UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31st, 2017
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report ______________
For the transition period from to
Commission file number 1-14014
| CREDICORP LTD. |
|
(Exact name of registrant as specified in its charter) |
| BERMUDA |
| (Jurisdiction of incorporation or organization) |
| Of our subsidiary |
| Banco de Credito del Peru: |
| Calle Centenario 156 |
| La Molina |
| Lima 12, Peru |
| (Address of principal executive offices) |
| Cesar Rios |
| Chief Financial Officer |
| Credicorp Ltd |
| Banco de Credito del Peru: |
| Calle Centenario 156 |
| La Molina |
| Lima 12, Peru |
| Phone (+511) 313 2014 |
| Facsimile (+511) 313 2121 |
| (Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Name of each exchange on which registered | |
| Common Shares, par value $5.00 per share | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Common Shares, par value $5.00 per share 94,382,317
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| Yes x | No ¨ |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
| Yes ¨ | No x |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes x | No ¨ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
| Yes x | No ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
| Large accelerated filer | x | Accelerated filer | ¨ |
| Non-accelerated filer | ¨ | Emerging Growth Company | ¨ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act ¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ¨ | International Financial Reporting Standards as issued | Other ¨ |
| by the International Accounting Standards Board x |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
| Item 17 ¨ | Item 18 ¨ |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes ¨ | No x |
| 2 |
| 3 |
| Abbreviations | Meaning | |
| AFM | Administradora de Fondos Mutuos or Mutual Fund Administrators | |
| AFP | Administradora de Fondo de Pensiones or Private Pension Funds Administrators - Peru | |
| AGF | Administradora General de Fondos or General Funds Management | |
| ALCO | Asset and Liabilities Committee | |
| ALM | Asset and Liabilities Management Service | |
| AML | Anti-Money Laundering | |
| AMV | Autorregulador del Mercado de Valores de Colombia or Colombia's Stock Market Self-regulator | |
| APERHU | Asociacion Peruana de Recursos Humanos or Peruvian Association of Human Resources | |
| ASB | Atlantic Security Bank | |
| ASBANC | Asociacion de Bancos del Peru or Association of Banks of Peru | |
| ASFI | Autoridad Supervisora del Sistema Financiero or Financial System Supervisory Authority - Bolivia | |
| ASHC | Atlantic Security Holding Corporation | |
| ASOMIF | Asociacion de Instituciones de Microfinanzas del Peru or Association of Microfinance Institutions of Peru | |
| ATM | Automated Teller Machine (cash machine) | |
| ATPDEA | Andean Trade Promotion and Drug Eradication Act | |
| AuC | Assets under Custody | |
| AuMs | Assets under Management | |
| BCB | Banco Central de Bolivia or Bolivian Central Bank | |
| BCI | Banco de Credito e Inversiones | |
| BCM | Business Continuity Management | |
| BCP Bolivia | Banco de Credito de Bolivia | |
| BCP Consolidated | Banco de Credito del Peru, including subsidiaries such as Mibanco. It is also called BCP | |
| BCP Stand-alone | Banco de Credito del Peru including BCP Panama and BCP Miami, branches located overseas, and excluding subsidiaries. | |
| BCRP | Banco Central de Reserva del Peru or Peruvian Central Bank | |
| BEX | Banca Exclusiva | |
| Bladex | Banco Latinoamericano de Comercio Exterior | |
| BLMIS | Bernard L. Madoff Investment Securities LLC |
| 4 |
| BOB | Bolivianos, Bolivian Currency | |
| BVL | Bolsa de Valores de Lima or Lima Stock Exchange | |
| CAE | Chief Audit Executive | |
| CAF | Corporacion Andina de Fomento or Andean Development Corporation | |
| CCSI | Credicorp Capital Securities Inc. | |
| CDR | Resettable Certificate of Deposits | |
| CET1 | Common Equity Tier I | |
| CGU | Cash-Generating Unit | |
| CID | Corporate and International Division | |
| CIMA | Cayman Islands Monetary Authority | |
| CLP | Chilean peso | |
| CMF | Comision del Mercado Financiero or Financial Markets Commission | |
| CODM | Chief Operating Decision Maker | |
| COFIDE | Corporacion Financiera de Desarrollo S.A. or Peruvian government-owned development bank | |
| CONFIEP | Confederacion Nacional de Instituciones Empresariales Privadas or National Confederation of Private Business Institutions in Peru | |
| Congress | Congress of the Republic of Peru | |
| COO | Chief Operating Officer | |
| COP | Colombian peso | |
| COSO | Committee of Sponsoring Organizations of the Treadway Commission | |
| CPS | Comisión de Protección Social or Social Protection Committee | |
| Credicorp Capital | Credicorp Capital Ltd., formerly Credicorp Investments Ltd. | |
| Credicorp Capital Bolsa | Credicorp Capital Sociedad Agente de Bolsa S.A., formerly Credibolsa S.A. | |
| Credicorp Capital Chile | Credicorp Capital Chile S.A., operating subsidiary of Credicorp Capital Holding Chile | |
| Credicorp Capital Colombia | Credicorp Capital Colombia S.A., formerly Correval S.A. | |
| Credicorp Capital Fondos | Credicorp Capital Sociedad Administradora de Fondos S.A., formerly Credifondos S.A. | |
| Credicorp Capital Holding Chile | Credicorp Capital Holding Chile S.A., holding subsidiary of Credicorp Capital Ltd. | |
| Credicorp Capital Holding Colombia | Credicorp Capital Holding Colombia S.A.S., holding subsidiary of Credicorp Capital Ltd. | |
| Credicorp Capital Holding Peru | Credicorp Capital Holding Peru S.A., holding subsidiary of Credicorp Capital Ltd. | |
| Credicorp Capital Peru | Credicorp Capital Peru S.A.A., operating subsidiary of Credicorp Capital Holding Peru, and formerly BCP Capital S.A.A. |
| 5 |
| Credicorp Capital Servicios Financieros | Credicorp Capital Servicios Financieros S.A., formerly BCP Capital Financial Services S.A. | |
| Credicorp Capital Titulizadora | Credicorp Capital Sociedad Titulizadora S.A., formerly Credititulos S.A. | |
| CRM | Customer Relationship Management | |
| CRS | Common Reporting Standards | |
| CTS | Severance indemnity deposits | |
| D&S | Disability and Survivorship | |
| DCM | Debt Capital Markets | |
| DTA | Deferred Tax Assets | |
| DTL | Deferred Tax Liabilities | |
| ECM | Equity Capital Management | |
| Edpyme | Empresas de Desarrollo de Pequeña y Microempresa or Small and Micro Firm Development Institutions | |
| Edyficar | Empresa Financiera Edyficar S.A. | |
| ENEL | Enel Distribucion Peru S.A.A. | |
| EPS | Entidad Prestadora de Salud or Health Care Facility | |
| FARC | Fuerzas Armadas Revolucionarias Colombianas or Revolutionary Armed Forces of Colombia | |
| FC | Foreign Currency | |
| FCG | Financial Consolidated Group | |
| FED | Federal Reserve System - US | |
| FELABAN | Federation of Latin American Banks | |
| FFIEC | Federal Financial Institutions Examination Council | |
| FI | Financial Institutions | |
| FIBA | Florida International Bankers Associations | |
| FINRA | Financial Industry Regulatory Authority - US | |
| FMV | Fair market value | |
| FSGC | Financial Services Guidance Committee | |
| FTA | Free Trade Agreement | |
| FuMs | Funds under Management | |
| Fund | Deposit Insuance Fund | |
| FX | Foreign exchange | |
| GAAP | Generally Accepted Accounting Principles | |
| GDP | Gross Domestic Product | |
| IASB | International Accounting Standards Board |
| 6 |
| IBNR | Incurred but not reported | |
| ICBSA | Inversiones Credicorp Bolivia S.A. | |
| IFC | International Finance Corporation | |
| IFRS | International Financial Reporting Standards | |
| IGA | Intergovernmental Agreements | |
| IGBVL | Indice General de la Bolsa de Valores de Lima or General Index of the Lima Stock Exchange | |
| IGV | Impuesto General a las Ventas or Value Added Tax | |
| IIA | Institute for Internal Auditing | |
| ILCR | Internal liquidity coverage ratio | |
| IMF | International Monetary Fund | |
| Inversiones IMT | Inversiones IMT S.A., currently eliminated, and replaced as an operating subsidiary by Credicorp Capital Chile | |
| IPO | Initial Public Offering | |
| IPPF | International Framework for Professional Practice of Internal Auditing | |
| IRB | Internal Ratings-Based | |
| IRS | Internal Revenue Service | |
| ISACA | Information Systems Audit and Control Association | |
| IT | Information Technology | |
| KRI | Key Risk Indicators | |
| LC | Local Currency | |
| LCR | Liquidity Coverage Ratio | |
| LIBOR | London InterBank Offered Rate | |
| LTV | Loan to Value | |
| LTV | Loan to Value | |
| M&A | Mergers and Acquisitions | |
| MALI | Museo de Arte de Lima or Lima's Fine Arts Museum | |
| MEF | Ministry of Economics and Finance | |
| Mibanco | Mibanco, Banco de la Microempresa S.A. | |
| MILA | Mercado Integrado Latinoamericano or Integrated Latin American Market -among Chile, Colombia and Peru | |
| MMD | Middle-Market Division | |
| MOU | Memorandum of undestanding | |
| MRTA | Movimiento Revolucionario Tupac Amaru or Tupac Amaru Revolutionary Movement | |
| NIM | Net Interest Margin | |
| NIST | National Institute of Standards and Technology |
| 7 |
| NPL | Non-performing loans | |
| NYSE | New York Stock Exchange | |
| OCI | Other Comprehensive Income | |
| OECD | Organization for Economic Cooperation and Development | |
| OPA | Oferta Publica de Adquisicion or Public Tender Offer | |
| P&C | Property and casualty (P&C) | |
| PEN | Peruvian Sol | |
| PPS | El Pacifico Peruano Suiza Compañia de Seguros y Reaseguros | |
| RB&WM | Retail Banking & Wealth Management Group | |
| REDESUR | Red Electrica del Sur S.A. | |
| REJA | Special Regime for Early Retirement | |
| ROAA | Return on Average Assets | |
| ROAE | Return on Average Equity | |
| ROE | Return on equity | |
| RWA | Risk-Weighted Assets | |
| S&P | Standard and Poor's | |
| SAM | Standardized Approach Method | |
| SARs | Stock Appreciation Rights | |
| SBP | Superintendencia de Bancos de Panama | |
| SBS | Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones or Superintendency of Banks, Insurance and Pension Funds - Peru | |
| SCTR | Seguro Complementario de Trabajo de Riesgo or Complementary Work Risk Insurance | |
| SEC | U.S. Securities and Exchange Commission | |
| SFC | Superintendencia Financiera de Colombia or Superintendency of Securities and Insurance | |
| SME | Small and medium enterprise | |
| SME - Pyme | Small and medium enterprise – Pequeña y microempresa or Small and micro enterprise | |
| SMV | Superintendencia del Mercado de Valores or Superintendence of the Securities Market - Peru | |
| SMVP | Superintendencia de Mercado de Valores de Panama | |
| Solucion EAH | Solucion Empresa Administradora Hipotecaria | |
| SPP | Sistema Privado de Pensiones or Private Pension System | |
| SUNAT | Superintendencia Nacional de Aduanas y de Administracion Tributaria or Superintendence of Tax Administration - Peru | |
| TAG | Consultancy boutique for Microsoft | |
| TOSE | Total Liabilities Subject to Reserve Requirements |
| 8 |
| TPP | Trans-pacific Parternship | |
| UAI | Internal Audit Unit | |
| VaR | Value at Risk | |
| VAT | Value-added tax | |
| VRAEM | Valley of Rivers, Apurimac, Ene and Mantaro | |
| WBG | Wholesale Banking Group |
| 9 |
PRESENTATION OF FINANCIAL INFORMATION
Credicorp Ltd. is a Bermuda limited liability company (and is referred to in this Annual Report as Credicorp, the Company, the Group, we, or us, and means either Credicorp as a separate entity or as an entity together with our consolidated subsidiaries, as the context may require). We maintain our financial books and records in Peruvian Soles and present our financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS differ in certain respects from Accounting Principles Generally Accepted in the United States (U.S. GAAP).
