicorp Ltd.

 

   Quarter   YTD 
ROAE  2Q17   1Q18   2Q18   Jun 17   Jun 18 
Banco de Credito BCP (1)   21.5%   23.0%   22.2%   20.5%   22.0%
M ibanco (2)   23.8%   28.7%   27.9%   19.6%   27.9%
BCB   17.9%   11.8%   13.9%   15.0%   12.6%
Grupo Pacífico (3)   13.9%   11.2%   10.7%   13.9%   11.0%
Prima   30.2%   24.3%   23.0%   28.1%   22.5%
Credicorp Capital   13.4%   11.1%   6.1%   10.5%   8.6%
Atlantic Security Bank   22.4%   15.4%   16.1%   20.1%   14.9%
Credicorp   18.2%   19.3%   18.1%   17.9%   18.5%

 

(1) Banco de Credito BCP includes BCP Stand-alone and subsidiaries such as Mibanco.

(2) ROAE including goodwill of BCP from the acquisition of Edyficar (Approximately US$ 50.7 million) was 21.6% in 2Q17, 26.5% in 1Q18 and 25.8% in 2Q18. YTD was 17.3% for June 2017 and 25.8% for June 2018.

(3) Figures include unrealized gains or losses that are considered in Pacifico’s Net Equity from the investment portfolio of Pacifico Vida. ROAE excluding such unrealized gains was 17.4% in 2Q17, 15.1% in 1Q18 and 14.5% in 2Q18. As of YTD, was 16.8% for June 2017 and 14.8% for June 2018.

 

  4

 

 

1.Interest-earning assets (IEA)

 

As of June 2018, IEAs reported a slight contraction QoQ due to a reduction in investments. Nevertheless, loan growth accelerated, which is reflected in a QoQ expansion of +2.2% in quarter-end balances and +2.4% in average daily balances. The YoY evolution, which eliminates the seasonal effects on loans, revealed significant growth of +9.7% in quarter-end balances and +9.2% in average daily balances. The improvement posted in loan growth was visible across most of the business segments but was led by Corporate Banking QoQ and Middle-Market Banking YoY.

 

Interest earning assets  As of   % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Cash and due from banks   25,361,757    22,290,932    19,385,506    -13.0%   -23.6%
Interbank funds   227,212    72,611    172,607    137.7%   -24.0%
Total investments   31,790,119    35,062,878    32,434,819    -7.5%   2.0%
Total loans (1)   93,670,216    100,570,511    102,766,633    2.2%   9.7%
Total interest earning assets   151,049,304    157,996,932    154,759,565    -2.0%   2.5%

 

(1) Quarter-end balance.

 

Total Investments (2)  As of   % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Fair value through profit or loss investments   4,686,995    8,312,081    4,986,068    -40.0%   6.4%
Fair value through other comprehensive income investments   22,016,939    22,673,306    23,291,981    2.7%   5.8%
Amortized cost investments   5,086,185    4,077,491    4,156,770    1.9%   -18.3%
Total investments   31,790,119    35,062,878    32,434,819    -7.5%   2.0%

 

(2) The names mandated by the IFRS9 norm are used in this chart. The former names, in the order presented in this chart, are: Trading securities, Investments available for sale and Investments held to maturity.

 

1.1. Evolution of IEA

 

Total loans

 

Total loans measured in quarter-end balances posted slightly higher growth, leading to a QoQ increase of 2.2%. This growth rate outpaced the expansion reported last quarter (0.1%). In this context, and considering the drop in total investments, loans increased their share in IEA, which was situated at 66.4% in 2Q18 vs. 63.7% in 1Q18.

 

The QoQ increase in loans at Credicorp was due primarily to:

 

(i)Expansion in Wholesale Banking loans, led by Corporate Banking;

 

(ii)Loan growth in the Mortgage segment, and;

 

(iii)Loan growth in the BCP Bolivia and Mibanco subsidiaries.

 

The YoY evolution also reflected acceleration in loan growth, which rose +9.7% and outpaced the expansion posted last quarter (+8.8%). It is important to note that significant growth was visible in all business segments and subsidiaries, with the exception of a slight contraction in loans at ASB.

 

Investments

 

The drop in Total Investments QoQ mainly reflects the sale of fair value through profit or loss investments (formerly trading securities) mainly due to sales of CDs from BCRP and to a lesser degree, due to the sale of Peruvian Government Bonds and bonds from other countries with investment grade. The aforementioned was generated in a context where Mark-to-Market of investments dropped significantly due to increases in global interest rates.

 

  5

 

 

Other IEA

 

Available funds fell -13.0% QoQ and -23.6% YoY due to a decrease in quarter-end balances in the available funds restricted with BCRP that are required for BCRP instruments on the funding side. This was in line with a drop in volumes of BCRP instruments for funding as these reached due date, thus releasing restricted available funds with BCRP.

 

1.2. Credicorp Loans

 

1.2.1. Loan evolution by business segment

 

The table below shows loan composition by subsidiary and business segment measured in average daily balances. These balances reflect trends or variations to a different degree than quarter-end balances, which may include pre-payments or loans made at the end of the quarter, which affect average daily balances less than quarter-end balances.

 

Overall, average daily loan balances posted, for a second consecutive quarter, an acceleration in loan growth rates both in QoQ and YoY terms. This was attributable to the loan expansion achieved in Wholesale Banking, and to a lesser extent due to an improvement in the pace of growth in Retail Banking, Mibanco and BCP Bolivia.

 

In terms of the portfolio mix, there was a slight change at BCP Stand-alone, where Wholesale Banking loans increased their share of total loans QoQ and YoY. This had a negative impact on the Net Interest Margin (NIM), as we will explain later in the report.

 

Loan evolution measured in average daily balances by segment(1)

 

  

TOTAL LOANS

Expressed in million S/

   % change   % Part. in total loans 
   2Q17   1Q18   2Q18   QoQ   YoY   2Q17   2Q18 
BCP Stand-alone   76,915    82,078    84,099    2.5%   9.3%   81.7%   81.8%
Wholesale Banking   40,709    43,661    44,898    2.8%   10.3%   43.2%   43.7%
Corporate   26,684    27,607    28,505    3.3%   6.8%   28.3%   27.7%
Middle - Market   14,026    16,054    16,393    2.1%   16.9%   14.9%   15.9%
Retail Banking   36,206    38,416    39,202    2.0%   8.3%   38.5%   38.1%
SME - Business   4,819    5,070    5,286    4.2%   9.7%   5.1%   5.1%
SME - Pyme   7,922    8,631    8,645    0.2%   9.1%   8.4%   8.4%
Mortgage   12,681    13,312    13,721    3.1%   8.2%   13.5%   13.3%
Consumer   6,502    6,970    7,123    2.2%   9.6%   6.9%   6.9%
Credit Card   4,283    4,433    4,428    -0.1%   3.4%   4.5%   4.3%
Mibanco   8,689    9,366    9,553    2.0%   9.9%   9.2%   9.3%
Bolivia   5,716    6,256    6,554    4.8%   14.7%   6.1%   6.4%
ASB   2,816    2,710    2,576    -4.9%   -8.5%   3.0%   2.5%
BAP's total loans   94,136    100,409    102,782    2.4%   9.2%   100.0%   100.0%

 

 

Highest growth in volumes

Largest contraction in volumes

 

  (1) Figures differ from previously reported due to the elimination of the “Others” segment (work-out unit). Loans from said segment have been distributed among the other segments accordingly.

 

  6

 

 

Loan Growth QoQ in Average Daily Balances

Expressed in million of S/

 

 

In the analysis by segment, QoQ expansion in loans measured in average daily balances reflects:

 

(i)Loan expansion in Wholesale Banking, both in the sub-segment of Corporate Banking (+3.3% QoQ) and in Middle-Market Banking (2.1% QoQ). In Corporate Banking, growth was due to expansion in loans for working capital and foreign trade while in Middle-Market Banking, expansion was attributable to long-term loans and to foreign trade.

 

(ii)Loan growth in the Mortgage and SME-Business segments within Retail Banking.

 

(iii)The increase in loans at BCP Bolivia, which posted growth of +4.8% QoQ in 2Q18. This evolution was attributable to growth in Middle-Market Banking, Mortgage (regulated portfolio) and in Corporate Banking.

 

(iv)The increase in Mibanco loans was in line with an improvement in the productivity of the sales force, which has allowed us to continue rolling out a strategy based on financial inclusion (new clients in the System) and on accompanying our clients’ growth.

 

Loan Growth YoY in Average Daily Balances

Expressed in million of S/

 

 

  7

 

 

An analysis of YoY growth by segment measured in average daily balances reveals:

 

(i)Loan expansion in Wholesale Banking, both in the Middle-Market sub-segment (+16.9% YoY) and in Corporate Banking (6.8% YoY). In Middle-Market Banking, growth was due to an increase in long-term loans and loans for working capital while in Corporate Banking, expansion was attributable to growth in loans for working capital and foreign trade. The expansion seen in these segments was due, in part, to the first fishing campaign in 2018, which generated a significant increase in capture volumes compared to the level posted by the first fishing campaign in 2017.

 

(ii)Loan growth in the Mortgage, SME-Pyme and Consumer segments in Retail Banking.

 

(iii)The expansion in Mibanco loan book, in line with on-going improvement in the productivity of the sales force.

 

(iv)Loan growth at BCP Bolivia, which was up +14.7% YoY in 2Q18. This evolution was attributable to loan expansion in the Corporate Banking, Mortgage (regulated portfolio) and Middle-Market Banking loans.

 

Year-to-date growth in average daily balances per segment

Expressed in million of S/

 

 

Finally, the level of average daily loan balances in the first half of 2018 registered an increase of 6.8% with regard to the average daily balance of the full year 2017. This expansion was due primarily to growth in Middle-Market and Corporate Banking loans and to a lesser extent, to increases in loans in the Mortgage, Mibanco and BCP Bolivia segments.

 

  8

 

 

1.2.2. Evolution of the level of dollarization by segment

 

Loan evolution by currency - average daily balances(1)

 

   DOMESTIC CURRENCY LOANS   FOREIGN CURRENCY LOANS   % part. by 
   Expressed in million S/   Expressed in million US$   currency 2Q18 
   2Q17   1Q18   2Q18   QoQ   YoY   2Q17   1Q18   2Q18   QoQ   YoY   LC   FC 
BCP Stand-alone   46,871    50,401    51,227    1.6%   9.3%   9,227    9,794    10,069    2.8%   9.1%   60.9%   39.1%
Wholesale Banking   18,270    19,761    19,869    0.5%   8.8%   6,892    7,390    7,666    3.7%   11.2%   44.3%   55.7%
Corporate   11,509    11,951    11,989    0.3%   4.2%   4,660    4,841    5,059    4.5%   8.6%   42.1%   57.9%
Middle-Market   6,761    7,810    7,880    0.9%   16.6%   2,231    2,549    2,607    2.3%   16.9%   48.1%   51.9%
Retail Banking   28,601    30,640    31,358    2.3%   9.6%   2,336    2,404    2,402    -0.1%   2.9%   80.0%   20.0%
SME - Business   2,304    2,317    2,383    2.8%   3.4%   772    851    889    4.4%   15.1%   45.1%   54.9%
SME - Pyme   7,599    8,343    8,375    0.4%   10.2%   99    89    83    -7.2%   -16.6%   96.9%   3.1%
Mortgage   9,460    10,365    10,836    4.5%   14.5%   989    911    884    -3.0%   -10.7%   79.0%   21.0%
Consumer   5,471    5,772    5,963    3.3%   9.0%   317    370    355    -4.0%   12.2%   83.7%   16.3%
Credit Card   3,766    3,843    3,801    -1.1%   0.9%   159    183    192    5.1%   20.9%   85.8%   14.2%
Mibanco   8,189    8,847    9,016    1.9%   10.1%   153    160    164    2.6%   7.1%   94.4%   5.6%
Bolivia   -    -    -    -    -    1,756    1,934    2,008    3.8%   14.4%   -    100.0%
ASB   -    -    -    -    -    865    838    789    -5.8%   -8.7%   -    100.0%
Total loans   55,060    59,248    60,243    1.7%   9.4%   12,001    12,726    13,030    2.4%   8.6%   58.6%   41.4%

 

Highest growth in volumes

Largest contraction in volumes

 

(1) Figures differ from previously reported due to the elimination of the “Others” segment (work-out unit). Loans from said segment have been distributed among the other segments accordingly.