We operate primarily through our four operating segments: banking, investment banking, insurance, and pension funds. See information about operating segments in “Item 4.-Information on the Company: (A) History and Development of the Company, and (B) Business Overview”.
Our six principal operating subsidiaries are: (i) Banco de Credito del Peru (which, together with its consolidated subsidiaries, is referred to as BCP Consolidated or just BCP); (ii) Atlantic Security Bank, which we hold through Atlantic Security Holding Corporation (which are referred to as ASB and ASHC, respectively); (iii) Pacífico Compañía de Seguros y Reaseguros (“PPS”, which together with its consolidated subsidiaries, is referred to as Grupo Pacifico); (iv) Prima AFP; (v) Credicorp Capital Ltd. (“Credicorp Capital”, which consolidates the companies of our investment banking platform); and (vi) Banco de Credito de Bolivia, which we hold through Inversiones Credicorp Bolivia S.A. (“ICBSA”). As of and for the year ended December 31, 2017, BCP contributed with 81.9% of our total assets, 71.8% of our net income and 70.8% of our net equity attributable to Credicorp’s equity holders1. Unless otherwise specified, the individual financial information for BCP Stand-alone, ASB, Grupo Pacifico, Prima AFP and Credicorp Capital included in this Annual Report is presented in accordance with IFRS and before eliminations for consolidation purposes. See “Item 3. Key Information – 3.A Selected Financial Data” and “Item 4. Information on the Company - 4.A History and Development of the Company.” We refer to BCP Stand-alone, ASB, Grupo Pacifico, Banco de Credito de Bolivia, Prima AFP and Credicorp Capital as our main operating subsidiaries, and we refer to Grupo Credito S.A. (“Grupo Credito”) and ASHC as our two main holding subsidiaries.
“Item 3. Key Information - 3.A Selected Financial Data” contains key information related to our performance. This information was obtained mainly from our Consolidated Financial Statements as of December 31, 2013, 2014, 2015, 2016 and 2017.
1 For the purposes of this document, equity holder refers to a shareholder
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Unless otherwise specified or the context otherwise requires, references in this Annual Report to “S/”, “Sol”, “local currency” or “Soles” are to Peruvian Soles (each Sol is divided into 100 centimos (cents)), and references to “$”, “US$,” “Dollars,” “foreign currency” or “U.S. Dollars” are to United States Dollars.
In light of changes in the Peruvian economy and Credicorp’s operations in Peru, the Board of Directors of Credicorp determined, in its session held on January 22, 2014, that from and after January 1, 2014 the Peruvian Sol would be the functional currency and the currency in which Credicorp’s financial statements would be presented. This decision was made in accordance with the International Financial Reporting Standards (“IFRS”), and specifically IAS 21, based on an analysis performed by Credicorp’s management, which revealed that the Sol has become since 2014 the most relevant currency for Credicorp’s subsidiaries in Peru, and specifically for Credicorp’s main subsidiary, Banco de Credito del Peru. This decision does not change the currency (U.S. Dollar) in which the nominal value of Credicorp’s shares is denominated. In accordance with Credicorp’s Bye-laws, these values remain in U.S. Dollars, the currency in which Credicorp’s stock is listed on the New York Stock Exchange (the “NYSE”) and on the Lima Stock Exchange (BVL by its Spanish initials). For this Annual Report, we have restated in Soles the financial information presented for years prior to 2014. The methodology used for the restatement is in accordance with the IFRS and specifically IAS 21 "The Effects of Changes in Foreign Exchange Rates". The methodology applied is explained in “Item 4. Information on the Company - 4.B Business overview - (10) Selected Statistical Information”.
Some of our subsidiaries, namely ASB; Credicorp Capital Securities Inc. (“CSI”); and Credicorp Capital Asset Management (subsidiaries of Credicorp Capital), maintain their operations and balances in U.S. Dollars and other currencies. As a result, in certain instances throughout this Annual Report, we have translated U.S. Dollars and other currencies to Soles. You should not construe any of these translations as representations that the U.S. Dollar amounts actually represent such equivalent Sol amounts or that such U.S. Dollar amounts could be converted into Soles at the rate indicated, as of the dates mentioned herein, or at all. Unless otherwise indicated, these Sol amounts have been translated from U.S. Dollar amounts at an exchange rate of S/3.241 = US$1.00, which is the December 31, 2017 exchange rate set by the Peruvian Superintendent of Banks, Insurance and Pension Funds (SBS by its Spanish initials). Converting U.S. Dollars to Soles on a specified date (at the prevailing exchange rate on that date) may result in the presentation of Sol amounts that are different from the Sol amounts that would result by converting the same amount of U.S. Dollars on a different specified date (at the prevailing exchange rate on such date). Our Bolivian subsidiary operates in Bolivianos. For consolidation purposes, our Bolivian subsidiary’s financial statements are also presented in Soles. Our Colombian and Chilean subsidiaries, Credicorp Capital Holding Colombia S.A.S. (“Credicorp Capital Holding Colombia”) and Credicorp Capital Holding Chile S.A. (“Credicorp Capital Holding Chile”) operate in Colombian Pesos and Chilean Pesos, respectively, and their financial statements are also converted into Soles for consolidation purposes.
| 11 |
Our management’s criteria for translating foreign currency, for the purpose of preparing the Credicorp Consolidated Financial Statements, are described in “Item 5. Operating and Financial Review and Prospects- 5.A Operating Results—(1) Critical Accounting Policies – 1.3 Foreign Exchange”
| 12 |
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report are not historical facts, including, without limitation, certain statements made in the sections entitled “Item 3. Key Information”, “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”, which are forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934 (or the Exchange Act). You can find many of these statements by looking for words such as “approximates”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “would”, “may”, or other similar expressions. These forward-looking statements are based on our management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in the forward-looking statements. Therefore, actual results, performance or events may be materially different from those in the forward-looking statements due to, without limitation:
| • | General economic conditions, including in particular economic conditions in Peru; |
| • | Performance of financial markets, including emerging markets; |
| • | The frequency and severity of insured loss events; |
| • | Interest rate levels; |
| • | Currency exchange rates, including the Sol/U.S. Dollar exchange rate; |
| • | Increasing levels of competition in Peru and other emerging markets; |
| • | Changes in laws and regulations; |
| • | Changes in the policies of central banks and/or foreign governments; |
| • | General competitive factors, in each case on a global, regional and/or national basis; |
| • | Effectiveness of our risk management policies; and |
| • | Losses associated with counterparty exposures. |
See “Item 3. Key Information - 3.D Risk Factors” and “Item 5. Operating and Financial Review and Prospects”.
We are not under any obligation to, and we expressly disclaim any obligation to, update or alter any forward-looking statements contained in this Annual Report whether as a result of new information, future events or otherwise.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
| 3. A | Selected financial data |
The following table presents a summary of our consolidated financial information at the dates and for the periods indicated. This selected financial data is presented in Soles. You should read this information in conjunction with, and qualify this information in its entirety by reference to, the Consolidated Financial Statements, which are also presented in Soles.
The summary of our consolidated financial data as of, and for the years ended, December 31, 2013, and 2014 was derived from the Consolidated Financial Statements audited by Paredes, Zaldivar, Burga & Asociados S.C.R.L, member firm of Ernst & Young Global (“EY Global”), independent registered public accountants. The consolidated financial data as of, and for the years ended, December 31, 2015, 2016, 2017 was derived from the Consolidated Financial Statements audited by Gaveglio, Aparicio y Asociados S.C.R.L, member firm of PricewaterhouseCoopers International Limited, independent registered public accountants.
The report of Gaveglio, Aparicio y Asociados S.C.R.L on the Consolidated Financial Statements as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 appears elsewhere in this Annual Report.
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SELECTED FINANCIAL DATA
| Year ended December 31, | ||||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2017 | |||||||||||||||||||
| (Soles in thousands, except percentages, ratios, and per common share data) | U.S.
Dollars in thousands (1) | |||||||||||||||||||||||
| INCOME STATEMENT DATA: | ||||||||||||||||||||||||
| IFRS: | ||||||||||||||||||||||||
| Interest income | 7,086,470 | 8,578,664 | 9,784,089 | 10,773,055 | 11,030,683 | 3,391,361 | ||||||||||||||||||
| Interest expenses | (2,052,913 | ) | (2,191,062 | ) | (2,527,133 | ) | (2,914,714 | ) | (2,959,196 | ) | (909,799 | ) | ||||||||||||
| Net Interest, income and expenses | 5,033,557 | 6,387,602 | 7,256,956 | 7,858,341 | 8,071,487 | 2,481,562 | ||||||||||||||||||
| Provision for loan losses, net of recoveries (2) | (1,230,371 | ) | (1,715,809 | ) | (1,880,898 | ) | (1,785,495 | ) | (1,789,165 | ) | (550,075 | ) | ||||||||||||
| Net interest, income after provision for loan losses | 3,803,186 | 4,671,793 | 5,376,058 | 6,072,846 | 6,282,322 | 1,931,487 | ||||||||||||||||||
| Commissions and fees | 2,259,927 | 2,521,829 | 2,644,191 | 2,771,561 | 2,911,408 | 895,106 | ||||||||||||||||||
| Net gains on sales of securities | 96,228 | 220,737 | 248,723 | 336,759 | 741,781 | 228,059 | ||||||||||||||||||
| Net gains on derivatives held for trading | (63,660 | ) | 22,202 | 207,938 | 44,500 | 103,580 | 31,845 | |||||||||||||||||
| Net gains from exchange difference | - | 172,095 | 46,563 | - | 17,394 | 5,348 | ||||||||||||||||||
| Net gains on financial assets designated at fair value through profit or loss | - | - | - | 51,667 | 67,633 | 20,794 | ||||||||||||||||||
| Net gains on foreign exchange transactions | 534,442 | 453,405 | 773,798 | 698,159 | 650,228 | 199,911 | ||||||||||||||||||
| Net premiums earned | 2,142,777 | 2,189,666 | 1,733,978 | 1,799,115 | 1,808,340 | 555,970 | ||||||||||||||||||
| Other income | 441,193 | 639,572 | 325,666 | 344,460 | 396,683 | 121,959 | ||||||||||||||||||
| Net claims incurred for life, general and health insurance contracts | (1,460,461 | ) | (1,426,733 | ) | (1,031,659 | ) | (1,098,905 | ) | (1,118,304 | ) | (343,820 | ) | ||||||||||||
| Others expenses (3) | (5,420,912 | ) | (6,075,096 | ) | (5,964,664 | ) | (6,128,734 | ) | (6,286,131 | ) | (1,932,657 | ) | ||||||||||||
| Profit before income tax | 2,332,720 | 3,389,470 | 4,360,592 | 4,891,428 | 5,574,934 | 1,714,002 | ||||||||||||||||||
| Income tax | (775,177 | ) | (968,224 | ) | (1,197,207 | ) | (1,281,448 | ) | (1,393,286 | ) | (428,363 | ) | ||||||||||||
| Net profit | 1,557,543 | 2,421,246 | 3,163,385 | 3,609,980 | 4,181, 648 | 1,285,639 | ||||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||
| Credicorp’s equity holders | 1,538,307 | 2,387,852 | 3,092,303 | 3,514,582 | 4,091,753 | 1,258,001 | ||||||||||||||||||
| Non-controlling interest | 19,236 | 33,394 | 71,082 | 95,398 | 89,895 | 27,638 | ||||||||||||||||||
| Number of shares as adjusted to reflect changes in capital | ||||||||||||||||||||||||
| Net income per common share attributable to Credicorp’s equity holders (4) | 19.35 | 30.04 | 38.91 | 44.23 | 51.49 | 15.83 | ||||||||||||||||||
| Diluted net income per share | 19.31 | 29.97 | 38.84 | 44.15 | 51.35 | 15.79 | ||||||||||||||||||
| Cash dividends declared and paid per common share U.S Dollar (5) | 1.90 | - | - | - | - | - | ||||||||||||||||||
| Cash dividends declared per common share Soles (5) | - | 6.7700 | 8.1910 | 12.2865 | 14.1726 | - | ||||||||||||||||||
| Additional cash dividends declared per common share Soles (5) | 15.7000 | |||||||||||||||||||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||||||
| IFRS: | ||||||||||||||||||||||||
| Total assets | 114,094,220 | 134,834,372 | 155,480,217 | 156,435,222 | 170,472,283 | 52,598,668 | ||||||||||||||||||
| Total loans (6) | 64,361,927 | 79,509,360 | 90,328,499 | 94,768,901 | 100,477,775 | 31,002,090 | ||||||||||||||||||
| Allowance for loan losses (2) | (2,385,958 | ) | (3,102,096 | ) | (4,032,219 | ) | (4,416,692 | ) | (4,943,008 | ) | (1,525,149 | ) | ||||||||||||
| Total deposits(7) | 68,182,519 | 76,783,964 | 88,307,962 | 85,583,120 | 96,717,674 | 29,841,923 | ||||||||||||||||||
| Equity attributable to Credicorp’s equity holders | 11,831,511 | 13,979,455 | 16,128,016 | 19,656,135 | 21,756,567 | 6,712,918 | ||||||||||||||||||
| Non-controlling interest | 511,594 | 646,570 | 599,554 | 460,376 | 497,136 | 153,390 | ||||||||||||||||||
| Total equity | 12,343,105 | 14,626,025 | 16,727,570 | 20,116,511 | 22,253,703 | 6,866,308 | ||||||||||||||||||
| 15 |
| 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||
| (Soles in thousands, except percentages, ratios, and per common share data) | ||||||||||||||||||||
| SELECTED RATIOS | ||||||||||||||||||||
| IFRS: | ||||||||||||||||||||
| Net interest margin – NIM (8) | 5.07 | % | 5.65 | % | 5. 45 | % | 5.46 | % | 5.33 | % | ||||||||||
| Return on average total assets - ROAA(9) | 1.41 | % | 1.92 | % | 2.13 | % | 2.25 | % | 2.50 | % | ||||||||||
| Return on average equity -ROAE (10) | 13.70 | % | 18.50 | % | 20.54 | % | 19.64 | % | 19.76 | % | ||||||||||
| Operating expenses as a percentage of net interest and non-interest income (11) | 46.16 | % | 46.15 | % | 43.52 | % | 43.27 | % | 43.98 | % | ||||||||||
| Operating expenses as a percentage of average assets (12) | 4.25 | % | 4.32 | % | 3.76 | % | 3.64 | % | 3.62 | % | ||||||||||
| Equity attributable to Credicorp’s equity holders as a percentage of period end total assets | 10.37 | % | 10.37 | % | 10.37 | % | 12.57 | % | 12.76 | % | ||||||||||
| Regulatory capital as a percentage of risk weighted assets – BIS ratio (13) | 15.05 | % | 14.99 | % | 15.95 | % | 16.33 | % | 15.92 | % | ||||||||||
| Total internal overdue loan amounts as a percentage of total loans (14) | 2.23 | % | 2.53 | % | 2.56 | % | 2.77 | % | 3.01 | % | ||||||||||
| Allowance for direct loan losses as a percentage of total loans | 3.52 | % | 3.76 | % | 4.25 | % | 4.44 | % | 4.48 | % | ||||||||||
| Allowance for loan losses as a percentage of total loans and other off-balance-sheet items (15) | 3.08 | % | 3.20 | % | 3.69 | % | 3.85 | % | 4.12 | % | ||||||||||
| Allowance for direct loan losses as a percentage of total internal overdue loans (16) | 157.50 | % | 148.65 | % | 166.16 | % | 160.55 | % | 148.98 | % | ||||||||||
| Allowance for direct loan losses as a percentage of impaired loans (17) | 102.44 | % | 99.22 | % | 105.35 | % | 99.90 | % | 98.36 | % | ||||||||||
In this document the total internal overdue includes internal overdue loans and under legal collection loans.
| (1) | The exchange rate used was 3.241 for balance sheet (end of year) and 3.252583 for Profit and Losses (average of the year). The latter includes more decimals looking for as accurate as possible figures in the Profit and Losses statement. |
| (2) | Provision for loan losses and allowance for loan losses include provisions and reserves with respect to total loans and off-balance sheet items such as letters of credit, performance bonds and stand-by letters. The figure in the Income Statement is net of write-off and recoveries. |
| (3) | The other expenses include loss on foreign exchange transactions (S/309.4 million in 2013 and S/60.6 million in 2016) and loss on financial assets designated at fair value through profit or loss (S/18.1 million in 2013, S/4.1 million in 2014 and S/33.5 million in 2015), |
| (4) | As of December 31, 2017, we had 94.4 million common shares issued and outstanding. Of this amount, 14.6 million were held by ASHC and 0.3 million are maintained for the share-based compensation plan, and are therefore considered treasury shares. The per-common-share data given considers net outstanding shares (total outstanding common shares net of treasury shares) of 79.5 million. See Notes 17 and 28 to the Consolidated Financial Statements. |
| (5) | Dividends based on net income attained for the financial years 2013 were declared and paid in U.S. Dollar. Dividends based on net income attained for the financial years 2014 and 2015 were declared in Soles and paid in U.S. Dollar after converting the Soles amount using the weighted exchange rate of PEN/US$ registered by the SBS for the transactions at the close of business on the declaration date. Dividends based on net income attained for the financial years 2016 and 2017 were declared in Soles and we will be paid in U.S. Dollar on May 12, 2017 and May 11, 2018, respectively, using the weighted exchange rate registered by the SBS for the transactions at the close of business on May 10, 2017 and May 09, 2018, respectively. . In October 2017, the Board of Director agreed to pay an additional dividend, which were declared in Soles and we will be paid in U.S. Dollar on November 24, 2017, using the weighted exchange rate registered by the SBS for the transactions at the close of business on November 22, 2017. |
| (6) | Total loans refer to direct loans plus accrued interest minus unearned interest. In our Consolidated Financial Statements, “loans, net of unearned income” refers to direct loans plus accrued interest minus unearned interest. See Note 7 to the Consolidated Financial Statements. In addition to loans outstanding, we had off-balance-sheet items, including those mentioned in Note (2) that amounted to S/13,036.7 million, S/17,319.5 million, S/19,004.7 million, S/19,832.0 million and S/19,369.6 million, as of December 31, 2013, 2014, 2015, 2016 and 2017, respectively. See Note 20 to the Consolidated Financial Statements. |
| (7) | Accrued interests are not included in Total deposits. |
| (8) | Net interest income as a percentage of average interest-earning assets, computed as the average of period-beginning and period-ending balances. |
| (9) | Net income attributable to Credicorp’s equity holders as a percentage of average total assets, computed as the average of period-beginning and period-ending balances. |
| (10) | Net income attributable to Credicorp’s equity holders as a percentage of average equity attributable to our equity holders, computed as the average of period-beginning and period-ending balances. |
| (11) | Sum of the salaries and employee´s benefits, administrative expenses, depreciation and amortization, acquisition cost, all as percentage of the sum of net interest income, commissions and fees, net gain on foreign exchange transactions, net gain from associates and net premiums earned. Acquisition cost includes net fees, underwriting expenses and underwriting income. |
| (12) | Sum of the salaries and employee´s benefits, administrative expenses, depreciation and amortization, acquisition cost, all as percentage of average assets. |
| (13) | Regulatory capital calculated in accordance with guidelines by the Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (or the BIS II Accord) as adopted by the SBS. See “Item 5. Operating and Financial Review and Prospects – 5.B Liquidity and Capital Resources - (1) Capital Adequacy Requirements for Credicorp.” |
| (14) | Depending on the type of loan, BCP and Mibanco consider internal overdue loans for corporate, large business and medium business loans after 15 days; for overdrafts, small and micro business loans after 30 days; and for consumer, mortgage and leasing loans the past-due installments are considered overdue after 30 to 90 days. After 90 days, the outstanding balance of the loan is considered internal overdue. ASB considers internal overdue loans all overdue loans except for consumer loans, which are considered internal overdue loans when the scheduled principal and/or interest payments are overdue for more than 90 days. BCP Bolivia considers loans as internal overdue after 30 days. |
| (15) | Other off-balance-sheet items primarily consist of Stand-by letters, Letters of Credit and Performance Bonds. See Note 20 to the Consolidated Financial Statements. |
| (16) | Allowance for direct loan losses, as a percentage of all internal overdue loans without for collateral securing such loans. |
| (17) | Allowance for direct loan losses as a percentage of loans classified in categories C, D and E. See “Item 4. Information on the Company - 4.B Business Overview - (10) Selected Statistical Information - 10.3 Loan Portfolio - 10.3.7 Classification of the Loan Portfolio. |
| 16 |
| 3. B | Capitalization and Indebtedness |
Not applicable.
| 3. C | Reasons for the Offer and Use of Proceeds |
Not applicable.
| 3. D | Risk Factors |
Our businesses are affected by many external and other factors in the markets in which we operate. Different risk factors can impact our businesses, our ability to operate effectively and our business strategies. You should consider the risk factors carefully and read them in conjunction with all the information in this document. You should note that the risk factors described below are not the only risks to consider. Rather, these are the risks that we currently consider material. There may be additional risks that we consider immaterial or of which we are unaware, and any of these risks could have similar effects to those set forth below.