 

In the analysis of loan growth by currency, the expansion posted QoQ and YoY is explained by growth in both the LC portfolio (+1.7% QoQ and +9.4% YoY) and the FC portfolio (+2.4% QoQ and +8.6% YoY).

 

1.2.3. Evolution of the level of dollarization by segment

 

YoY evolution of the level of dollarization by segment (1)(2)

 

(1) Average daily balances.

(2) The FC share of Credicorp’s loan portfolio is calculated including BCP Bolivia and ASB, however the chart shows only BCP Stand-alone and Mibanco’s loan books.

 

At BCP Stand-alone, the loan-dollarization level remained relatively stable YoY. However, the analysis by business segments shows a reduction in the dollarization level in the Mortgage and SME-Pyme segments. The dedollarization in the mortgage segment was due to the decreasing interest rate differential between new disbursements in LC and FC loans, which was attributable to the downward and stable trend for LC and FC rates, respectively. Conversely, Wholesale Banking, SME-Business and Credit card segments posted a slight increase in their dollarization levels. In the case of Wholesale Banking, loan growth in FC is explained mainly by financing for the first fishing campaign.

 

  9

 

 

It is important to highlight that, as shown in the graph below, the percentage of the loan portfolio that is highly exposed to FX risk on credit risk remains relatively stable at a level close to 0%.

 

FX risk on credit risk – BCP Stand-alone

 

 

1.2.4. BCRP de-dollarization plan at BCP Stand-alone

 

At the end of 2014, BCRP set up a Program to reduce the dollarization level of the loan book in the Peruvian Banking System. As part of this Program, BCRP set some targets to reduce the loan balance in US Dollars progressively at the end of June 2015, December 2015, December 2016, December 2017 and December 2018. The balances that are subject to reduction targets are the total FC portfolio with some exceptions and the balance of the joint mortgage and car loan portfolio. The balance required at the end of December 2018 is as follows:

 

(i)For the total portfolio in FC, the goal set for 2017 will continue to apply. In this context, the balance at the end of December 2018 must represent no more than 80% of the total loan balance in FC reported at the end of September 2013 (excluding loans that meet certain requirements.)

 

At the end of June 2018, BCP Stand-alone already registered a compliance level of 97% with regard to the goal set by BCRP for December 2018.

 

(ii)For the Mortgage and Car portfolio in FC, the goal set for 2017 will continue to apply until November 2018. In December, a 10% adjustment will be made. The goal will be adjusted by 10% every year to reach a minimum of 5% of net equity. The balance at the end of December 2018 must represent no more than 60% of the balance registered at the end of February 2013.

 

At the end of June 2018, BCP Stand-alone posted a compliance level with BCRP’s de-dollarization target of 101%.

 

  10

 

 

1.2.5. Market share in loans

 

Market share in Peru

 

 

(1) Wholesale Banking market shares are different that previously reported because loans from COFIDE are now included in the denominator.

(2) Mortgage segment includes Mibanco's market share of 1.1% as of May 2018 and March 2018, and of 1.0% as of June 2017.

(3) Consumer segment includes Mibanco's market share of 1.6% as of May 2018, 1.7% as of March 2018, and 2.1% as of June 2017.

(4) Market Shares for Corporate, Middle-market and SME-Business are as of June 2018.

 

At the end of May 2018, BCP Stand-alone continued to lead the market with a market share (MS) of 29.3%, which was significantly higher than the level posted by its closest competitor. This level is very similar to that obtained in 1Q18 (29.3%) and in 2Q17 (28.8%).

 

Corporate Banking reported a decrease of -220 bps in its MS QoQ, while Middle-market Banking increased its MS in +80 bps. In the YoY evolution, Corporate Banking reported a reduction of -30 bps in its MS while Middle Market Banking posted an increase of +220 bps. It is important to mention that both segments continue to lead in their respective markets.

 

In Retail Banking, BCP reported a relatively stable market share and continued to lead in virtually all of its segments, with the exception of SME-Business. In this segment, BCP is situated in second place but is focused on growing its market share, as is evident in a YoY expansion of +180 bps.

 

Mibanco reported a MS in the SME segment that topped 2017’s level by +70 bps, situating at 23.2%.

 

Finally, BCP Bolivia’s market grew +10 bps QoQ and +30 bps YoY, which allowed it to remain in fourth place in the Bolivian Financial System.

 

  11

 

 

2.Funding Sources

 

At the end of 2Q18, total funding fell QoQ. This was primarily attributable to the decrease in BCRP Instruments and, to a lesser extent, to a slight drop in total deposits, mainly in LC. Deposits continued to be the main source of funding at Credicorp, and in the YoY analysis they represent the main source to replace BCRP Instruments that reached their due date. All of the aforementioned had a positive impact on Credicorp’s funding cost, which remained relative stable since 2016 (+6 bps QoQ, -5 bps YoY and -9 bps YTD), despite increases in international interest rates.

 

Funding      As of       % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Non-interest bearing demand deposits   24,051,059    26,464,658    24,630,138    -6.9%   2.4%
Interest bearing Demand deposits   4,884,148    4,597,370    4,652,886    1.2%   -4.7%
Saving deposits   26,085,580    29,724,860    29,709,658    -0.1%   13.9%
Time deposits   29,576,960    30,238,770    30,762,161    1.7%   4.0%
Severance indemnity deposits   7,039,767    6,676,449    7,275,824    9.0%   3.4%
Interest payable   401,618    490,998    513,568    4.6%   27.9%
Total deposits   92,039,132    98,193,105    97,544,235    -0.7%   6.0%
Due to banks and correspondents   8,066,962    7,824,148    8,057,222    3.0%   -0.1%
BCRP instruments   8,989,728    6,494,792    4,578,878    -29.5%   -49.1%
Repurchase agreements (1)   2,700,084    2,867,326    2,710,701    -5.5%   0.4%
Bonds and subordinated debt   15,295,673    15,318,649    15,283,893    -0.2%   -0.1%
Total funding (2)   127,091,579    130,698,020    128,174,929    -1.9%   0.9%

(1) Since 2Q18, Repurchase agreements is excluded from Other liabilities and shown in a individual account. Also, it is included in the Total funding.

(2) Since 1Q18, Total Funding excludes the following accounts: acceptances outstanding, reserves for property and casualty claims, reserve for unearned premiums, reinsurance payable and other liabilities.

 

2.1. Funding Structure

 

Evolution of the funding structure and cost – BAP

(S/ billion)

 

 

(1) The funding cost differs from previously reported due to the methodology change of the denominator, which do not include the following accounts:

acceptances outstanding, reserves for property and casualty claims, reserve for unearned premiums, reinsurance payable and other liabilities.

 

  12

 

 

The figure depicting the evolution of Credicorp’s structure and funding cost is calculated with period-end balances.

 

Total funding reported a slight decrease QoQ, which was due primarily to a decrease in the level of BCRP Instruments and to a lesser extent, to a minor contraction in deposits. The most noteworthy aspects of the funding structure were:

 

(i)The importance of deposits as a funding source, whose share of total funding continued to increase QoQ and posted an even larger increase YoY despite the slight QoQ contraction in the volume of total deposits.

 

(ii)The deposit mix reported a significant share of demand and savings deposits, which represented 60.5% of total deposits. These deposit types register lower costs than others in the mix, but most importantly, they have replaced most of BCRP instruments.

 

(iii)The continuous reduction in the volume of BCRP Instruments, which after falling continuously since 2016, reached its lowest level in 3 years at the end of June 2018. This funding type has been replaced mainly by lower-cost deposits.

 

All of the aforementioned has allowed the funding cost to remain relatively stable since December 2016.

 

2.2. Deposits

 

Deposits      As of       % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Non-interest bearing demand deposits   24,051,059    26,464,658    24,630,138    -6.9%   2.4%
Interest bearing Demand deposits   4,884,148    4,597,370    4,652,886    1.2%   -4.7%
Saving deposits   26,085,580    29,724,860    29,709,658    -0.1%   13.9%
Time deposits   29,576,960    30,238,770    30,762,161    1.7%   4.0%
Severance indemnity deposits   7,039,767    6,676,449    7,275,824    9.0%   3.4%
Interest payable   401,618    490,998    513,568    4.6%   27.9%
Total deposits   92,039,132    98,193,105    97,544,235    -0.7%   6.0%

 

Total deposits fell slightly QoQ. This was mainly attributable to a decrease in non-interest-bearing demand deposits, which fell slightly QoQ. This drop was, however, somewhat attenuated by an increase in the volume of CTS deposits and time deposits.

 

The QoQ reduction was attributable to a contraction in:

 

(i)Non-interest-bearing demand deposits at BCP Stand-alone, which was in line with a decrease in the average volume of current accounts in Wholesale Banking in the month of June, and

 

(ii)Savings deposits at BCP Stand-alone.

 

The aforementioned was slightly offset by a QoQ increase in:

 

(i)Severance indemnity deposits given that employers make the first deposit in 2Q every year (in the month of May).

 

(ii)Time deposits, through BCP Stand-alone and ASB due to an increase in corporate time deposits.

 

(iii)Interest-bearing demand deposits at BCP Stand-alone due to an increase in deposit of entities from the financial system.

 

  13

 

 

In YoY terms, total deposits increased +6.0%, mainly due to:

 

(i)Savings deposits, whose YoY results reflect the campaigns throughout the year to capture savings.

 

(ii)Time deposits, which grew thanks to campaigns in 2017 to capture deposits from individuals and companies, mainly at BCP Stand-alone and BCP Bolivia.

 

(iii)Last, non-interest bearing demand deposits, which expanded mainly due an increase in the average balance of current accounts of institutional clients.

 

2.2.1. Deposits: dollarization level

 

Dollarization Level of Deposits (1) – BAP

 

(1) Q-end balances.

 

Credicorp - Deposit Dollarization measured in quarter-end balances

 

 

The dollarization level of Credicorp deposits increased QoQ due to growth in FC deposits, which was mainly attributable to higher levels of demand deposits1 and savings deposits. The aforementioned was amplified by the drop in both of these deposits types in LC. In the case of time deposits, QoQ growth was primarily due to LC deposits. Deposits in CTS accounts, as indicated in section 2.2 Deposits, were made primarily in LC.

 

In the YoY evolution, an on-going reduction is evident in the dollarization level of total deposits, in line with growth in savings, time and non-interest-bearing deposits in LC.

 

 

1 Includes interest-bearing and non-interest bearing demand deposits.

 

  14

 

 

2.2.2. Market share in Deposits

 

Market share in Peru

 

Source: BCP

(1) Demand deposits includes Mibanco's market share of 0.2% at the end of June 2017 and March 2018, and 0.1% at the end of May 2018.

(2) Savings deposits includes Mibanco's market share of 1.2% at the end of June 2017 and March 2018 and 1.3% at the end of May 2018.

(3) Time deposits includes Mibanco's narket share of 5.8% at the end of June 2017, 6.0% at the end of March 2018 and 6.1% at the end of May 2018.

(4) Severance indemnity deposits includes Mibanco's market share of 1.3% at the end of June 2017, 1.2% at the end of March 2018 and 1.3% at the end of May 2018.

 

At the end of May 2018, the subsidiaries of Credicorp in Peru, BCP and Mibanco, continued to lead the market for total deposits with a market share (MS) of 33.4%. This level of MS is approximately 14.3 percentage points above the level posted by its closest competitor.

 

In the YoY analysis, total MS increased with regard to the level in June 2017, which was in line with YoY growth in all deposit types.

 

BCP Bolivia continued to rank fifth in the financial system in Bolivia, with a market share of 10.0% at the end of June 2018 versus 9.9% at the end of March 2018. In the YoY analysis, the MS remained stable with regard to the figure reported at the end of June 2017 (10.2%).

 

2.3. Other funding sources

 

Other funding sources      As of       % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Due to banks and correspondents   8,066,962    7,824,148    8,057,222    3.0%   -0.1%
BCRP instruments   8,989,728    6,494,792    4,578,878    -29.5%   -49.1%
Repurchase agreements   2,700,084    2,867,326    2,710,701    -5.5%   0.4%
Bonds and subordinated debt   15,295,673    15,318,649    15,283,893    -0.2%   -0.1%
Total Other funding sources   35,052,447    32,504,915    30,630,694    -5.8%   -12.6%

 

The total of other sources of funding fell -5.8% QoQ, due mainly to a decrease in the level of BCRP instruments.

 

The share of BCRP Instruments in total funding at Credicorp fell QoQ and YoY, mainly due to a decrease in substitution and expansion repos with BCRP.

 

BCP Stand-alone – BCRP Instruments

S/ Billions

 

 

  15

 

 

Repurchase agreements fell QoQ due to a decrease in transactions at ASB, BCP Stand-alone and Mibanco.

 

Bonds and Subordinated Debt fell after a corporate bond expired in June 2018 at BCP Stand-alone.

 

Due to banks and correspondents grew QoQ due to an increase in the level of due-to banks with foreign banks and interbank funds at BCP Stand-alone.

 

The YoY analysis continued to show the on-going reduction in BCRP Instruments.

 

2.4. Loan / Deposit (L/D)

 

Loan / Deposit Ratio by Subsidiary

 

 

The L/D ratio at Credicorp increased QoQ to situate at 105.4% after loans expanded 2.2% in a quarter in which deposits contracted 0.7%. The analysis by subsidiary shows that BCP Stand-alone increased its L/D ratio, in line with the trend seen at Credicorp. The L/D ratio at Mibanco was situated at 124.6% in 2Q18 given that QoQ growth in total loans outpaced growth in total deposits.

 

Loan / Deposit Ratio by Currency

 

Local Currency Foreign Currency
 

 

The QoQ analysis by currency indicates that the L/D ratio in LC at Credicorp increased given loan growth in LC, which was amplified by a drop in LC deposits. The L/D in FC increased slightly after growth in FC loans at BCP Stand-alone outpaced growth in FC deposits.

 

The YoY analysis reveals that the L/D ratio at Credicorp was relatively stable while the L/D in FC grew slightly; both of these scenarios were attributable to the fact that, in both currencies, loan growth continues to top growth in deposits.

 

  16

 

 

2.5. Funding Cost

 

The funding cost at Credicorp remained stable, increasing only +6 bps QoQ. This was mainly attributable to:

 

(i)A drop in the deposit volume for non-interest-bearing deposits in LC, which represents the funding source with the lowest cost (zero). This is reflected in the slight increase seen in the average-weighted funding cost in LC.

 

(ii)Slight growth QoQ in FC funding cost due to higher global interest rates, as is evident in the figure “Funding cost - Credicorp.”

 

Funding Cost – Credicorp

 

 

The figure depicting Credicorp’s funding cost is calculated based on period-end balances.

 

As is evident in the figure above, the funding cost in LC has historically been higher than the funding cost in FC. Nevertheless, the funding cost in FC has increased due to rising global interest rates. This has affected costs of FC funding, which represents 55% of Credicorp’s total funding. The aforementioned was attenuated by an on-going decline in the funding cost in LC, which was associated with reference rate cuts in 2017 and part of 2018.

 

In the YoY and YTD analysis, the funding cost fell in line with the evolution of the funding structure. In the current scenario, deposits post a higher share of total funding (76.1% in 2Q18, 74.9% 1Q18 and 72.4% in 2Q17), effectively replacing BCRP Instruments; this substitution implied a consequent shift to lower-cost funding. Furthermore, since 2017, BCRP’s reference rate fell (50 bps throughout 2018), which led to a drop in the funding cost in LC after almost three years of on-going upward pressure.

 

The funding cost(2) per subsidiary is depicted in the table below. It is important to note:

 

   BCP       BCP       Banking     
   Stand-alone   Mibanco   Bolivia   ASB   Business   Credicorp (1) 
2Q17   2.15%   5.08%   2.26%   2.05%   2.38%   2.37%
1Q18   2.01%   4.49%   2.84%   0.97%   2.19%   2.26%
2Q18   2.06%   4.28%   2.94%   1.44%   2.26%   2.32%
Jun 17   2.17%   5.09%   2.08%   2.07%   2.39%   2.38%
Jun 18   2.03%   4.38%   2.84%   1.04%   2.21%   2.29%

(1) Includes banking business results, other subsidiaries and consolidation adjustments.

 

(i)The slight increase QoQ in BCP Stand-alone’s funding cost. However, YoY and YTD its funding cost decreased.

 

(ii)Mibanco’s funding cost, which had been subject to upward pressure since 2014, stabilized in 2017 and fell at the beginning of 2018.

 

 

(2) The funding costs differs from previously reported levels due to a change in the methodology to calculate the denominator, which no longer includes: outstanding account acceptances, reserves for property and casualty claims, reserve for unearned premiums, reinsurance payable and other liabilities. Since 2Q18, the account "Repurchase agreement" was excluded from Other liabilities and was included in the calculation of Total funding.

 

  17

 

 

3.Portfolio quality and Provisions for loan losses

 

The cost of risk (CofR) fell QoQ and YoY to situate at 1.22%, which was similar to the level reported in 2010 when Retail Banking segments represented approximately 41% of total loans, and prior to the acquisition of Mibanco. This drop was due to an improvement in the quality of risk in the SME-Pyme, Mibanco, Consumer and Credit Card segments in the last three years, which was captured in advance by the forward-looking nature of the IFRS9 methodology. YTD, the cost of risk was 1.33%, which was 74 bps below the level posted in the first semester of 2017.

 

Portfolio quality and Provisions for loan losses  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Gross Provisions   (499,390)   (438,873)   (385,131)   -12.2%   -22.9%   (1,100,200)   (824,004)   -25.1%
Loan loss recoveries   66,171    67,849    71,959    6.1%   8.7%   130,487    139,808    7.1%
Provision for loan losses, net of recoveries   (433,219)   (371,024)   (313,172)   -15.6%   -27.7%   (969,713)   (684,196)   -29.4%
Cost of risk (1)   1.85%   1.48%   1.22%   -26 bps    -63 bps    2.07%   1.33%   -74 bps 
Provisions for loan losses / Net interest income(2)   22.0%   18.2%   15.2%   -310 bps    -690 bps    24.4%   16.7%   -770 bps 
Total loans (Quarter-end balance)   93,670,216    100,570,511    102,766,633    2.2%   9.7%               
Allowance for loan losses   4,323,480    4,805,105    4,819,704    0.3%   11.5%               
Write-offs   381,986    353,984    345,253    -2.5%   -9.6%               
Internal overdue loans (IOLs) (3)   2,749,047    2,995,217    3,113,014    3.9%   13.2%               
Refinanced loans   922,974    910,583    1,086,135    19.3%   17.7%               
Non-performing loans (NPLs) (4)   3,672,021    3,905,800    4,199,149    7.5%   14.4%               
Delinquency ratio over 90 days   2.25%   2.19%   2.25%                         
IOL ratio   2.93%   2.98%   3.03%                         
NPL ratio   3.92%   3.88%   4.09%                         
Coverage ratio of Internal overdue loans   157.3%   160.4%   154.8%                         
Coverage ratio of NPLs   117.7%   123.0%   114.8%                         

 

(1) Annualized provisions for loans losses / Total loans.

(2) Figures differ from previously reported, please consider the data presented on this report.

(3) Includes overdue loans and loans under legal collection. (Quarter-end balances)

(4) Non-performing loans include internal overdue loans and refinanced loans. (Quarter-end balances)

 

As indicated in 1Q18, on the first of January 2018, Credicorp adopted the requirements of IFRS9 to calculate net provisions for loan losses, among others (for more details, see Annex 11.10 IFRS9 Revelation).

 

The IFRS9 methodology classifies the portfolio in three stages based on criteria that seeks to determine significant increases in risk or impairment:

 

·Stage 1: For a healthy portfolio
·Stage 2: For a healthy portfolio with a significant increase in risk
·Stage 3: For a portfolio in default

 

Next, it is necessary to calculate the forward-looking expected loss for assets included in each of these stages. For this calculation, projections in three macroeconomic scenarios are used, and the parameters for the probability of default, loss given default and exposure at the time of default are applied.

 

The primary difference with IAS 39 is that the IFRS9 rule requires financial entities to calculate provisions based on a forward-looking expected loss approach instead of incurred and incurred but not reported loss.

 

Given the forward-looking nature of expected loss, IFRS9 captures in advance the improvement or deterioration in the portfolio’s risk quality. This means that if the portfolio’s quality of risk improves, IFRS9 reflects the improvement faster than under the IAS 39 methodology. Nevertheless, provisions for loans net of recoveries calculated under IAS 39 and under IFRS9 tend to converge over time.

 

  18

 

 

In terms of the impact that adopting IFRS9 has had on the calculation of net provisions for loan losses, it is important to note two main effects:

 

(i)One-off effect: On January 01, 2018, there was an increase of S/257.7 million in the allowance for loan losses on the Balance Sheet, which led to a drop of S/226.1 million in retained earnings and a drop in deferred taxes.

 

(ii)The recurring impact on the Income Statement: Since January 1, 2018, the requirement for net provisions for loan losses is calculated under the forward-looking expected loss methodology. As such, in 2Q18, the provisions requirement fell -15.6% QoQ and -27.7% YoY, which we will explain later in the report.

 

3.1. Provisions for loan losses

 

The QoQ analysis shows a 15.6% drop in loan provisions net of recoveries, which was attributable to:

 

(i)The improvement in the risk level of the loan portfolio in Retail Banking segments after these segments reported higher-than-expected levels of delinquency in previous years (SME-Pyme in 2014 and Consumer and Credit Card between 2015 and 2016). The aforementioned was reflected in an improvement in these segments’ default ratios.

 

(ii)The improvement in the risk quality of Mibanco’s loan book, which has been evident since 2015.

 

These elements, coupled with the slight and gradual recovery seen in the macroeconomic scenario, were captured in advance by the use of IFRS9 methodology, as we explained in the previous section.

 

It is important to note that although Mibanco, SME-Pyme, Consumer and Credit Card combined represent approximately 30% of Credicorp’s loan portfolio, they explained on average 82% of the total provisions for loan losses made in the last four years. Thus, their risk-quality improvement has been the main driver in the reduction of provisions for loan losses in the last three years. In this context, and due to the forward-looking nature of expected loss IFRS9 methodology captured in advance the improvement in the risk level of these segments and consequently, the cost of risk situated at 1.22%. This level is similar to that reported in 2010, when the Retail Banking segments represented approximately 41% of total loans and prior to the acquisition of Mibanco.

 

In the YoY and YTD analysis, provisions for loans net of recoveries fell -27.7% and -29.4%, respectively, due to an improvement in the risk quality of Retail Banking and Mibanco’s portfolios. The cost of risk in 1H18 reached a level of 1.33%, 74 bps below the level registered in 1H17, and 48 bps lower than the cost of risk of the underlying portfolio in 1H17 (1.81%, excluding the effects of the El Nino Phenomenon and the Lava Jato Case).

 

3.2. Portfolio Quality

 

Delinquency ratios

 

(1) Adjusted NPL ratio = (Non-performing loans + Charge-offs) / (Total loans + Charge-offs).

(2) Cost of risk = Annualized provisions for loan losses net of recoveries / Total loans.

(3) Cost of risk of the underlying portfolio excludes the effects of El Nino Phenomenon and the Lava Jato Case.

 

  19

 

 

Prior to analyzing the evolution of delinquency ratios, it is important to remember that:

 

(i)Traditional delinquency ratios (IOL and NPL ratios) continue to be distorted by the presence of loans with real estate collateral (commercial and residential properties). This means that a significant portion of loans that are more than 150 days past due cannot be written-off (despite the fact that provisions have been set aside) given that a judicial process must be initiated to liquidate the collateral, which takes five years on average.

 

(ii)In the second half (2H) of every year, loans are more dynamic, particularly in the SME-Pyme and Mibanco segments given that the main campaigns (Christmas and year-end campaigns) are held in the second semester (2H) and these short-term loans are paid off in 1H of the following year.