(1) Our geographic location exposes us to risk related to Peruvian political, social and economic conditions
Most operations of BCP, Grupo Pacifico, Prima AFP, and a significant part of Credicorp Capital’s operations are located in Peru. In addition, while ASB is based outside of Peru, most of its customers are located in Peru. Therefore, our results are affected by economic activity in Peru. Changes in economic conditions, both international and domestic, or government policies can alter the financial health and normal development of our business. The changes may include, but are not limited to, high inflation, currency depreciation, confiscation of private property and financial regulation. Similarly, terrorist activity, political and social unrest, and possible natural disasters (i.e. earthquakes, flooding, etc.) can adversely impact our operations.
| 17 |
Peru has a long history of political instability that includes military coups and a succession of regimes that featured heavy government intervention in the economy. In 1990, Alberto Fujimori took office as president in the middle of hyperinflation (7,649.7% in 1990) and insecurity due to terrorist activities. Market-based reforms and the gradual success of the authorities in capturing terrorist leaders allowed the country to stabilize, and by 1995 Fujimori was re-elected. The administration was accused of authoritarian behavior, especially after closing Peru’s Congress in 1992 and crafting a new constitution. The Fujimori administration also faced several corruption charges. Shortly after starting a controversial third term, Fujimori resigned the presidency and a transitional government led by Valentin Paniagua called for elections to be held in April 2001. After spending several years in Japan, Fujimori was brought back to Peru and was sentenced in 2009 to 25 years in prison for human rights violations. The governments that have been elected since 2001 are those of Alejandro Toledo, from 2001 to 2006; Alan Garcia, from 2006 to 2011; Ollanta Humala from 2011 to 2016; and Pedro Pablo Kuczynski, whose term began in 2016 (as described below) and was to end in 2021. These administrations, despite their different policy priorities, have each been characterized by political fragmentation (more than ten different political organizations have nominated candidates for President in each of the four elections since 2001) and low popularity (usually around 20% - 30% approval ratings). Each of these administrations has also shared mostly cordial relationships with neighboring countries.
Humala’s presidency ended on July 28, 2016. The first round of presidential elections was held on April 10, 2016. A second round between candidates Ms. Keiko Fujimori and Mr. Pedro Pablo Kuczynski was necessary as none of the candidates obtained more than 50% of the valid votes. The second round was held on June 5, 2016, and Pedro Pablo Kuczynski was elected president for the 2016-2021 term with 50.12% of the vote. Kuczynski’s presidential period started in July 28, 2016, with high economic expectations due to the highly skilled technical team that backed him and the government. However, the Lava-Jato case that started in Brazil has put on hold on-going infrastructure projects in Peru that started during the last two governments2. Moreover, in midst of the Lava-Jato case investigations, in December 2017 a Presidential Vacancy motion was proposed by Congress. The vote did not succeed because only 79 of 87 votes required were obtained. Furthermore, in March 2018, a second Presidential Vacancy motion was presented by Congress. On March 21ST 2018 Pedro Pablo Kuczynski presented his resignation as President to Congress amid high political turmoil. His resignation was accepted on March 22. On March 23 Martin Vizcarra (Kuczynski’s former first vice-president) assumed as President, as provided in the Constitution. While the three major international credit rating agencies (Moody’s, S&P and Fitch) remarked that general macroeconomic policies are not expected to change under the new government, any disruption of large-scale projects and a high degree of political uncertainty could affect Peru’s GDP and deteriorate the financial situation of some of Credicorp’s clients.
2 In December 2016 the United States Department of Justice revealed that Odebrecht, the largest Brazilian construction company, had secured around 100 projects in 12 countries (including Peru, Colombia, Ecuador, Panama, Dominican Republic, etc.) using bribery and corruption. Since early 2017 Peruvian prosecutors have investigated the case which allegedly implicated former and current local authorities.
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Notwithstanding, during the past 17 years Peru has experienced a period of relative economic and political stability, especially compared to the period between 1980 and 2000. This stability has been reflected in Peru’s average growth rate of 5.1% for GDP and 5.5% for Domestic Demand (2001-2017); four consecutive democratic transitions; a relatively consistent free-market approach to economic policy; and growth in GDP per capita, which reached US$6,598 in 2017 (equivalent to S/ 21,386 at an exchange rate of S/ 3.241), according to the International Monetary Fund (IMF). Nevertheless, political risk is present in any Peruvian presidential election because it is possible that a radical candidate with more interventionist economic policies could prevail. Ollanta Humala was elected in 2011 on a far-left policy platform, which was cast aside after he assumed office. Moreover, in the 2016 first round Presidential Elections, candidate Veronika Mendoza, also with a leftist policy platform, came in third place amid promises of curbs on mining projects and renegotiating gas export contracts. Hence, there is a sizeable portion of the electorate still demanding an economy that is more reliant on public spending. Therefore, there remains a risk of significant political and economic change.
Peru also has a history of domestic terrorism. Between the late 1970s and the early 1990s, both Shining Path (Sendero Luminoso in Spanish) and Movimiento Revolucionario Tupac Amaru (“MRTA”) conducted a series of terrorist attacks that caused thousands of casualties and affected normal political, economic and social activities in many parts of the country, including Lima, the capital of Peru. In 1992, the leader of Shining Path, Abimael Guzman, was captured and later sentenced to life in prison (a new trial affirmed the sentence in 2006). By the end of the 1990s, most other members of Shining Path, as well as MRTA, were also captured and sentenced to prison terms. However, in late 1996 a group of MRTA members stormed the residence of Japan’s Ambassador to Peru and held a group of politicians, diplomats and public figures hostage for approximately four months. In April 1997, a military operation put an end to the hostage situation. All 14 terrorists died in the confrontation, while all but one hostage survived. Since then, and for the following 20 years, terrorist activity in Peru has been mostly confined to small-scale operations in the Huallaga Valley and the VRAEM (Valleys of Rivers Apurimac, Ene and Mantaro) areas, both in the Eastern part of the country. In 2012, the Peruvian government captured Florindo Flores, one of the last remaining leaders of Shining Path, which substantially weakened the organization’s activities in the Huallaga Valley.
Despite these efforts, terrorist activity and the illegal drug trade continue to be significant challenges for Peruvian authorities. The Huallaga Valley and VRAEM constitute the largest areas of coca cultivation in the country and thus serve as a hub for the illegal drug trade. Any violence derived from the drug trade or a resumption of large-scale terrorist activities could hurt our operations.
After serving 25 years in prison due to terrorist activity, a total of seven members from Shining Path and two from MRTA were released in 2017.
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Another source of risk is related to political and social unrest in areas where mining, oil and gas operations take place. In recent years, Peru has experienced protests against mining projects in several regions around the country. Mining is an important part of the Peruvian economy. In 2017 it represented approximately 10% of Peru’s GDP and approximately 60% of the country’s exports, while oil and gas represented 2% of Peru’s GDP and 7% of Peru’s exports according to the Peruvian Central Bank (BCRP by its Spanish initials). On several occasions, local communities have opposed these operations and accused them of polluting the environment and hurting agricultural and other traditional economic activities. In late 2011 and throughout 2012, social and political tension peaked around Conga, a gold mining project in the northern region of Cajamarca. The launch of Conga, which involved investments of approximately US$4.5 billion, failed because of the protests. Peru’s government commissioned an Environmental Impact Study developed by international experts which introduced recommendations for the project.
Delays or cancellations of mining projects could reduce economic growth and business confidence, thereby hurting the financial system both directly (many mining projects are at least partially financed by local financial institutions) and indirectly (overall economic activity could decelerate).
(2) It may be difficult to serve process on or enforce judgments against us or our principals residing outside of the United States
A significant majority of our directors and officers live outside the United States (principally in Peru). Most of our assets and those of our principal subsidiaries are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon us or our principals to initiate a civil suit under the United States securities laws in United States courts. We have also been advised by our Peruvian counsel that liability under the United States federal securities laws may not be enforceable in original actions in Peruvian courts. In addition, judgments of United States courts obtained in actions under the United States federal securities laws may not be enforceable. Similarly, our Bermuda counsel have advised us that courts in Bermuda may not enforce judgments obtained in other jurisdictions, or entertain actions in Bermuda, against us or our directors or officers under the securities laws of those jurisdictions.
In addition, our Bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. This waiver limits the rights of shareholders to assert claims against our officers and directors for any action taken by an officer or director. It also limits the rights of shareholders to assert claims against officers for the failure of an officer or director to take any action in the performance of his or her duties, except with respect to any matter involving willful negligence, willful default, fraud or dishonesty on the part of the officer or director.
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(3) Our ability to pay dividends to shareholders and to pay corporate expenses may be adversely affected by the ability of our subsidiaries to pay dividends to us
As a holding company, our ability to make dividend payments, if any, and to pay corporate expenses will depend upon the receipt of dividends and other distributions from our operating subsidiaries. Our principal operating subsidiaries are BCP, BCP Bolivia, Grupo Pacifico, ASB, Prima AFP and Credicorp Capital. Subject to certain reserve and capital adequacy requirements under applicable regulations, we are able to cause our subsidiaries to declare dividends. If our subsidiaries do not have funds available, or are otherwise restricted from paying us dividends, we may be limited in our ability to pay dividends to shareholders. Currently, despite the minimum capital requirements, there are no restrictions on the ability of BCP, BCP Bolivia, Grupo Pacifico, ASB, Prima AFP or Credicorp Capital to pay dividends abroad. In addition, our right to participate in the distribution of assets of any subsidiary, upon any subsidiary’s liquidation or reorganization (and thus the ability of holders of our securities to benefit indirectly from such distribution), is subject to the prior claims of creditors of that subsidiary, except where we are considered an unsubordinated creditor of the subsidiary. Accordingly, our securities will effectively be subordinated to all existing and future liabilities of our subsidiaries, and holders of our securities should look only to our assets for payments.