 

The IOL ratio remained relatively stable QoQ and YoY while the NPL ratio rose +21 bps QoQ and +17 bps YoY. This was attributable to a refinanced loan for a client in the Wholesale Banking segment, which is 100% provisioned (further details later in the report). If we exclude the particular refinanced loan, Credicorp’s NPL ratio in 2Q18 would have been relatively stable YoY (3.94%).

 

Coverage ratios

 

The coverage ratios for the IOL and NPL portfolios fell this quarter. This was due to deceleration of growth in the allowance for loan losses due to the continuous improvement in risk quality, as explained in section 3.1 Net provisions for loan losses.

 

3.2.1. Delinquency indicators by business line

 

Wholesale Banking – Delinquency ratios

 

 

(i)The QoQ analysis shows a drop in the volume of the IOL portfolio in Wholesale Banking due to the refinancing of past-due loans. Nevertheless, the volume of the NPL portfolio grew even further due to a refinanced loan for S/153 million granted to a specific client. It is important to note that this refinanced loan is 100% provisioned. In this context, the IOL ratio fell while the NPL ratio increased by +42 bps QoQ and +47 bps YoY. If we exclude the effect of the specific refinanced loan, the NPL ratio for Wholesale Banking would have been 0.76%, which would have represented growth of only +8 bps QoQ and +13 bps YoY.

 

  20

 

 

BCP Bolivia – Delinquency ratios

 

 

(ii)BCP Bolivia reported an improvement QoQ and YoY in its IOL and NPL ratios due to a drop in the volume of internal overdue loans. This QoQ reduction was generated after some corporate clients regularized outstanding payments in 2Q18.

 

SME-Business – Delinquency ratios

 

 

(iii)Given that the SME-Business segment registers seasonality in loan origination, it is important to focus on the YoY analysis, which shows that traditional delinquency ratios, both for the IOL and NPL portfolios, increased +34 bps and +26 bps, respectively. The increase in delinquency ratios was attributable to growth in the IOL portfolio, primarily due to the deterioration in the situation of one client. Please not that this business’s risk quality ratios remain within the organization’s appetite for risk.

 

  21

 

 

SME - Pyme – Delinquency ratios

 

 

(iv)In the SME-Pyme portfolio, it is important to analyze the early delinquency ratio, which excludes loans that are overdue less than 60 days (volatile loans whose percentage of recovery is very high) and those overdue more than 150 days (loans that have been provisioned but which cannot be written off due to the existence of real estate collateral- commercial properties that take five years on average to liquidate).

 

Since the beginning of the second half of 2014, early delinquency has followed a downward trend YoY. This in line with on-going improvement in the risk quality of vintages after adjustments were made in the SME-Pyme business model. The impact of these modifications became more apparent in 2015. In 2Q18, early delinquency rose slightly YoY, which reflected Credicorp’s decision to re-enter segments with slightly higher risk. It is important to note that since 2017, this segment has situated “comfortably” within the risk appetite defined for the segment, which in turn aims to maximize the portfolio’s profitability while balancing risk quality and loan growth.

 

Mortgage – Delinquency ratios

 

 

(v)In terms of Mortgage loans, it is important to note that these ratios have also been affected by the existence of real estate collateral, where foreclosure takes around 5 years. During this period, these loans cannot be written-off although provisioned. Nevertheless, traditional delinquency ratios fell QoQ. This was in line with the acceleration of loan growth due to Credicorp’s strategy to go into segments that imply slightly higher risk to maximize portfolio profitability. The strategy improved the pace of loan origination, while keeping risk indicators within the organization’s risk appetite.

 

  22

 

 

The early delinquency ratio, which excludes the effect of loans that are over 150 days overdue, was relatively stable QoQ and YoY. It is important to note that this indicator is within the average levels observed over the past two years and is within the business’s risk appetite.

 

Consumer – Delinquency ratios

 

 

(vi)In the Consumer portfolio, the portfolio’s risk profile continues to improve in comparison to the level posted by vintages from 2015 or before, which led to the delinquency problem. This improvement has been achieved due to the different initiatives for risk management and collections that are in place today. The portfolio’s new composition reflects the calibrated profile generated by the change in the risk admission policy.

 

Early delinquency increased slightly +10 bps QoQ but fell -29 bps YoY to situate at levels that have consistently fallen below those of 2013, prior to the deterioration in risk quality. In this context, we have carried out a strategy to accelerate the pace of growth to maximize the portfolio’s profitability while preserving the organization’s appetite for risk.

 

The traditional ratios for delinquency fell both QoQ and YoY due to a drop in internal overdue loans and refinanced loans after on-going improvement in the risk quality of new vintages (in line with the adjustments made in risk management and collections). Additionally, we have observed an uptick in the pace of growth of total loans, which reflects the latest adjustments to admission guidelines under the strategy mentioned above.

 

Credit Card – Delinquency ratios

 

 

(vii)In the Credit Card segment, early delinquency increased +18 bps QoQ but remained relatively stable YoY, situating within the organization’s appetite for risk. This reflects an improvement in the risk quality of new vintages and in the portfolio mix after corrective measures were taken to address the delinquency problem that emerged at the end of 2015.

 

  23

 

 

Mibanco – Delinquency ratios

 

 

(viii)The IOL and NPL ratios increased both QoQ and YoY due to growth in internal overdue loans, which was attributable to (i) slight portfolio deterioration, in line with a minor decline in collection effectiveness, and ii) delinquency registered in the vintages for the skip programs offered to clients affected by the El Nino Phenomenon, which have begun to mature. It is worth mentioning that Mibanco has already addressed the collection-effectiveness issue. It is important to note that this business continues to post risk quality ratios that are within the organization’s appetite for risk.

 

  24

 

 

4.Net Interest Income (NII)

 

In 2Q18, NII, the main source of income, expanded +0.9% QoQ and +4.8% YoY, which represents an improvement with regard to the evolution registered in 1Q18 (-0.8% QoQ and +1.8% YoY). This favorable evolution is due primarily to: (i) growth in interest income, mainly due to the expansion in average daily loan balances; and (ii) relatively low growth in interest expenses, which were contained by the reduction in interest expenses on loans that reflects the on-going contraction in the volume of BCRP Instruments. The aforementioned translated into an increase in NIM of +13 bps QoQ and +3 bps YoY. Additionally, the improvement in the cost of risk led risk-adjusted NIM to recover +26 bps QoQ and +39 pbs YoY, and to improve +31 bps with regard to the level in 1H17.

 

Net interest income  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   2018 / 2017 
Interest income   2,715,901    2,789,927    2,812,623    0.8%   3.6%   5,455,680    5,602,550    2.7%
Interest on loans   2,353,070    2,414,352    2,462,973    2.0%   4.7%   4,714,729    4,877,325    3.4%
Dividends on investments   4,223    8,595    7,483    -12.9%   77.2%   34,346    16,078    -53.2%
Interest on deposits with banks   20,416    28,349    30,875    8.9%   51.2%   43,876    59,224    35.0%
Interest on securities   331,953    324,068    296,995    -8.4%   -10.5%   645,385    621,063    -3.8%
Other interest income   6,239    14,563    14,297    -1.8%   129.2%   17,344    28,860    66.4%
                                         
Interest expense   747,989    746,240    749,805    0.5%   0.2%   1,474,682    1,496,045    1.4%
Interest on deposits   284,093    288,309    295,582    2.5%   4.0%   551,627    583,891    5.8%
Interest on borrowed funds   199,127    167,432    149,799    -10.5%   -24.8%   397,633    317,231    -20.2%
Interest on bonds and subordinated notes   210,905    216,083    230,561    6.7%   9.3%   419,064    446,644    6.6%
Other interest expense (1)   53,864    74,416    73,863    -0.7%   37.1%   106,358    148,279    39.4%
Net interest income (1)   1,967,912    2,043,687    2,062,818    0.9%   4.8%   3,980,998    4,106,505    3.2%
Risk-adjusted Net interest income (1)   1,534,693    1,672,663    1,749,646    4.6%   14.0%   3,011,285    3,422,309    13.6%
Average interest earning assets   149,939,696    158,600,872    156,378,249    -1.4%   4.3%   148,745,969    156,982,188    5.5%
Net interest margin (1)(2)   5.25%   5.15%   5.28%   13bps   3bps   5.35%   5.23%   -12bps
NIM on loans (1)(2)   8.12%   7.72%   7.77%   5bps   -35bps   8.02%   7.69%   -33bps
Risk-adjusted Net interest margin (1)(2)   4.09%   4.22%   4.48%   26bps   39bps   4.05%   4.36%   31bps
Net provisions for loan losses / Net interest income   22.01%   18.15%   15.18%   -297bps   -683bps   24.36%   16.66%   -770bps

 

(1) Figures differ from previously reported, please consider the data presented on this report.

(2) Annualized.

 

4.1. Interest Income

 

Interest Income – LC Interest Income – FC
   

 

  25

 

 

In the QoQ analysis, the 0.8% increase in Interest Income is due primarily to growth in interest income on loans, which was in turn due to:

 

(i)Slight acceleration in the growth of average daily loan balances (+2.4% QoQ), which although led by Wholesale Banking also received a significant boost from Retail Banking and Mibanco. Loan growth from Retail Banking and Mibanco has increased considerably, going from representing 25% of the increase in total average daily balances in 1Q18 to accounting for 40% of total volume growth in 2Q18. In this context, the volume effect and mix by segment registered a larger positive impact in 2Q18 than in 1Q18.

 

(ii)Loan expansion, measured in average daily balances, posted the same growth in LC and FC, unlike in past quarters when growth was led by FC loans, where margins are generally lower than those associated with LC loans. In this scenario, the effect of the currency mix also favored growth in interest income on loans.

 

(iii)A context of relative stability in margins after various quarters of contractions due to high competition in Wholesale Banking and an improvement in the risk profile of Retail Banking. This stability in margins meant that the volume effect for growth translated directly into an improvement in interest income on loans.

 

All of the aforementioned offset the drop-in interest income on securities, which was seen primarily in LC and reflected the contraction in fair-value-through-profit-or-loss investments (formerly trading securities) at BCP, as explained earlier.

 

In the YoY analysis, interest income expanded +3.6%, which represented a recovery with regard to the figure reported in 1Q18. The increase in the generation of interest income on loans was, as in the QoQ case, the catalyst of recovery YoY. The main factors that explain the +4.7% YoY in interest income on loans are:

 

(i)The volume effect due to an acceleration in the growth of average daily balances (+9.2% YoY) and to the mix per segment where Retail Banking and Mibanco accounted for 45% of growth, similar to the 48% in 1Q18.

 

(ii)The currency mix was also favorable given that growth in average daily balances was more balanced between the LC and FC portfolios.

 

Similar to the QoQ evolution, all of the aforementioned offset the contraction in interest income on securities, as outlined above.

 

All of the aforementioned led to an improvement in trends in YTD terms, as is evident in +2.7% growth in interest income in 1H18 with regard to 1H17’s result.

 

4.2. Interest Expenses

 

Interest Expenses – LC Interest Expenses - FC
   

 

  26

 

 

In the QoQ analysis, interest expenses grew 0.5%. This was primarily attributable to:

 

(i)The increase in interest expenses on deposits due to an interest-rate effect and a volume effect. In the first case, interest expenses on FC deposits increased in line with higher market interest rates in dollars. The volume effect is explained by the different mix, although total deposits contracted QoQ, interest-bearing deposits grew. Moreover, time deposits, which constitute the most expensive deposit type, contracted in April but expanded significantly in May and June thus the mix of time deposits registered a higher cost than that in 1Q18.

 

(ii)Growth in interest expenses on bonds and subordinated debt due to the one-off effect of the cancellation of interest-rate-swaps (IRS) registered several years ago for some bonds in FC. This decision was made after considering the current scenario of increasing interest rates in dollars. It is important to note that although this effect increased the level of interest expense, in this quarter and going forward, in the future volatility will decrease given that issuances will be fixed rate.

 

The two aforementioned effects were attenuated by a decrease in interest expenses on borrowed funds, specifically in LC, which is due to the significant reduction in the volume of BCRP instruments.

 

In the YoY analysis, interest expenses grew +0.2%. Similar to the situation in the QoQ analysis, growth in this component was due primarily to higher interest expenses on deposits. The main factors that explain +4.0% growth YoY in interest expenses on deposits were:

 

(i)The volume effect due to growth in interest-bearing deposits, which was primarily due to expansion in Savings Deposits and to a lesser extent, in time deposits.

 

(ii)The interest rate effect given that interest rates in FC continue to follow an upward trend.

 

(iii)The currency mix of deposits also had an impact on growth in interest expenses on deposits given that the YoY expansion was led by LC deposits, which are more expensive than FC deposits.

 

It is important to note the decrease in Interest on borrowed after on-going reductions in BCRP Instruments.

 

The YTD analysis shows similar trend to the QoQ and YoY variations, interest expenses in 1H18 grew 1.4% compared to the level posted in 1H17. This was primarily due to growth in Interest expenses on deposits.

 

4.3. Net Interest Margin (NIM) and Risk-Adjusted NIM

 

Credicorp’s NIM and Risk-Adjusted NIM (1)

 

(1) Starting on 1Q17, we exclude derivatives from the NII result. For comparative purposes, figures starting from 1Q16 have been recalculated with the new methodology

 

  27

 

 

NIM evolved favorably both QoQ and YoY due to:

 

(i)Higher growth in NII (+0.9% QoQ and +4.8% YoY), as explained in section 4.1 Interest Income and 4.2 Interest Expenses, in line with an improvement in the dynamic of loan expansion and the controlled growth in interest expenses.

 

(ii)Slight reduction in average IEAs due to a significant reduction in fair-value-through-profit-or-loss investments (formerly trading securities), as explained in section 1.1 Interest Income.

 

(iii)Higher loan growth in a scenario marked by a decrease in investments amplified the effect of the change in the composition of IEAs, where the share of loans, the most profitable asset, increased to 66% in comparison with 62% in June 2017.

 

The slight recovery of NIM, coupled with a significant and on-going reduction in provisions for loans losses, led to an improvement of +26 bps QoQ and + 39 bps YoY in risk-adjusted NIM.

 

In YTD terms, NIM fell -12 bps due to the higher growth rate posted by IEAs compared to that of NII. However, it is important to mention that better performance QoQ and YoY in 2Q18 vs 1Q18 helped mitigate the contraction posted in 1H18.

 

NIM on loans recovered slightly QoQ, which was attributable to (i) loan expansion in Wholesale Banking and Retail Banking and in both currencies, and (ii) the relative stability of margins after a period of contraction due to aggressive competition in Wholesale Banking and an improvement in the risk profile of Retail Banking. The improvement in NIM on loans in 2Q18 attenuated the contraction registered in previous months and as such, in YoY and YTD terms, we see a reduction of -35 bps and -33 bps, respectively.    

NIM on loans(3)

 

 

It is also important to analyze NIM by subsidiary. The table below contains the interest margins for each of Credicorp’s main subsidiaries.

 

   BCP Stand-       BCP         
NIM Breakdown  alone   Mibanco   Bolivia   ASB   Credicorp (2) 
2Q17 (1)   4.51%   15.20%   4.50%   2.22%   5.25%
1Q18   4.39%   15.88%   3.63%   2.19%   5.15%
2Q18   4.52%   16.07%   3.73%   2.15%   5.28%
YTD - Jun 17   4.59%   15.54%   4.51%   2.14%   5.35%
YTD - Jun 18   4.47%   16.06%   3.58%   2.13%   5.23%

NIM: Annualized Net interest income / Average period end and period beginning interest earning assets.

(1) Figures of ASB and Credicorp differs from previously reported, please consider the date presented on this report.

(2) Credicorp also includes Credicorp Capital, Prima, Grupo Credito and Eliminations for consolidation purposes."

 

The QoQ evolution of global NIM by subsidiary shows an increase in Credicorp’s margin; this was primarily attributable to BCP Stand-alone, which represents around 66% of net interest income. In this context, NIM at BCP Stand-alone reached the level posted in 2Q17, showing a clear recovery after several quarters of deterioration.

 

 

(3) NIM on loans is calculated as follows:

 

 

The share of loans within total earning assets is calculated by dividing the average of the beginning and closing balances of total loans for the reporting period, by the average of the beginning and closing balances of the interest earning assets for the reporting period.

 

  28

 

 

BCP Stand-alone reached the level posted in 2Q17, showing a clear recovery after several quarters of deterioration.

 

Mibanco, which represents around 24% of net interest income, posted an increase in its NIM QoQ due to significant growth in the loan level measured in average daily balances. YoY and in accumulated terms, NIM at Mibanco posted the same positive evolution.

 

  29

 

 

5.Non-Financial Income

 

Although non-financial income contracted QoQ and YoY due to the loss posted in the item Gains on sales of securities, it is important to note the growth QoQ and YoY in fee income and in gains on FX transactions, which are the main components of non-financial income.

 

Non-financial income  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   2018 / 2017 
Fee income (1)   721,983    749,692    766,994    2.3%   6.2%   1,403,031    1,516,686    8.1%
Net gain on foreign exchange transactions   160,256    162,295    180,669    11.3%   12.7%   326,742    342,964    5.0%
Net gain from associates (2)   5,974    8,387    9,506    13.3%   59.1%   11,997    17,893    49.2%
Net gain on sales of securities   83,151    92,389    (8,756)   -109.5%   -110.5%   140,972    83,633    -40.7%
Net gain on derivatives   15,313    (312)   14,597    -4778.5%   -4.7%   69,654    14,285    -79.5%
Result on exchange difference   2,305    5,889    1,031    -82.5%   -55.3%   11,375    6,920    -39.2%
Other non-financial income   69,771    82,876    84,009    1.4%   20.4%   138,516    166,885    20.5%
Total non financial income   1,058,753    1,101,216    1,048,050    -4.8%   -1.0%   2,102,287    2,149,266    2.2%
(1) Figures differ from previously reported, please consider the data presented on this report.
(2) Mainly includes the agreement between Grupo Pacifico and Banmedica.
                                         
   Quarter   % change   YTD   % change 
Millions (S/)  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   2018 / 2017 
(+) EPS contribution (50%)   9.74    13.24    13.29    0.4%   36.4%   21.5    26.5    23.3%
(-) Private health insurance deduction (50%)   -3.77    -4.85    -3.79    -22.0%   0.5%   -9.5    -8.6    -9.3%
(=) Net gain from associates excluding Non-recurring income / expense   5.97    8.39    9.51    -13.3%   59.1%   12.0    17.9    49.2%
(+) Non-recurring income/expense   -    -    -    -    -    -    -    - 
(=) Net gain from associates   5.97    8.39    9.51    13.3%   59.1%   12.0    17.9    49.2%

 

Non-financial income continued to fall QoQ, which was primarily due to:

 

(i)Losses on Net gain on sales of securities at BCP Stand-alone, which reflects the effects of the sale of some investments in a context for rising global interest rates. The instruments that caused such loss were government bonds with investment grade. Prima AFP also reported a reduction in net gain on sales of securities, related with the effects of the mark-to-market of the managed funds on the legal reserve of Prima AFP. Finally, Credicorp Capital also experimented a decrease in net gain on sales of securities, related with the sale of certain investments that were negatively impacted by the increase in international rates.

 

The aforementioned loss was partially offset by:

 

(i)The increase in Net gain on FX transactions at BCP Stand-alone due to higher volumes of foreign exchange transactions and, to a lesser extent, to the margin obtained despite a scenario of low volatility in the exchange rate this past quarter.

 

(ii)The increase in Fee income, the main source of non-financial income, due to improvements in BCP Stand-alone’s performance, particularly in terms of drafts and transfers, payments and collections, and foreign trade.

 

(iii)The increase in Net gain on derivatives, which was primarily attributable to BCP Stand-alone, which posted higher gains on swaps and forwards and to a lesser extent, to Credicorp Capital due to an increase in gains on forwards.

 

Non-financial income posted a slight decline YoY due to:

 

(i)Losses on Net gain on sales of securities, as we mentioned in the QoQ analysis.

 

  30

 

 

The aforementioned was significantly attenuated by the increase in:

 

(i)Fee income due to the favorable evolution of banking commissions at BCP Stand-alone and to a lesser extent, to Mibanco, as we will explain further in section 5.1.2 Banking Business.

 

(ii)Net gain on FX transactions through BCP Stand-alone due to an increase in trading volumes.

 

(iii)Other income at Mibanco due to the sale of a branch.

 

(iv)Net gain from associates that corresponds to the 50% of net income generated from the join-venture with Banmedica, which posted improvement for the second consecutive quarter.

 

The analysis 1H18 vs 1H17 shows that non-financial income increased due to growth in:

 

(i)Fee income, which improved in the banking business and to a lesser extent, at Credicorp Capital,

 

(ii)Net gain on FX transactions due to an increase in transactions volumes, and

 

(iii)Other income associated with the sale of a judicial portfolio that was written-off at BCP Stand-alone in 1Q18.

 

(iv)Net gain on investments in associates that reflects the continuous improvement in the results from the agreement with Banmedica.

 

5.1. Fee Income

 

5.1.1. By subsidiary

 

The figure below shows the contribution of each of Credicorp’s subsidiaries to fee income at Credicorp in 2Q18.

 

Evolution of fee income QoQ by subsidiary (S/ Million)

 

 

* Others include Grupo Pacifico and eliminations for consolidation purposes.

 

  31

 

 

The next figure shows the YoY evolution of fee income by subsidiary:

 

Evolution of fee income YoY by subsidiary (S/ Millions)

 

 

 

* Others include Grupo Pacifico and eliminations for consolidation purposes.

 

5.1.2. Banking Business

 

Composition of Fee Income in the Banking Business

 

Fee Income  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   2018 / 2017 
Miscellaneous accounts (1)   170,676    177,257    178,172    0.5%   4.4%   344,568    355,428    3.2%
Credit cards (2)   72,237    71,241    74,153    4.1%   2.7%   144,363    145,394    0.7%
Drafts and transfers   42,328    48,966    55,136    12.6%   30.3%   83,433    104,102    24.8%
Personal loans (2)   24,989    22,898    23,401    2.2%   -6.4%   48,725    46,299    -5.0%
SME loans (2)   15,266    17,049    15,171    -11.0%   -0.6%   33,239    32,220    -3.1%
Insurance (2)   18,297    19,629    20,489    4.4%   12.0%   36,813    40,118    9.0%
Mortgage loans (2)   10,417    9,182    9,763    6.3%   -6.3%   20,536    18,945    -7.7%
Off-balance sheet (3)   44,303    51,545    51,376    -0.3%   16.0%   87,377    102,921    17.8%
Payments and collections (3)   96,404    97,778    102,492    4.8%   6.3%   191,951    200,270    4.3%
Commercial loans (3)(4)   18,547    20,596    19,400    -5.8%   4.6%   35,727    39,996    11.9%
Foreign trade (3)   9,944    7,626    10,714    40.5%   7.7%   22,140    18,339    -17.2%
Corporate finance and mutual funds (4)   20,548    15,387    15,234    -1.0%   -25.9%   33,871    30,621    -9.6%
ASB (4)   7,722    8,736    7,917    -9.4%   2.5%   13,419    16,654    24.1%
Others (4)(5)   53,644    61,065    60,805    -0.4%   13.3%   97,316    121,870    25.2%
Total fee income   605,322    628,954    644,223    2.4%   6.4%   1,193,478    1,273,178    6.7%

 

Source: BCP

(1) Saving accounts, current accounts, debit card and master account.

(2) Mainly Retail fees.

(3) Mainly Wholesale fees.

(4) Figures differ from previously reported, please consider the data presented on this report.

(5) Includes fees from BCP Bolivia, Mibanco, network usage and other services to third parties, among others.

 

In the QoQ analysis, fee income in the banking business increased +2.4% QoQ, which was mainly due to:

 

(i)The improvement in transactional activity, which was reflected in growth in the Drafts and transfers, Payments and collections component.

 

(ii)The increase posted in Foreign trade was attributable to higher income from Import Letters of Credit and Export Letters of Credit.