In addition, the value of any dividend paid by our operating subsidiaries that declare dividends in a currency different from Credicorp’s dividends (e.g. ASB, BCP Bolivia, Credicorp Capital Holding Chile, and Credicorp Capital Holding Colombia) is subject to the impact of the depreciation of the dividend’s currency against Credicorp’s functional currency. This would have a negative impact on our ability to pay dividends to shareholders. For further details about Credicorp’s Dividend Policy refer to Item 8. Financial Information – 8.A Consolidated Statements and Other Financial Information – (3) Dividend Policy.
(4) Our financial statements, mainly our interest-earning assets and interest-bearing liabilities, could be exposed to fluctuations in interest rates, foreign currency exchange rates and exchange controls, which may adversely affect our financial condition and results of operations
Since January 1, 2014, the functional currency of our financial statements has been the Sol; however, Credicorp’s subsidiaries generate revenues in Soles, U.S. Dollars, Bolivian Pesos, Colombian Pesos, and Chilean Pesos. Mainly in BCP, BCP Bolivia, ASB, Credicorp Capital Colombia and Credicorp Capital Chile are particularly exposed to foreign exchange fluctuations. As a result, the fluctuation of our functional currency against other currencies could have an adverse impact on our results. In addition, any exchange controls implemented in the countries in which we operate may adversely affect our financial condition and results of operations.
| 21 |
The Peruvian government does not impose restrictions on a company’s ability to transfer Soles, U.S. Dollars or other currencies from Peru to other countries, or to convert Peruvian currency into other currencies. Nevertheless, Peru has implemented restrictive exchange controls in its history, and the Peruvian government might in the future consider it necessary to implement restrictions on such transfers, payments or conversions. For further details see “Item 10. Additional Information- 10.D Exchange Controls”.
The interest income we earn on our interest-earning assets and the interest expense we pay on our interest-bearing liabilities, could be affected by changes in domestic and international market interest rates, which are sensitive to many factors beyond our control, including monetary policies and domestic and international economic and political conditions.
We have implemented several policies to manage the interest rate risk exposure and seek proactively to update the interest rate risk profile to minimize losses and optimize net revenues; however a sudden and/or significant volatility in market interest rates could have a material adverse effect on our financial condition and results of operations. For further detail see “Item 11. Quantitative and Qualitative Disclosures about Market Risk – (9) Sensitivity to Changes in Interest Rates
We also face foreign exchange risk on credit that we extend through our banking business, which is primarily conducted through BCP. To address this risk, BCP’s Foreign Exchange Credit Risk Management identifies borrowers that may not meet their debt obligations due to currency mismatches by performing a sensitivity analysis of the credit rating of companies and the debt-service capacity of individuals. Then, we classify borrowers according to their level of foreign exchange credit risk exposure. We closely monitor these clients and, on an ongoing basis, we revise our risk policies to underwrite loans as well as to manage our portfolio of foreign currency denominated loans; however, these policies may not sufficiently address our foreign exchange risk, resulting in adverse effects on our financial condition and results of operation.
We have taken steps to manage the gap between our foreign currency-denominated assets and liabilities in several ways, including closely matching their volumes and maturities. Nevertheless, a sudden and significant depreciation of the Sol could have a material adverse effect on our financial condition and results of operations. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk - (10) Foreign Exchange Risk”.
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(5) Regulatory changes and adoption of new international guidelines to sectors in which we operate could impact our earnings and adversely affect our operating performance
Because we are subject to regulation and supervision in Peru, Bolivia, Colombia, Chile, the Cayman Islands, the United States of America, and Panama, changes to the regulatory framework in any of these countries or changes in tax laws could adversely affect our business.
Banking
We are, most directly, subject to extensive supervision and regulation through the SBS’s Banking and Insurance System Law (Ley General del Sistema Financiero y del Sistema de Seguros y Orgánica de la Superintendencia de Banca y Seguros) and the Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates (Reglamento para la Supervision Consolidada de los Conglomerados Financieros y Mixtos).
The SBS and the Peruvian Central Bank supervise and regulate BCP and Mibanco’s operations. Peru’s constitution and the SBS’s statutory charter grant the SBS the authority to oversee and control banks and other financial institutions, including pension funds and insurance companies. The SBS and the Peruvian Central Bank have general administrative responsibilities over BCP, including defining capital and reserve requirements. In past years, the Peruvian Central Bank has, on numerous occasions, changed the deposit reserve requirements applicable to Peruvian commercial banks as well as the rate of interest paid on deposit reserves and the amount of deposit reserves on which no interest is payable by the Peruvian Central Bank. Such changes in the supervision and regulation of BCP may adversely affect our results of operations and financial condition. See “Item 4. Information on the Company — 4.B Business Overview — (9) Supervision and Regulation — 9.2 BCP and Mibanco”. Furthermore, changes in regulation related to consumer protection made by these agencies may also affect our business.
The Superintendency of the Securities Market (Superintendencia del Mercado de Valores or SMV by its Spanish initials) also supervises some of our subsidiaries such as BCP, Credicorp Capital Sociedad Agente de Bolsa (Credicorp Capital Bolsa) and Credicorp Capital Sociedad Administradora de Fondos (Credicorp Capital Fondos).
In Colombia, we are subject to supervision and regulation through the Superintendency of Securities and Insurance (SFC - Superintendencia Financiera de Colombia) and the Colombian Stock Market Self-regulator (AMV - Autorregulador del Mercado de Valores de Colombia). In Chile, we are subject to supervision and regulation through the Commission of Financial Market from Chile (CMF - Comisión del Mercado Financiero). See “Item 4. Information on the Company — 4.B Business Overview — (9) Supervision and Regulation — 9.5 Credicorp Capital”.
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Changes in U.S. laws or regulations applicable to our business, or the adoption of new regulations, such as under the Foreign Account Tax Compliance Act (FATCA) or the Dodd-Frank Wall Street Reform and Consumer Protection Act, may have an adverse effect on our financial performance and operations.
We are also regulated by the United States Federal Reserve System, which shares its regulatory responsibility with the State of Florida Department of Banking and Finance - Office of Financial Regulation, with respect to BCP’s Miami agency, and by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA), with respect to Credicorp Capital Securities, a U.S. broker dealer.
Similarly, we are regulated by other governmental entities in other jurisdictions. In the Cayman Islands, we are subject to the supervision and regulation of the Cayman Islands Monetary Authority (CIMA). In Bolivia, we are subject to the supervision of the Financial System Supervisory Authority (ASFI by its Spanish initials) that has assumed all regulatory functions held previously by the Superintendency of Banks and Financial Entities and the Superintendency of Pensions, Securities and Insurance. Nonetheless, in 2010 the Insurance and Pensions sectors have come out of this regulation and have their own Supervision Authority: Pensions and Insurance Inspection and Control Authority (Autoridad de Fiscalización y Control de Pensiones y Seguros – APS)
Finally, in Panama, we are subject to the supervision of the Superintendency of Banks of Panama and the regulatory framework set forth in the Decree Law 9 of February 25, 1998. Changes in the supervision and regulation of our subsidiaries in other countries may adversely affect our results of operations and financial condition.
Taxation
For Peruvian Regulation see Item 10.Additional Information – 10.E. Taxation.
The Chilean Statutory Income Tax rate to resident legal entities is 25% under the attribution regime and 27% under the semi-integrated regime (25.5% for semi-integrated regime only for 2017).
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On the other hand, foreign resident individuals or legal entities are subject to a 35% dividend withholding tax. This tax applies at the moment of the effective remittance of the dividend and the corporate income tax can be used as a credit. In case of non-treaty country resident shareholders, the corporate tax credit is limited to 65% of the corporate income tax associated to such dividend. Therefore, in this case, the total tax burden for foreign taxpayers, subject to a 35% tax rate, will be of 44.45%. Nonetheless, the “65% limit” does not apply to those investors domiciled or resident in a country with which Chile has a Double Taxation Treaty in force. Additionally, a transitory rule provides that this benefit will also be applicable to those investors who are residents of countries with which Chile has a Double Taxation Treaty subscribed and pending ratification, to the extent that the treaty was signed prior to January 1, 2017. This transitory rule would be in effect until 2019.
If the Chilean entity has chosen the attributed regime, the corporate tax will be fully creditable, regardless of the country of residence of the shareholder.
The Group chose the “Income Tax semi-integrated system”. The additional tax rate has not been changed.
The Colombian statutory income tax rate is 34% (33% as from 2018 and onwards). A temporary income surtax of 6% and 4% was introduced for fiscal year 2017 and 2018, respectively. This surtax will apply only from a tax base equal to or greater than 800,000,000 Colombian pesos, approximately US$268,096.
As of 2017 distribution of dividends to non-residents is subject to a 5 percent withholding tax, which will be increased to 35 percent if dividends are distributed out of previously untaxed earnings after the 5% percent withholding tax is assessed.
Profits earned up to December 31, 2016, are not subject to the 5 percent withholding tax on dividends, even though the distribution occurs from and after January 1, 2017.
For details on Income tax review by the Tax Authorities on the jurisdictions in which we operate, please refer to note 18 (d) of the consolidated financial statements.
Insurance
Our Property and Casualty (P&C) and Life insurance business is carried out by Pacifico Seguros y Reaseguros S.A., which is part of Grupo Pacifico. The insurance business is subject to regulation by the SBS. New legislation or regulations may adversely affect Grupo Pacifico’s ability to underwrite and price risks accurately, which in turn would affect underwriting results and business profitability. Grupo Pacifico is unable to predict whether and to what extent new laws and regulations that may affect its business will be adopted in the future.
| 25 |
On April 14, 2016, the Congress of the Republic of Peru (“Congress”) approved a law that modifies some aspects of the nation’s private pension system. The new law, which was promulgated on April 21, 2016, might continue to have a negative effect on part of Pacifico’s annuities business, which is composed of retirement and disability and survivorship. Retirement annuities, which represents approximately 1.9% of Pacifico’s total gross premiums earned in 2017, is the only line of business that has been affected by the change in regulation thus far.
Grupo Pacifico is also unable to predict the timing of the adoption of any new laws and the effects any such new laws or regulations may have on its operations, profitability and financial condition in future years. However, we still expect Peru to adopt new legislation in the coming years, similar to the measure enacted by the European Union through Solvency II, which sought to further reduce the insolvency risk faced by insurance companies by improving the regulation regarding the amount of capital that insurance companies in the European Union must hold.
Our operating performance and financial condition depend on Grupo Pacifico’s ability to underwrite and set premium rates accurately across a full spectrum of risks. In order to be profitable, Grupo Pacifico must generate sufficient premiums to offset losses, loss adjustment expenses and underwriting expenses.