 

(iii)The increase in Credit Cards due to a higher volume of transactions.
  32

 

 

The aforementioned offset (i) the contraction in fee income from the SME-Pyme portfolio; (ii) lower gains on commercial loans.

 

In the YoY analysis, growth was situated at +6.4%, which was due to:

 

(i)The improvement in Drafts and Transfers due to the El Nino Phenomenon campaign, which began at the end of 1Q17. Despite the slowdown that was expected at the end of December, this component continues to post growth.

 

(ii)The increase in Miscellaneous accounts, which was associated with higher billing due to an uptick in the use of debit cards.

 

(iii)The increase in Off-balance sheet, which was primarily due to performance bonds.

 

(iv)Others, which was attributable to Mibanco due to an increase in its fee income from penalties for late payment. This was related to the change in the method to collect such income because last year it was charged to clients as an interest rate for late payment and this year it has become a flat fee.

 

(v)The increase in Payments and collections due to the recovery that this service posted after having registered a decline in previous quarters due to the El Nino Phenomenon.

 

The aforementioned offset the drop in income from Corporate finance and mutual funds, which was attributable to an atypical increase in income in 2Q17 due to recognition of deferred commissions on loans that were paid.

  33

 

 

6.Insurance Underwriting Result

 

The insurance underwriting result fell -2.9% QoQ due to an increase in net claims and a decrease in the net earned premium for the life insurance business, which was mitigated by an improvement in the performance of the property and casualty (P&C) business. In the YoY analysis, this result fell -11.0% due to an increase in the net claims, commissions and underwriting expenses in both the property and casualty (P&C) and life business.

 

Insurance underwriting result  Quarter   % Change   YTD   % change 
S/ 000  2Q17   1T18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Net earned premiums   466,375    508,202    511,960    0.7%   9.8%   931,679    1,020,162    9.5%
Net claims   (278,265)   (294,745)   (300,845)   2.1%   8.1%   (559,229)   (595,590)   6.5%
Acquisition cost (1)   (61,665)   (97,548)   (98,556)   1.0%   59.8%   (123,726)   (196,104)   58.5%
Total insurance underwriting result   126,445    115,909    112,559    -2.9%   -11.0%   248,724    228,468    -8.1%

 

(1) Includes net fees and underwriting expenses.

 

Total underwriting result by business

(S/ millions)

 

 

 

The QoQ drop in the underwriting result was registered in the life insurance business and was associated with a (i) decrease in net earned premiums attributable to higher underwriting reserves in Annuities; (ii) an increase in net claims for Individual Life, Credit Life and Annuities; and (iii) an increase in the acquisition cost, given that reinsurance profit sharing was reported in 1Q18. Nevertheless, this effect was attenuated by an improvement in the underwritten result in P&C business due to an increase in net earned premiums for Commercial lines and lower underwriting expenses in Car line.

 

The YoY variation reflects a drop in the underwriting result in both property and casualty and life business. In P&C business, the variation was due to an increase in net claims in Cars, Medical Assistance and Commercial lines and an increase of the acquisition cost; this impact was attenuated by an increase in the net earned premiums. In terms of life insurance, the drop is due to an increase in the net claims in Annuities and AFP, and higher commissions in Credit Life; attenuated by a higher level of premiums in Annuities, Credit Life and Individual Life.

 

In the accumulated analysis (June 2018 vs June 2017), the underwriting result in 2018 posted a variation of -8.1% which was due primarily to an increase in net claims of both life and P&C business; and to a higher acquisition cost due to (i) an increase in life insurance commissions, and (ii) lower underwriting income for the aforementioned change.

 

  34

 

 

6.1. Net earned premiums

 

Written premiums by business

(S/ millions)

 

Net earned premiums by business

(S/ millions)

     
     

 

Written premiums increased +7.4% QoQ, in life and property and casualty business due to:

 

(i)In life insurance business, was mainly attributable to higher sales in Annuities for the new product “Renta Flex”.

 

(ii)In property and casualty business, the increase was due to Car and Commercial Lines (Hull insurance, technical risks and fire); attenuated by a decrease in Personal Lines.

 

Net earned premiums increased +0.7% QoQ, mainly through property and casualty business, which was associated with a higher level of premiums in Commercial Lines and in Personal Lines. Nevertheless, this effect was mitigated by a decrease in the net earned premium in life insurance due to an increase in reserves for Annuities.

 

In the YoY analysis, Written premiums increased +22.6% primarily through the life insurance business, which was associated with the higher sales of “Renta Flex” and higher premiums in credit life due to a growth in alliances´ channels; and in the property and casualty business , due to an increase in Medical Assistance

 

In the YoY analysis, net premiums increased +9.8%both in life insurance and in the P&C business. The growth posted in the life business was registered in Annuities associated with the “Renta Flex” product; and Credit life through the “alliance channels”. In property and casualty, the YoY variation was a result of higher premiums in Medical Assistance line despite an increase in reserves.

 

In the accumulated analysis (June 2018 vs June 2017), written premiums increased +14.8%. This was mainly attributable to the life insurance business in Annuities and Credit Life.; and in the P&C business to Medical Assistance.

 

  35

 

 

6.2. Net claims

 

Net claims by business

(S/ millions)

 

 

 

Net claims rose +2.1% QoQ in both property and casualty and life business. Growth in the P&C business was attributable to Commercial Lines after the number of incidences registered for hull insurance line     increased; while in Medical Assistanc, the increase was due to higher reported cases. The increase in life insurance was associated to Individual Life, where reported cases increased, and with; Credit Life due to growth in the bancassurance channel and in Annuities due to pension payments for the “Renta Flex” product.

 

In the YoY analysis, net claims increased +8.1% in both life and property and casualty business. The increase in life insurance was attributable to pensions linked to the “Renta Flex” product in Annuities; and to a drop in discount rates used to calculate claims in the AFP line. In property and casualty business, the increase was attributable to the same lines mentioned in the case of QoQ growth.

 

In the accumulated analysis, Net claims increased +6.5% especially in Life Insurance business associated to Annuities and AFP lines; and Medical Assistance in P&C business.

 

6.3. Acquisition cost

 

Acquisition cost by Business

(S/ millions)

 

 

  36

 

 

Acquisition cost  Quarter   % change   YTD   % change 
S/ 000  2Q17   1T18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Net fees   (49,849)   (66,815)   (68,888)   3.1%   38.2%   (103,344)   (135,703)   31.3%
Underwriting expenses   (24,882)   (32,633)   (30,914)   -5.3%   24.2%   (48,721)   (63,547)   30.4%
Underwriting income   13,066    1,900    1,246    -34.4%   -90.5%   28,339    3,146    -88.9%
Acquisition cost   (61,665)   (97,548)   (98,556)   1.0%   59.8%   (123,726)   (196,104)   58.5%

 

The acquisition cost increased +1.0% QoQ due to (i) higher commissions in P&C business due to the higher premiums in Commercial Lines in 2Q18 and (ii) lower underwriting income in life insurance, given that reinsurance profit sharing was reported in 1Q18. This was attenuated by a decrease in underwriting expenses in property and casualty business in Cars line.

 

In the YoY and YTD analysis (1H18 vs 1H17), the acquisition cost increased due to:

 

(i)Higher net fees due to increase in commissions in Credit Life, in line with the higher production of premiums through alliances.

 

(ii)A reduction in the underwriting income, which is explained by a change in the nature of the policy fee, which was previously classified in this concept, but it is currently considered as part of written premiums and accrues over 12 months.

 

(iii)To a lesser extent, a higher underwriting expense.

 

  37

 


7.Operating Expenses and Efficiency

 

The efficiency ratio remained relatively stable YoY (+10 bps) but deteriorated 50 bps compared to the level registered in 1H17. The deterioration is explained by higher growth in operating expenses than in operating income. The former is the result of an increase in total employee salaries and benefits, administrative and general expenses, and the acquisition cost of the insurance business. The latter reflects the slower pace of growth in NII, the main income source, which in turn reflects improvements in the risk quality of loans in a context of relative low loan growth.

 

Total expenses  Quarter   % change   YTD   % change 
S/ 000  2Q17   1Q18   2Q18   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Salaries and employees benefits   746,499    777,345    780,827    0.4%   4.6%   1,499,765    1,558,172    3.9%
Administrative, general and tax expenses   541,054    496,375    560,514    12.9%   3.6%   1,029,520    1,056,889    2.7%
Depreciation and amortizacion   113,958    116,699    115,729    -0.8%   1.6%   229,845    232,428    1.1%
Other expenses   51,676    49,325    66,770    35.4%   29.2%   101,168    116,095    14.8%
Total expenses   1,453,187    1,439,744    1,523,840    5.8%   4.9%   2,860,298    2,963,584    3.6%
Acquisition cost (1)   61,665    97,548    98,556    1.0%   59.8%   123,726    196,104    58.5%
Operating income (2)   3,340,118    3,477,840    3,547,575    2.0%   6.2%   6,735,476    7,025,415    4.3%
Operating expenses (3)   1,463,176    1,487,967    1,555,626    4.5%   6.3%   2,882,856    3,043,593    5.6%
Reported efficiency ratio (4)   43.8%   42.8%   43.9%   110 bps    10 bps    42.8%   43.3%   50 bps 
Operating expenses / Total average assets (5)   3.63%   3.49%   3.69%   20 bps    6 bps    3.62%   3.61%   -3 bps 

 

(1) The acquisition cost of Pacifico includes net fees and underwriting expenses.

(2) Operating income = Net interest income + Fee income + Gain on foreign exchange transactions + Net gain from associates + Net premiums earned + Net gain on derivatives+ Result on exchange difference.

(3) Operating expenses = Total expenses + Acquisition cost - Other expenses.

(4) Operating expenses / Operating income.

(5) Annualized operating currency / Average of Total Assets. Average is calculated with period-beginning and period-ending balances.

 

In the QoQ analysis, the deterioration of operating efficiency is attributable to the 4.5% increase in operating expenses, which in turn reflects the increase in administrative, general and tax expenses that will be explained in section 7.1 Credicorp’s administrative, general and taxes expenses. It is important to remember that the seasonality of operating expenses leads the efficiency ratio register its lowest yearly level in every 1Q.

 

In the YoY analysis, which eliminates seasonality, the operating efficiency ratio was relatively stable in a context in which operating income reported higher growth than last year; nevertheless, operating expenses increased at a higher rate.

 

On the operating expenses side, the YoY increase reflects:

 

(i)The increase in employee salaries and benefits, which was in line with the increase in the number of employees across Credicorp and at BCP Stand-alone in particular.

 

(ii)The expansion in administrative and general expenses, as we will explain in more detail later on.

 

(iii)Higher acquisition cost due to the factors explained in chapter 6.3 Acquisition Cost.

 

In terms of operating income, the improvement in generations was due to:

 

(i)Higher interest income on loans, as explained in chapter 4. Net interest income (INI).

 

(ii)The increase in fee income, due to an improvement in the evolution at BCP Stand-alone, as indicated in chapter 5.1.2. Banking Business.

 

In YTD terms, the efficiency ratio shows a 50 bps deterioration given that operating expenses expanded at a higher rate than operating income.