To price premium rates accurately, Grupo Pacifico must:
| · | collect and analyze a substantial volume of data; |
| · | provide sufficient resources to its technical units; |
| · | develop, test and apply appropriate rating formulae; |
| · | closely monitor changes in trends in a timely fashion; and |
| · | predict both severity and frequency with reasonable accuracy. |
If Grupo Pacifico fails to assess the risks that it assumes accurately or does not accurately estimate its retention, it may fail to establish adequate premium rates. Failure to establish adequate premium rates could reduce income and have a material adverse effect on our operating results or financial condition. Moreover, there is inherent uncertainty in the process of establishing life insurance reserves and property and casualty (P&C) loss reserves. Reserves are estimates based on actuarial and statistical projections at a given point in time of what Grupo Pacifico ultimately expects to pay out on claims and the related costs of adjusting those claims, based on the facts and circumstances then known. Factors affecting these projections include, among others: (i) in the case of life insurance reserves, changes in mortality/longevity rates, interest rates, persistency rates and regulation; and (ii) in the case of P&C loss reserves, changes in medical costs, repair costs and regulation. Any negative effect on Grupo Pacifico could have a material adverse effect on our results of operations and financial condition.
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Pension fund
Despite the fact that private pension fund administrators have always been closely regulated by the SBS, in 2012, the Peruvian government passed a Law to Reform the Private Pension System (SPP by its Spanish initials). The reform aimed to expand coverage for individuals (referred to as “affiliates”), create greater competition, and reduce administration fees in the SPP. The Law to Reform the SPP is being implemented in phases. See “Item 4. Information on the Company – 4.B. Business Overview – (9) Supervision and Regulation – 9.7 Prima AFP”.
(6) A deterioration in the quality of our loan portfolio may adversely affect our results of operations.
Given that a significant percentage of our income is related to lending activities, a significant deterioration of loan quality would have a material adverse effect on our business, financial condition and results of operations. We are subject to concentration default risks in our loan portfolio. Problems with one or more of our largest borrowers may adversely affect our financial condition and results of operations. While loan portfolio risk associated with lending to certain economic sectors or clients in certain market segments can be mitigated through adequate diversification, our pursuit of opportunities in which we can charge higher interest rates, and thereby increase revenue, may reduce diversification of our loan portfolio and expose us to greater credit risk.
In addition, loan concentration in commercial sectors is particularly salient in Peru and significant deterioration in such sectors may have a material adverse effect on our business, financial condition and results of operations. Our current strategy includes increasing our exposure to market segments with heightened credit risk, including middle-market and consumer segments, such as unsecured small companies and consumer loans and consumer mortgages, which have higher risk profiles as compared to loans to large corporate customers. Given the changing composition of our loan portfolio and possible adverse changes in the environment in which we operate, our future results may differ significantly from our past results.
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(7) Our banking and capital market operations in neighboring countries expose us to risk related to political and economic conditions.
BCP Bolivia, Credicorp Capital Holding Colombia and Credicorp Capital Holding Chile expose us to risk related to Bolivian, Colombian and Chilean political and economic conditions, respectively. Most economies in Latin America and the Caribbean experienced low economic growth in 2017, due to: (i) weak global demand, (ii) a high political polarization, and (iii) sluggish investment. Significant changes to Bolivian, Colombian and Chilean political and economic conditions could have an adverse effect on our business, financial condition and results of operations.
Bolivia
In October 2014, Evo Morales was reelected as President of Bolivia for a third five year term. During this third term, the government is expected to continue the economic policies and reforms of the first two presidential terms of Mr. Morales, which concentrated on (i) redistribution programs through different bonus schemes, (ii) deepening the industrialization of strategic economic sectors, and (iii) closing Bolivia’s infrastructure gap. Given the government’s high dependence on income from exports of natural gas to Brazil and Argentina, declines in the price of the gas exported (which is linked to the price of oil) could strain government finances and reduce its ability to continue the high levels of public spending of the last several years.
In February 2016, the government called up for a referendum on whether President Evo Morales could serve as president for a fourth term. With 51.30% votes against the approval of a third term, Movimiento al Socialismo, (President Morales’ political party) will have to nominate a new presidential candidate for the next presidential election. However, in November 2017, the Plurinational Constitutional Court, in a controversial decision, authorized Evo Morales to run again in the presidential elections scheduled for November 2019. Political instability ahead of the 2019 elections could lead to a reduction on foreign investment and a deterioration in the investment climate in Bolivia.
Additionally, the financial services law (Ley de Servicios Financieros N° 393), which was enacted in 2013, established lending quotas and caps on interest rates that could negatively impact interest margins on banks and reduce their ability to generate enough capital to maintain the growth rates in their lending portfolios experienced during the last several years.
During 2017, Bolivia’s macroeconomic indicators continued to deteriorate. GDP growth was a healthy 4.3% and among the highest rates in the region, but below the average growth rate of the last five years and below the budgeted growth rate of 4.8%. Also, in 2017 and for a third consecutive year, Bolivia experienced both fiscal and current account deficits due to lower exports and increased government spending. Inflation in 2017 was the lowest since 2009 at 2.7%, well below the Central Bank´s target of 5.3%. On the other hand, as of December 2017, international reserves represented 28% of GDP (US$10.261 billion), having increased by 1.8% relative to 2016.
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Colombia
The Colombian economy continued to slow down last year, particularly as a result of the negative effect on private consumption from the tax reform that came into force in January 2017, which increased the value added tax from 16% to 19%. The decision to implement a new tax reform was based on the need to adjust the fiscal accounts to lower oil prices. This, jointly with a high political polarization after the peace deal with the FARC guerrillas, drove economic sentiment to low levels during the year. GDP grew by approximately 1.7% in 2017. External and fiscal imbalances continued to correct last year. Regarding external accounts, a slight recovery in oil prices and sluggish domestic demand led the current account deficit to narrow from 4.4% of GDP in 2016 to approximately 3.6% in 2017. On the fiscal front, tax reform and lower public spending allowed the government to meet its fiscal deficit target of 3.6% of GDP last year, compared to 4.0% in 2016. Inflation reached 4.1% in 2017, 1.7 percentage points (“pp”) below the figure recorded in 2016 amid a reversion of temporary factors that affected prices that year, a stabilization of the foreign exchange, and a wider output gap. Standard & Poor’s, cut Colombia’s sovereign long-term foreign currency rating from BBB to BBB- due to lower potential growth and fiscal challenges from 2019 onwards. Overall, considering that both presidential and Congressional elections will be held in 2018, expectation is that activity is likely to remain slow for some additional months until economic agents are familiar with the president and his policies.. Likewise, proposals by candidates on the fiscal front will be key for avoiding further rating actions as the fiscal path set in the fiscal rule for the upcoming years is demanding. Currently, the consensus expects continuity in economic policy as the most likely scenario.
Chile
Chilean GDP grew by approximately 1.5% in 2017 as compared to 1.6% GDP growth for 2016. Throughout the year, economic activity remained sluggish amid certain one-off events such as La Escondida labor strike in early-2017 and overall weakness in different sectors. Although some leading indicators reversed their downward trend by the end of last year, pessimism in confidence indicators (consumer and business) continued to affect private consumption and investment figures. Particularly, the construction sector still acted as a drag on the economy, leading aggregate investment to contract for the fourth year in a row. The reform agenda proposed by the Bachelet administration added to the uncertainty, particularly in respect of social security area (pensions). Importantly, in December 2017 Sebastian Piñera (Chile Vamos Coalition, center-right) succeeded against Alejandro Guillier (Fuerza de la Mayoria, left) in the presidential election. President Piñera aims to introduce policy changes to several areas, including pensions (including, among other things, to increase by 4 percentage points the monthly contributions directed to individual accounts and to incentivize people to postpone their retirement age), tax system (including, among other things, to reintegrate the tax regime and to reduce the corporate rate from 27% to 24-25%) and infrastructure (including, among other things, to promote public to private partnership agreements focused on highways, ports, and airports). That said, the new Congress composition will limit president-elect Piñera’s ability to implement his main reform objectives as no coalition will run an absolute majority. Finally, certain imbalances remain in the economy with the fiscal deficit standing at 2.8% of GDP, the current account deficit reaching 1% of GDP, and inflation lying at 2.3%.
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(8) Our trading activities expose us to volatility in market prices, declines in market liquidity or fluctuations in foreign currency exchange rates, which may result in losses that could have a material adverse effect on our business, financial condition and results of operations.
The securities and derivative financial instruments in our trading portfolio may cause us to record gains or losses, when sold or marked to market, and may fluctuate considerably from period to period due to numerous factors that are beyond our control, including foreign currency exchange rates, interest rate levels, the credit risk of our counterparties and general market volatility. These losses from trading activities could have a material adverse effect on our business, financial condition and results of operations. In this sense, risk is inherent in the Group’s trading activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability.
(9) Natural disasters in Peru could disrupt our businesses and affect our results of operations and financial condition.
We are exposed to natural disasters in Peru, such as earthquakes, floods and mudslides. Earthquakes in Peru are common occurrences as the country is located in a seismic zone: the interface between the Nazca and South American tectonic plates. Peru has been adversely affected by earthquakes in the past, including a 7.9 magnitude earthquake that struck the central coast of Peru in 2007. The country is also vulnerable to El Niño, which provokes floods and mudslides in the north and central Andean regions. Due to its very strong intensity, the 1997-1998 El Niño destroyed crops and infrastructure equivalent to 2.2% of GDP (Gross Domestic Product). Heavy rains caused by El Niño have severely damaged infrastructure in early 2017. This weather phenomenon will affect negatively Peru’s GDP and may affect the financial situation of some of Credicorp’s clients.
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Similar natural disasters or other types of disaster could impair our operational capacity. Our business continuity plans include emergency response, disaster recovery, operations continuity, crisis management, data protection and recovery, and critical systems redundancy. Although we test our business continuity plans annually, these plans may prove to be ineffective which could have a material adverse effect on our ability to carry out our businesses, especially if an incidence or disaster affects computer-based data systems or damages customer or other data. In addition, if a significant number of our employees were affected by the natural disaster, our ability to conduct business could be impaired.
Our subsidiary Grupo Pacifico is further exposed to risks associated with natural disasters. To protect Grupo Pacifico’s solvency and liquidity, our insurance business historically has obtained reinsurance for a substantial portion of its earthquake-related risks through automatic quota share and excess loss treaties; however, there can be no assurance that a major catastrophe would not have a material adverse impact on our results of operations or financial condition or that our reinsurance policies will be an effective hedge against our exposure to risks resulting from natural disasters.
(10) We operate in a competitive banking environment that may limit our potential to grow, particularly in the medium term, as more foreign banks establish or expand operations in Peru.
BCP has experienced increased competition, including increased pressure on margins. This is primarily a result of the following:
| • | Highly liquid foreign-owned commercial banks in the market; |
| • | Local and foreign investment banks with substantial capital, technology, and marketing resources; and |
| • | Local pension funds that lend to BCP’s corporate customers through participation in those customers’ securities issuances. |
Larger Peruvian companies have gained access to new sources of capital through the local and international capital markets, and BCP’s existing and new competitors have increasingly made inroads into the higher margin, middle market and retail banking sectors. Such increased competition, with entrants who may have greater access to capital at lower costs, has affected BCP’s loan growth as well as reduced the average interest rates that BCP can charge its customers.
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Competitors may also dedicate greater resources to, and be more successful in, the development of technologically advanced products and services that may compete directly with BCP’s products and services. Such competition would adversely affect the acceptance of BCP’s products and/or lead to adverse changes in the spending and saving habits of BCP’s customer base. If competing entities are successful in developing products and services that are more effective or less costly than the products and services developed by BCP, BCP’s products and services may be unable to compete successfully. BCP may not be able to maintain its market share if it is not able to match its competitors’ loan pricing or keep pace with their development of new products and services. Even if BCP’s products and services prove to be more effective than those developed by other entities, such other entities may be more successful in marketing their products and services than BCP because of their greater financial resources, higher sales and marketing capacity or other similar factors.
As a result of Peru’s strong economic growth, which has outpaced growth by nearby countries, some banks have sought and obtained authorization to open representative offices in Peru. With the increased competition, more individuals will have access to credit, and the percentage of the population using banking services will likely climb. This will eventually put downward pressure on interest rates. Any negative impact on BCP as a result of increased competition could have a material adverse effect on our results of operations and financial condition. See “Item 4. Information on the Company – 4.B. Business Overview – (6) Competition”.
(11) Economic and market conditions in other countries may affect the Peruvian economy and the market price of Peruvian securities.
Economic conditions in other countries and developments in international financial markets can affect Peru’s economic growth. The country’s exports are highly concentrated in the mining industry; with tax revenues from the sector that peaked at 14% in 2007, and in 2017 they represented 3.4% of total tax revenues. In addition, gold and copper exports represented 48% of all shipments in 2017. Therefore, Peruvian trade responds significantly to fluctuations in metal prices, especially gold and copper, which fell 36.6% and 41.7%, respectively, between December 2012 and December 2015. This turned a US$6.4 billion trade surplus in 2012 into a US$2.9 billion trade deficit in 2015. In contrast, 2017 registered a US$6.3 billion trade surplus (2016: US$ 1.9 billion) due to a US$5.6 billion increase in copper exports since 2015 (the exported volume of copper increased 48.5%) and US$1.3 billion increase in gold exports since 2015 (average export prices of gold increased 8.4%). In 2017 the price of copper increased 32% and stood at its highest price in three years, and the terms of trade increased 7.3%, the first positive result in six years.
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In addition to changes in prices, Peru is also vulnerable to fluctuations in foreign demand, especially from the United States and China. A more pronounced economic slowdown in China over the next few years poses a risk to Peruvian growth as it may impact exports and foreign direct investment. Lower growth in Latin America can also impact the Peruvian economy and our business, especially with regard to Chile, Colombia, Bolivia and Panama, where we have operations, as well as Brazil and Mexico, which have a broad impact throughout the region because of their size. Moreover, regarding the Trans-Pacific Partnership (TPP), after long held negotiations between the Trade ministers of the 12 Asia-Pacific countries, a final agreement was signed on February 4, 2016. The free trade agreement would enter into force 60 days after the date in which all original signatories have notified the Depositary of the Agreement (responsible for receiving and disseminating documents) of their approval of the amendment in accordance with their respective applicable legal procedures. However, because the President of the United States has indicated that the United States would not ratify the agreement, the state of the TPP execution remains uncertain.
Furthermore, financial conditions in global markets also affect the economy, affecting interest rates for local corporate bonds and influencing the exchange rate. Monetary policy tightening in developed economies, particularly on the part of the Federal Reserve System in the United States, could affect economic activity in Peru to the degree that it strengthens the dollar and increases interest rates, thereby reducing access to funding for some local businesses. Also, since the Peruvian economy still has some level of dollarization (29.1% of loans and 39.9% of deposits as of December 2017), potential balance sheet effects should also be contemplated since a higher exchange rate could increase debt burdens for individuals and businesses that have taken loans in dollars but earn their income in local currency.
However, the BCRP has taken steps to foster de-dollarization and thus reduce this vulnerability by defining in January 2015 the so-called “De-dollarization Program” that implies additional foreign currency reserve requirements on financial institutions when:
| · | balance of total loans in dollars (excluding loans for foreign trade operations) at December 2015 were above 90% of the balance recorded in September 2013; the target for December 2016 was updated to 80% of the balance of September 2013, this target continued to apply for December 2017; and |
| · | balance of car loans and mortgage loans in dollars at December 2015 were above 85% of the balance in February 2013; the target for December 2016 was updated to 70% of the balance recorded in February 2013; and thereafter the target would be lowered by 10 percentage points each year. Therefore, the target for December 2017 was 60% of the balance recorded in February 2013. |
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In the context of the aforementioned “De-dollarization Program”, Credicorp’s main subsidiary BCP Stand-alone has reduced significantly the level of foreign exchange risk on credit risk, which in turn reduces the impact mentioned in this risk factor. For further details, see “Item 4. Information on the company – 4.B Business Overview – (9) Supervision and Regulation – 9.2 BCP and Mibanco – 9.2.7 The Peruvian Central bank monetary and macro prudential policy”.
These targets were complemented by the addition of two new types of Currency Report Operations (known as Repo). The instruments complemented the de-dollarization process by:
| · | providing liquidity in local currency to financial institutions for an amount up to 20% of such institution’s Total Liabilities Subject to Reserve Requirements (TOSE by its Spanish Initials) in foreign currency through a Repo - Expansion. However, under no circumstance, can the median reserve requirements decrease below 25%; |
| · | providing foreign currency to financial institutions at spot prices in order to finance the re-denomination of their foreign currency loans through a Repo – Substitution. |
(12) A failure in, or breach of, our operational or security systems, fraud by employees or outsiders, other operational errors, and the failure of our system of internal controls to discover and rectify such matters could temporarily interrupt our businesses, increasing our costs and causing losses.
We have defined and implemented governance with specific roles for risk and control assessment, monitoring and awareness programs, security initiatives, business objectives, corporate alignment and regulatory compliance with banking, credit card, insurance and pension fund industry requirements in Peru, Bolivia, Chile, Colombia, Panama, the Cayman Islands and the United States.
Although we have a strong IT infrastructure and highly-skilled professionals managing our IT operations, our risk exposure could be significant. We are still vulnerable to failure of our operational systems and to cybersecurity threats.
Credicorp has not experienced any material losses related to cyber-attacks or operational instability. Credicorp is continuously working and investing resources in maintaining and updating control processes in order to prepare and adapt to new technologies and to strengthen our cyber and operational security. As a matter of policy, Credicorp maintains an investment protection program to ensure that the group has the technologies and processes it needs to keep its operations and assets safe. However, our use of the internet and telecommunications technologies to conduct financial transactions, as well as the increased sophistication and activities of organized criminals, hackers and other external parties, could potentially impact the confidentiality, integrity and availability of critical information.
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A failure in, or breach of, our operational or cybersecurity systems could temporarily interrupt our business, increasing our costs and causing losses. Temporary interruptions or failures in hardware and software that support our business and customers’ transactions could result in regulatory fines, penalties, and reputational loss. Like other financial institutions and global companies, we constantly strive to provide more, and better, functionality to our customers; expanding our mobile and internet based products and services, and thus increasing our footprint and visibility. Also, like most significant financial companies, we are regularly the target of attempted cyber-attacks that use increasingly sophisticated techniques; we use sophisticated tools available to us and undertake to keep and maintain our operations sound and safe.
As are other financial institutions, we are susceptible to, among other things, fraud by employees or outsiders, unauthorized transactions by employees and other operational errors (including clerical or record keeping errors and errors resulting from faulty computer or telecommunications systems). While we believe that we maintain a system of internal controls designed to monitor and control operational risk, we cannot assure you that our system of internal controls will be entirely effective. Losses from the failure of our system of internal controls to discover and rectify such matters could have a material adverse effect on our business, financial condition and results of operations.
Credicorp has developed recovery strategies (disaster recovery plans and operational continuity plans) and response plans (incident management and crisis management) that, in the face of risk situations that interrupt the main products and services, may mitigate the financial, legal and reputational impact. We are aware that new threats may be presented, but the company is constantly working to strengthen response mechanisms and recovery strategies to be more resilient to this kind of events.
(13) Our anti-money laundering and anti-terrorist financing measures might not prevent third parties from using us as a conduit for such activities and could damage our reputation or expose us to fines, sanctions or legal enforcement, which could have a material adverse effect on our business, financial condition and results of operation.
We comply with applicable anti-money laundering and anti-terrorist financing laws and regulations. Also, we have developed various policies and procedures, under a comprehensive approach based in international practices, including internal controls and “know-your-customer” procedures, aimed at preventing money laundering and terrorist financing. Our anti- money laundering policies and procedures are based upon, and comply with the applicable law of our different operations. However, such measures, policies and procedures may not be completely effective in preventing third parties from using us as a conduit for money laundering (including illegal cash operations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could be impacted, and/or we could become subject to fines, sanctions or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), which could have an adverse effect on our business, financial condition and results of operation. To mitigate the above-mentioned risk our Corporate Compliance Division has established several programs to strengthen the ethical behavior of Credicorp. For further details see “Item 4. Information on the Company — 4.B Business Overview — (2) Corporate compliance”
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(14) Acquisitions and strategic partnerships may not perform as expected, which could have an adverse effect on our business, financial condition and results of operation.
Acquisitions and strategic partnerships, including those made in our investment banking and insurance businesses, may not perform as expected since our assessment could be based on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions, investments and alliances may not produce the anticipated synergies or perform in accordance with our expectations, which could have an adverse effect on our business, financial condition and results of operation.
(15) Reinsurance is an important tool in risk management of any primary insurance company and as such, it allows achieving a level of risk diversification that in turns helps to reduce losses. But, we face the possibility that the reinsurance companies will be unable to honor their contractual obligations.
Credicorp assumes reinsurance risk in the normal course of business for our insurance contracts when applicable. Premiums and claims on assumed reinsurance are recognized as revenue or expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business.
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To mitigate the above-mentioned risk, Credicorp’s requirements in regard to reinsurer counterparty credit risk are higher than local regulatory requirements, as set by Grupo Pacifico’s risk management unit and approved by the Risk Management Committee.
(16) Risks not contemplated in our insurance policies may affect our results of operation.
We maintain insurance in amounts that we believe to be adequate to cover risks related to our operations including, among others, general banking liability insurance for our business, general professional liability for services we provide, general directors and officers liability for our directors and executives and general liability against fraudulent activity. However, it is possible that the terms and conditions of the insurance policies we have will not cover a specific event or incident or that our insurance will cover only part of the losses that we may incur.
If any uninsured events occur with respect to a significant portion of our operations, such lack of coverage could have a material adverse effect on our financial conditions and results of operations. Additionally, if we are unable to renew our insurance policies from time to time or losses or other liabilities occur that are not covered by insurance or that exceed our insurance limits, we could be subject to significant unexpected additional costs which could adversely affect our business.