 

  38

 

 

7.1. Credicorp’s Administrative, General and Tax Expenses

 

Credicorp’s administrative, general and tax expenses

 

Administrative, general and tax expenses  Quarter   % change   YTD   % change 
S/ 000  2Q17   %   1Q18   %   2Q18   %   QoQ   YoY   Jun 17   Jun 18   Jun 18 / Jun 17 
Marketing   67,901    13%   63,807    13%   71,303    13%   11.7%   5.0%   125,195    135,110    7.9%
Taxes and contributions   52,589    10%   56,247    11%   59,295    11%   5.4%   12.8%   103,983    115,542    11.1%
Insfrastructure   68,611    13%   61,586    12%   70,408    13%   14.3%   2.6%   130,009    131,994    1.5%
Minor expenses(1)   54,338    10%   36,258    7%   42,538    8%   17.3%   -21.7%   109,973    78,796    -28.4%
Systems outsourcing   55,254    10%   50,835    10%   56,770    10%   11.7%   2.7%   110,641    107,606    -2.7%
Programs and systems   57,912    11%   58,808    12%   62,295    11%   5.9%   7.6%   113,369    121,103    6.8%
Communications   22,284    4%   19,249    4%   21,301    4%   10.7%   -4.4%   41,423    40,550    -2.1%
Rent   45,846    8%   43,477    9%   45,238    8%   4.1%   -1.3%   89,824    88,715    -1.2%
Consulting   48,498    9%   29,473    6%   36,888    7%   25.2%   -23.9%   79,742    66,361    -16.8%
Channels   47,109    9%   47,801    10%   54,964    10%   15.0%   16.7%   92,003    102,766    11.7%
Others (1)(2)   20,712    4%   28,834    6%   39,513    7%   37.0%   90.8%   33,358    68,347    104.9%
Total administrative, general and tax expenses   541,054    100%   496,375    100%   560,514    100%   12.9%   3.6%   1,029,520    1,056,889    2.7%

 

(1) Since 1Q18, the minor expenses account has decreased because it no longer includes the transfer cost between Pacífico EPS and Pacífico Vida and the others account has increased because it no longer considers the elimination of those expenses..

(2) Others include ASB, BCP Bolivia, Grupo Credito and eliminations for consolidation.

 

The QoQ increase in Administrative, general and tax expenses was due to:

 

(i)Higher expenses in the infrastructure account (which includes expenses for security personnel and maintenance) due to an increase in the minimum wage in May.

 

(ii)The increase in marketing expenses was attributable primarily to BCP Stand-alone due to higher payments for LATAM kilometer campaigns and expenses for the World Cup and Mother’s Day campaigns in the social networks.

 

(iii)Consulting, mainly at BCP Stand-alone due to projects to improve commission and interest by exploring digital banking solutions and defining the strategy for retail banking.

 

(iv)The increase in the others account, mainly due to a reduction in eliminations for consolidation among the group’s companies.

 

The YoY increase was attributable to higher expenses for channels, particularly in commissions paid to Agentes BCP due to higher income for drafts and transfers as explained in chapter 5.1.2. Banking Business. The aforementioned was slightly attenuated by lower expenses of Consulting given that in 2Q17, projects were underway with Mckinsey to develop a digital transformation strategy for BCP Stand-alone.

 

In the accumulated analysis (1H18 vs 1H17), administrative and general expenses increased slightly due to a variation in expenses in channels, as mentioned above, and to higher spending for marketing due to an increase in BCP’s payments for the LATAM kilometers program. The aforementioned was slightly attenuated by higher spending on consulting to develop the Transformation project in 1H17.

 

7.2. Operating Expenses / Total Average Assets Ratio

 

In terms of the operating expenses/average total assets ratio, the QoQ increase was due to seasonal effects on operating expenses. In the annual analysis, the deterioration is due to a higher increase, proportionally speaking, in operating expenses than in average total assets due to the reasons outlined above.

 

  39

 

 

Operating Expenses / Total Average Assets Ratio

 

 

 

The figure below depicts the evolution of the variation of operating costs with regard to average assets over the last 4 years. It is important to note that the levels obtained over the last few years have improved in comparison to 2014. This is mainly due to on-going control and management of operating expenses in a low-growth context for assets and for loans, particularly in 2016 and 2017.

 

QoQ % of Change QoQ of Operating Expenses and Total Average Assets

 

 

 

7.3. Efficiency Ratio

 

Efficiency Ratio by Subsidiary (1)

 

   BCP
Stand-alone
   Mibanco   BCP
Bolivia
   ASB   Grupo
Pacifico
   Prima   Credicorp
Capital
   Credicorp 
2Q17   42.1%   54.0%   54.4%   22.4%   27.0%   43.8%   88.6%   43.8%
1Q18   39.2%   49.6%   63.8%   23.5%   31.8%   49.8%   108.6%   42.8%
2Q18   40.9%   49.0%   65.9%   24.4%   31.9%   43.0%   106.8%   43.9%
Var. QoQ   170 bps    -60 bps    210 bps    90 bps    10 bps    -680 bps    -180 bps    110 bps 
Var. YoY   -120 bps    -500 bps    1150 bps    200 bps    490 bps    -80 bps    1820 bps    10 bps 
Acum Jun 2017   40.1%   54.7%   55.9%   22.3%   27.2%   43.8%   99.0%   42.8%
Acum Jun 2018   40.1%   49.3%   64.9%   23.9%   31.8%   46.3%   107.7%   43.3%
% change Jun 18 / Jun 17   0 bps    -540 bps    900 bps    160 bps    460 bps    250 bps    870 bps    50 bps 

 

(1)(Total expenses + acquisition cost - other expenses) / (Net interest income + fee income + Net gain on foreign exchange transactions + Result on exchange difference + Net gain on derivates + Net gain from associates + Net earned premiums).
  40

 

 

Given the seasonality on operating expenses, the QoQ analysis reveals the bulk of this effect, which is mainly attributable to the higher administrative and general expenses, as explained in chapter 7.1 Credicorp’s administrative, general and taxes expenses.

 

In the YoY analysis, which eliminates the seasonality effect, shows a stable efficiency ratio with a slight deterioration of 10 bps. It is important to mention (i) stability in the efficiency ratio of BCP Stand-alone despite significant expenses for the Transformation strategic initiative, and (ii) the improvement in operating efficiency at Mibanco. The positive performance of these two subsidiaries significantly attenuated the deterioration posted at other subsidiaries.

 

It is important to note that Credicorp Capital’s efficiency ratio, under Credicorp’s methodology, is over 100% because it does not include all the components of its core income4. If we include all of Credicorp Capital’s core income, the efficiency ratio was situated between 75%-85% over the last few quarters.

 

In the majority of the subsidiaries that posted a deterioration in operating efficiency, the drop was due to a decrease in income; nevertheless, operating expenses have been well managed and have posted very limited growth.

 

 

(4) The core income of Credicorp Capital includes all the accounts consider in the operating income of Credicorp and the net gain on sales of securities.

  41

 

 

8.Regulatory Capital

 

8.1. Regulatory Capital – BAP

 

Regulatory Capital and Capital Adequacy Ratios  As of   % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Capital Stock   1,318,993    1,318,993    1,318,993    0.0%   0.0%
Treasury Stocks   (208,952)   (210,310)   (208,754)   -0.7%   -0.1%
Capital Surplus   271,561    199,996    248,535    24.3%   -8.5%
Legal and Other capital reserves (1)   15,865,972    17,578,906    17,555,309    -0.1%   10.6%
Minority interest (2)   349,354    376,990    313,149    -16.9%   -10.4%
Loan loss reserves (3)   1,288,931    1,355,885    1,389,348    2.5%   7.8%
Perpetual subordinated debt   813,250    806,750    818,000    1.4%   0.6%
Subordinated Debt   5,001,933    4,421,708    4,479,672    1.3%   -10.4%
Investments in equity and subordinated debt of financial and insurance companies   (751,329)   (613,241)   (584,750)   -4.6%   -22.2%
Goodwill   (632,707)   (641,505)   (635,829)   -0.9%   0.5%
Deduction for subordinated debt limit (50% of Tier I excluding deductions) (4)   -    -    -    -    - 
Deduction for Tier I Limit (50% of Regulatory capital) (4)   -    -    -    -    - 
Total Regulatory Capital (A)   23,317,006    24,594,173    24,693,674    0.4%   5.9%
                          
Tier I (5)   12,603,980    13,615,257    13,632,682    0.1%   8.2%
Tier II (6) + Tier III (7)   10,713,027    10,978,916    11,060,992    0.7%   3.2%
                          
Financial Consolidated Group (FCG) Regulatory Capital Requirements   16,583,872    17,683,008    18,561,511    5.0%   11.9%
Insurance Consolidated Group (ICG) Capital Requirements   974,207    926,264    952,127    2.8%   -2.3%
FCG Capital Requirements related to operations with ICG (8)   (259,450)   (256,143)   (296,132)   15.6%   14.1%
ICG Capital Requirements related to operations with FCG (9)   -    -    -    -    - 
Total Regulatory Capital Requirements (B)   17,298,629    18,353,128    19,217,507    4.7%   11.1%
Regulatory Capital Ratio (A) / (B)   1.35    1.34    1.28           
Required Regulatory Capital Ratio (10)   1.00    1.00    1.00           

 

(1) Legal and other capital reserves include restricted capital reserves (S/ 12,071 million) and optional capital reserves (S/ 5,484 million).

(2) Minority interest includes Tier I (S/ 313 million).

(3) Up to 1.25% of total risk-weighted assets of Banco de Credito del Peru, Solucion Empresa Administradora Hipotecaria, Mibanco and Atlantic Security Bank.

(4) Tier II + Tier III cannot be more than 50% of total regulatory capital.

(5) Tier I = capital + restricted capital reserves + Tier I minority interest - goodwill - (0.5 x investment in equity and subordinated debt of financial and insurance companies) + perpetual subordinated debt.

(6) Tier II = subordinated debt + Tier II minority interest tier + loan loss reserves - (0.5 x investment in equity and subordinated debt of financial and insurance companies).

(7) Tier III = Subordinated debt covering market risk only.

(8) Includes regulatory capital requirements of the financial consolidated group.

(9) Includes regulatory capital requirements of the insurance consolidated group.

(10) Regulatory Capital / Total Regulatory Capital Requirements (legal minimum = 1.00).

 

Credicorp maintained a comfortable capitalization level at the end of 2Q18, which represented 1.28 times the capital required by the regulator in Peru. This ratio fell slightly QoQ due to an increase in the total regulatory capital requirement (+4.7% QoQ), which was partially attenuated by an increase in Credicorp’s capital level (0.4% QoQ). In the first case, the QoQ increase in the requirement was due primarily to expansion in the financial business due to favorable loan growth at BCP Consolidated. Capital generation at Credicorp reflected net income in 2Q18, which increased retained earnings for the period.

 

The YoY analysis reveals a reduction in the regulatory capital ratio, which fell from 1.35 in 2Q17 to 1.28 in 2Q18. This drop was attributable to an increase in Credicorp’s regulatory capital requirement, which rose +11.1% YoY due to growth in the banking business. Regulatory capital grew only 5.9% YoY, which was mainly attributable to an increase in special reserves and restricted special reserves of +10.6% YoY as part of the distribution of net income attained in 2017.

  42

 

 

8.2. Regulatory Capital – BCP Stand-alone based on Peru GAAP

 

Regulatory Capital and Capital Adequacy Ratios  As of   % change 
S/ 000  Jun 17   Mar 18   Jun 18   QoQ   YoY 
Capital Stock   7,933,342    8,770,365    8,770,365    0.0%   10.6%
Legal and Other capital reserves   3,885,494    4,184,303    4,184,303    0.0%   7.7%
Accumulated earnings with capitalization agreement   -    -    -    -    - 
Loan loss reserves (1)   1,135,491    1,146,746    1,175,836    2.5%   3.6%
Perpetual subordinated debt   731,925    645,400    654,400    1.4%   -10.6%
Subordinated Debt   4,478,286    4,041,960    4,098,116    1.4%   -8.5%
Unrealized profit (loss)   -    -    -    -    - 
Investment in subsidiaries and others, net of unrealized profit and net income   (1,242,614)   (1,275,333)   (1,323,742)   3.8%   6.5%
Investment in subsidiaries and others   (1,388,099)   (1,567,782)   (1,728,854)   10.3%   24.5%
Unrealized profit and net income in subsidiaries   145,486    292,449    405,113    38.5%   178.5%
Goodwill   (122,083)   (122,083)   (122,083)   0.0%   0.0%
Total Regulatory Capital   16,799,842    17,391,358    17,437,194    0.3%   3.8%
Off-balance sheet   30,829,912    32,849,193    81,688,289    148.7%   165.0%
Tier 1 (2)   11,807,371    12,840,318    12,825,113    -0.1%   8.6%
Tier 2 (3) + Tier 3 (4)   4,992,471    4,551,040    4,612,081    1.3%   -7.6%
Total risk-weighted assets   100,527,444    109,285,520    115,681,027    5.9%   15.1%
Market risk-weighted assets (5)   1,198,004    1,870,259    1,118,132    -40.2%   -6.7%
Credit risk-weighted assets   90,839,316    98,592,033    105,677,561    7.2%   16.3%
Operational risk-weighted assets   8,490,124    8,823,228    8,885,333    0.7%   4.7%
Adjusted Risk-Weighted Assets   99,945,976    108,539,396    114,929,164    5.9%   15.0%
Total risk-weighted assets   100,527,444    109,285,520    115,681,027    5.9%   15.1%
(-) RWA Intangible assets, excluding goodwill.   581,469    1,304,099    1,334,862    2.4%   129.6%
(+) RWA Deferred tax assets generated as a result of temporary differences in income tax, in excess of 10% of CET1   -    557,976    582,998    4.5%   - 
(-) RWA Deferred tax assets generated as a result of past losses   -    -    -    -    - 
Total capital requirement   12,465,353    13,662,112    14,402,739    5.4%   15.5%
Market risk capital requirement (5)   119,800    187,026    111,813    -40.2%   -6.7%
Credit risk capital requirement   9,083,932    9,859,203    10,567,756    7.2%   16.3%
Operational risk capital requirement   849,012    882,323    888,533    0.7%   4.7%
Additional capital requirements   2,412,609    2,733,560    2,834,636    3.7%   17.5%
                          
Capital ratios                         
Tier 1 ratio (6)   11.75%   11.75%   11.09%          
Common Equity Tier 1 ratio (7)   11.54%   11.22%   11.11%          
BIS ratio (8)   16.71%   15.91%   15.07%          
Risk-weighted assets / Regulatory capital (9)   5.98    6.28    6.63           

 

(1) Up to 1.25% of total risk-weighted assets.

(2) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + (0.5 x Unrealized profit and net income in subsidiaries) - Goodwill - (0.5 x Investment in subsidiaries) + Perpetual subordinated debt (maximum amount that can be included is 17.65% of Capital + Reserves + Accumulated earnings with capitalization agreement + Unrealized profit and net income in subsidiaries - Goodwill).

(3) Tier 2 = Subordinated debt + Loan loss reserves + (0.5 x Unrealized profit and net income in subsidiaries) - (0.5 x Investment in subsidiaries).

(4) Tier 3 = Subordinated debt covering market risk only. Tier 3 exists since 1Q10.

(5) It includes capital requirement to cover price and rate risk.

(6) Tier 1 / Risk-weighted assets.

(7) Common Equity Tier I = Capital + Reserves – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability) + retained earnings + unrealized gains.

Adjusted Risk-Weighted Assets = Risk-weighted assets - (RWA Intangible assets, excluding goodwill, + RWA Deferred tax assets generated as a result of temporary differences in income tax, in excess of 10% of CET1, + RWA Deferred tax assets generated as a result of past losses)."

(8) Regulatory Capital / Risk-weighted assets (legal minimum = 10% since July 2011)

(9) Since July 2012, Risk-weighted assets = Credit risk-weighted assets * 1.00 + Capital requirement to cover market risk * 10 + Capital requirement to cover operational

risk * 10 * 1.00 (since July 2014).    

  43

 

 

At the end of 2Q18, the BIS ratio was situated at 15.07%, which is lower than the figure registered at the end of 1Q18 (15.91%). It is important to note that this ratio reaches its highest point every 1Q when the Annual General Meeting of Shareholders approves the capitalization of retained earnings and the constitution of special reserves and restricted special reserves as part of the plan to distribute the net income attained in 2017. The reduction in the BIS ratio was due to a significant increase in risk-weighted assets (+5.9% QoQ), which was attributable to loan growth.

 

The Tier 1 ratio dropped from 11.75% in 1Q18 to 11.09% in 2Q18 due to a slight drop in Tier 1 (-0.1% QoQ) versus significant growth in RWAs (5.9%). It is important to remember that this ratio reaches its highest level in 1Q every year.

 

Finally, the Common equity tier 1 ratio (CET1), which is considered the most rigorous ratio with which to measure capitalization levels, registered a contraction of -11 bps QoQ after significant growth was reported in adjusted risk-weighted assets (5.9% QoQ).

 

It is important to consider that from this quarter and on the adjusted RWAs consider a new requirement from the Supervisor. The adjustment implies the inclusion of undrawn credit facilities for the calculation of RWAs. Without the adjustment required by the Supervisor, the BIS ratio would have decreased less than the reported figure and the CET1 ratio would have increased, as shown in the table below:

 

   Reported   Without SBS change requirement 
       As of       % change   As of   % change 
   Jun 17   Mar 18   Jun 18   QoQ   YoY   Jun 18   QoQ   YoY 
Common Equity Tier 1 ratio   11.54%   11.22%   11.11%   -11 bps    -43 bps    11.37%   15 bps    26 bps 
BIS ratio   16.71%   15.91%   15.07%   -84 bps    -163 bps    15.42%   -49 bps    35 bps 

 

Common Equity Tier 1 Ratio – BCP Stand-alone

 

March 2018 June 2018
 

  

(1) Includes investments in BCP Bolivia and other subsidiaries.

  44

 

 

9.Banking business’s Distribution channels

 

   As of   % change (units) 
   Jun 17   Mar 18   Jun 18   QoQ   YoY 
Branches   451    438    435    -3    -16 
ATMs   2,339    2,321    2,326    5    -13 
Agentes BCP   6,017    6,191    6,456    265    439 
Total BCP's Network   8,807    8,950    9,217    267    410 
Total Mibanco's Network (1)   320    325    327    2    7 
Total Peru's Network   9,127    9,275    9,544    269    417 
Branches   51    55    54    -1    3 
ATMs   263    275    274    -1    11 
Agentes BCP Bolivia   178    248    289    41    111 
Total Bolivia's Network   492    578    617    39    125 
Total Banking Business Network (2)   9,619    9,853    10,161    308    542 

(1) Mibanco does not have Agentes or ATMs because it uses the BCP network. Mibanco branches include Banco de la Nacion branches,

which in Jun 17, Mar 18 and Jun 18 were 40, 38 and 38 respectively.

(2) ASB not included.

 

The distribution channels at BCP Stand-alone, Mibanco and BCP Bolivia boasted 10,161 points of contact at the end of 2Q18. This reflects an increase of 308 points QoQ.

 

BCP Stand-alone posted a total of 9,217 points of contact at the end of 2Q18, which represented an increase of 267 points QoQ. This was due primarily to an increase in Agentes BCP (+265 QoQ) given that during the first quarter, the portfolio of Agentes is cleaned up and new incorporations are reflected in the second quarter of every year. Growth in this channel is part of the bank’s strategy to grow cost-efficient channels to reach a goal of 6600 Agentes BCP.

 

At Mibanco, the number of offices remained stable QoQ. It is important to note that Mibanco has an agreement with the Banco de la Nacion to use its branches throughout the country to reduce operating costs. At the end of 2Q18, these branches represented 12% (38) of the total of 327 offices.

 

BCP Bolivia increased its points of contact by 39 QoQ in 2Q18. This was attributable to an increase in the number of Agentes BCP Bolivia as part of a growth strategy to reach a total of 300 Agentes at the end of 2018.

 

In the YoY analysis, the total number of points of contact at BCP Stand-alone increased 410 units, mainly due to growth in Agentes BCP (+439). The number of branches fell by 16 YoY, in line with the banking penetration strategy and with efforts to promote client migration to lower-cost channels.

 

Mibanco increased the total number of branches (+7 YoY) due to on-going expansion. BCP Bolivia posted growth in its points of access (+125 YoY), which was due primarily to an increase in Agentes.

 

Points of contact – BCP Stand-alone

 

   As of   % change (units) 
   Jun 17   Mar 18   Jun 18   QoQ   YoY 
Lima   282    276    273    -3    -9 
Provinces   169    162    162    0    -7 
Total Branches   451    438    435    -3    -16 
Lima   1,578    1,531    1,533    2    -45 
Provinces   761    790    793    3    32 
Total ATM's   2,339    2,321    2,326    5    -13 
Lima   3,155    3,269    3,351    82    196 
Provinces   2,862    2,922    3,105    183    243 
Total Agentes BCP   6,017    6,191    6,456    265    439 
Total points of contact   8,807    8,950    9,217    267    410 

 

  45

 

 

This quarter, points of contact at BCP Stand-alone increased by 267; Lima registered an increase of 81 points and the provinces, 186.

 

In the YoY analysis, the significant growth in total points of contact is due mainly to the increase of 439 Agentes BCP, both in Lima (+196) and in the Provinces (+243). It is important to note that the plan for expansion is based on the historic evolution of this channel in each territory with an eye on achieving growth targets at the national level. Higher growth has been planned for the provinces given that profit margins are higher there.

 

The aforementioned offset the reduction in Branches and ATMs. Branches were eliminated in both Lima and the provinces due to migration to most cost-effective channels. In terms of ATMs, Lima reported a drop YoY (-45) after ATMS at the branch level were removed. In the provinces, the number of ATMs increased (+32) as new sites were set up in branches and at neutral points.

 

Transactions per channel – BCP Stand-alone

 

      Monthly average in each quarter   % change 
   N° of Transactions per channel (1)  2Q17   %   1Q18   %   2Q18   %   QoQ   YoY 
Traditional  Teller   8,032,558    7.0%   7,989,543    6.2%   8,029,752    6.1%   0.5%   0.0%
channels  Telephone banking   3,444,444    3.0%   4,502,039    3.5%   4,738,082    3.6%   5.2%   37.6%
Cost-efficient  Agentes BCP   16,756,666    14.7%   19,147,059    14.8%   20,936,116    15.9%   9.3%   24.9%
channels  ATMs   20,322,610    17.8%   21,733,218    16.8%   20,892,105    15.9%   -3.9%   2.8%
Digital  Mobile banking   22,820,770    20.0%   35,607,617    27.5%   41,967,471    32.0%   17.9%   83.9%
channels  Internet banking Via BCP   19,063,071    16.7%   14,087,742    10.9%   7,330,994    5.6%   -48.0%   -61.5%
   Balance inquiries   2,252,493    2.0%   1,716,853    1.3%   1,754,730    1.3%   2.2%   -22.1%
   Telecrédito   9,642,090    8.4%   10,415,356    8.1%   10,744,973    8.2%   3.2%   11.4%
Others  Direct debit   650,734    0.6%   615,195    0.5%   667,155    0.5%   8.4%   2.5%
   Points of sale P.O.S.   11,161,763    9.8%   13,251,916    10.3%   14,035,053    10.7%   5.9%   25.7%
   Other ATMs netw ork   202,417    0.2%   201,712    0.2%   206,892    0.2%   2.6%   2.2%
   Total transactions   114,349,615    100.0%   129,268,250    100.0%   131,303,325    100.0%   1.6%   14.8%

(1) Figures include monetary and non-monetary transactions.

 

The monthly average of transactions remained stable QoQ while an increase of 14.8% was evident in the YoY analysis. It is important to note that in 2Q18, the increase in the transactions volume was associated mainly with Mobile Banking (+17.9%), which continued to significantly increase its share of total transactions, reaching a level lof 32.0% in 2Q18; this reflects our strategy to migrate to digital channels.

 

Internet Banking Vía BCP posted the largest drop in its transaction volume (-48.0% QoQ), followed by ATMs (-3.9% QoQ).

 

In the YoY analysis there was an increase in the monthly average of transactions, which was due mainly to an increase in the volume in the following channels:

 

(i)Mobile Banking (+83.9% YoY) continues to increase its through mobile applications “Banca Celular BCP” and “Tus Beneficios BCP” via growth in time deposits, confirmation operations with digital tokens, and loan or service payments.

 

(ii)Agentes BCP (+24.9% YoY), due to growth in drafts that was driven by a radio campaign (national and provisions radio stations) in the month of May and June. This channel also experienced growth in deposits, withdrawals and service payments (an option to pay light bills in the provinces was set up) as part of our World Cup campaign.

 

(iii)Points of sale P.O.S (+25.7% YoY), where the increase was due primarily to World Cup campaigns for debit card clients and to a higher penetration of VISANET. This venue’s share of total the total monthly transactions average increased to 10.7% in 2Q18 vs. 9.