ITEM 4. INFORMATION ON THE COMPANY
| 4. A | History and development of the company |
Credicorp Ltd. is a limited liability company that was formed in Bermuda on October 20, 1995 to act as a holding company, to coordinate the policy and administration of our subsidiaries BCP, ASB, BCP Bolivia, Grupo Pacifico and Credicorp Capital. We currently hold, directly and indirectly, 97.7% of BCP, 100% of ASHC, 95.84% of BCP Bolivia and 98.5% of Grupo Pacifico. See “Item 4. Information on the Company — 4.C Organizational Structure”.
Our principal activity is to coordinate and manage the business plans of our subsidiaries in an effort to implement a universal banking service mainly in Peru, Bolivia, Colombia and Chile and to develop our insurance and investment banking businesses. Though we primarily focus on the aforementioned countries, we also make limited investments in other countries in the same region. Our registered address is Clarendon House, 2 Church Street, Bermuda. The management and administrative office (i.e., principal place of business) of our subsidiary, Banco de Credito del Peru, is located at Calle Centenario 156, La Molina, Lima 12, Peru, and the phone number is +51-1-313-2000.
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As of December 31, 2017, our total assets were S/ 170.5 billion and our net equity was S/ 21.8 billion. Our net income attributable to our equity holders in 2015, 2016 and 2017 was S/ 3,092.3 million, S/ 3,514.6 million and S/ 4,091.8 million, respectively. See “Item 3. Key Information — 3.A Selected Financial Data” and “Item 5. Operating and Financial Review and Prospects”.
During 2012, Credicorp, as part of our strategic plan, initiated the creation of a regional investment banking platform. On April 27, 2012, Credicorp acquired a 51% stake in Correval S.A. Comisionista de Bolsa, a brokerage entity established in Bogota, Colombia, for approximately US$72.3 million (approximately S/246.6 million). On July 31, 2012, Credicorp acquired 60.6% of IM Trust S.A. Corredores de Bolsa, an investment banking entity established in Santiago, Chile, for approximately US$131.5 million (approximately S/447.1 million), For our investment banking operations in Peru, we created Credicorp Capital Peru S.A.A. (formerly BCP Capital S.A.A.), a company incorporated in Peru that was established in April 2012 through the split of an equity block of BCP. Assets transferred included Credicorp Capital Bolsa, Credicorp Capital Titulizadora, Credicorp Capital Fondos and BCP’s investment banking activities. The equity block split had no effect on Credicorp’s consolidated financial statements; no gains or losses arose from it.
On September 25, 2014, Credicorp announced that its subsidiary PPS had reached an initial agreement with Banmedica S.A. (“Banmedica”, a Santiago Stock Exchange listed company with a market capitalization of US$1,317 million as of September 25, 2014), to develop businesses in the healthcare industry in Peru and further providing medical services, health insurance and health plans. This transaction reflects Credicorp’s strategy to capitalize on PPS’s in-depth knowledge of the Peruvian market and Banmedica’s extensive know-how and successful experience in the health care industry. On December 30, 2014, PPS signed the final agreement with Banmedica to enter into the healthcare market in Peru. Based on this agreement, Credicorp lost control of its subsidiary Pacifico Entidad Prestadora de Salud (Pacifico EPS), which became an associate. This agreement came into effect on January 1, 2015.
The agreement has two major parts:
| (i) | both parties agreed to develop healthcare plans and medical services in Peru, exclusively through Pacifico EPS and its subsidiaries. Banmedica contributed their Peruvian subsidiaries Clinica San Felipe and Laboratorios ROE, plus US$32 million in cash to obtain 50% interest in the capital stock of Pacifico EPS. |
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| (ii) | Banmedica paid US$25 million in cash to PPS to obtain 50% of the results related to PPS’s health insurance business in Peru. The distributable income is held in equal parts (50/50) and it is determined based on a formula agreed to by both parties in the contract. Health insurance business, which is a line of business of Credicorp, via its subsidiary Pacifico, who assumes the risk insurance. |
This transaction resulted in profits of S/99 million, which is recognized in “Net gain on sales of securities” in the consolidated statements of income.
At Grupo Credito’s shareholder meeting held on February 11, 2015, shareholders approved the terms of split of equity block of Grupo Credito in favor of Credicorp Capital Holding Peru S.A., a company incorporated on September 3, 2014 and a subsidiary of Credicorp Capital Ltd. (“Credicorp Capital”). The equity block was composed of the investment that Grupo Credito held in Credicorp Capital Holding Peru, whose net equity was approximately S/511.3 million as of May 31, 2015. As a result, Grupo Credito reduced its share capital by approximately S/491.7 million. Credicorp Capital Holding Peru also increased its share capital by about S/491.7 million and issued 491,686,830 new shares with a nominal value of S/1.00 each in favor of Credicorp Ltd (shareholder of Grupo Credito). In October 2015, Credicorp’s Board of Directors approved the transfer of the shares to Credicorp Capital, finishing the reorganization process to regroup, under Credicorp Capital, all the investments in subsidiaries related to capital markets.
On March 20, 2014, Credicorp, through its subsidiary Edyficar, acquired a 60.68% stake in Mibanco, Banco de la Microempresa S.A. (Mibanco), a local bank that specialized in the micro and small entities sector, for approximately S/504.8 million or US$179.5 million, in cash. On April 8, 2014, Grupo Credito S.A. and Edyficar, subsidiaries of Credicorp Ltd., acquired from the International Finance Corporation (IFC) an additional 6.5% stake in Mibanco (5% through Grupo Credito S.A. and 1.5% through Edyficar) for approximately S/54.1 million. In addition, Credicorp’s subsidiaries made a Public Tender Offer (Oferta Publica de Adquisicion or OPA by its Spanish initials) to non-controlling shareholders of Mibanco pursuant to the Capital Markets Law. Credicorp acquired an additional 18.56% of Mibanco’s capital stock for approximately S/153.6 million; and in September 2014, acquired an additional 1.19% for approximately S/10 million. As of December 31, 2014, Credicorp held 86.93% of Mibanco’s capital stock and paid an aggregate of approximately S/722.5 million. A merger transaction between Edyficar and Mibanco, which involved a spin-off of the majority of the assets and liabilities of Edyficar, was made effective on March 2, 2015. No gains or losses were recognized in the income statement. As of the merger day, Credicorp held 95.36% of the new Mibanco's capital stock.
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On May 12, 2016, Banco de Credito del Peru (BCP) sold its shares of Banco de Credito de Bolivia (“BCP Bolivia”) to ICBSA, an indirect subsidiary of Credicorp Ltd., through a book auction over the Bolivian Stock Exchange. This transfer was part of the rearrangement of Credicorp’s organizational structure in Bolivia to efficiently manage its investments in that country and to comply with applicable Bolivian rules and regulations. The transaction was executed over the Bolivian Stock Exchange. A total of 43,237 shares were sold at a price of Bs.25,811 per share, which account for Bs.1,115,990,207 of revenue, equivalent to US$162,680,788.19. To finance the acquisition by ICBSA, Grupo Credito S.A. (shareholder of this company and subsidiary of Credicorp Ltd.) made a capital contribution in Bolivianos to ICBSA equivalent to US$163 million.
On September 30, 2016, Credicorp Capital, through its holding subsidiaries, concluded the acquisition of the non-controlling interest, which it did not own, in its operating subsidiaries Credicorp Capital Colombia S.A. (“Credicorp Capital Colombia”, formerly Correval) and Inversiones IMT S.A. (currently eliminated, and replaced as an operating subsidiary by Credicorp Capital Chile S.A. (“Credicorp Capital Chile”)). During this acquisition process and after the approval of its Board of Directors, Credicorp made several capital contributions totaling US$120,146,350 to Credicorp Capital, which, in addition to other available resources, allowed its subsidiary to proceed with the aforementioned acquisitions.
In January 2017, Credicorp’s Board of Directors approved the transfer of 9% of BCP’s total shares to Grupo Credito (Credicorp’s Peruvian wholly owned subsidiary) through a capital contribution, to facilitate Credicorp’s future investments in Peru without modifying the controlling structure of BCP. The total amount paid for all the shares was S/3,505,916,484.50. Under the new structure, Credicorp directly holds 3.7% of BCP’s total shares and, in conjunction with its subsidiary Grupo Credito, continues to control the same 97.7% of such shares without modifying the internal governance structure. This modified organizational structure did not affect the way Credicorp and BCP manage their day-to-day operations, and Credicorp’s dividend policy has not changed as a result of this transaction.
At the respective mandatory Annual Shareholders' Meetings of PPS and Pacifico Vida, each held on February 23, 2017, the merger between PPS and Pacifico Vida was approved, pursuant to which PPS will transfer all of its equity to Pacifico Vida (including the transfer of all assets, rights, obligations and other legal relationships deriving from or linked to such assets and liabilities), all in accordance with the absorption merger form contemplated in section 2 of article 344 of the General Companies Law. The merger came into effect on August 1, 2017, when the respective Public Deed of Merger was granted, which occurred after the Superintendent of Banking, Insurance and AFP issued the corresponding Merger authorization. As a result of the dissolution of PPS, the company's shares were excluded from the Public Securities Market Registry and delisted from the Lima Stock Exchange, without the obligation to make a Public Offering by exclusion. The merger permits Credicorp to realize synergies in its decision-making process and through the integration of all its insurance business lines. The closer proximity between companies also allows Grupo Pacifico to improve its value proposition to customers, who seek integral insurance solutions. No gains or losses were recognized in the income statement.
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| 4. B | Business Overview |
(1) Credicorp operating segments
We are the largest financial services holding company in Peru. For management purposes, Credicorp is organized into four operating segments based on our products and services. According to IFRS, an operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker, who makes decisions about resources allocated for the segment and assesses its performance, and for which discrete financial information is available. We conduct our financial services business through our operating segments as follows: banking, insurance, pension funds and investment banking.
The terms “Peruvian commercial bank,” “Peruvian insurance company” and other similar terms used in this Annual Report do not include the assets, results or operations of any foreign parent company or foreign subsidiary of such Peruvian company.
| 1.1 | Banking |
Our banking business, in terms of lending and investment, is organized into (i) wholesale banking activities, including our corporate and middle-market banking business segments, which are carried out by BCP’s Wholesale Banking Group (WBG); (ii) retail banking activities, including our SME-Business, SME-Pyme, mortgage, consumer financing, credit card and wealth management segments, which are carried out by BCP’s Retail Banking & Wealth Management Group (RB&WM); (iii) treasury activities, including money market trades, foreign exchange trading, derivatives and proprietary trading; (iv) micro-lending, which is conducted through Mibanco; (v) wholesale and retail banking activities in Bolivia; and (vi) private banking, asset management and proprietary investment activities, which we perform through ASB, a Cayman Islands licensed bank.
The majority of our banking business is carried out through BCP Stand-alone, which together with Mibanco, held 32.6% of the Peruvian market share in loans and 32.5% market share in deposits, as of December 31, 2017. A portion of our banking business is also carried out by ASB. We conduct banking activities in Bolivia through BCP Bolivia, a full service commercial bank, which as of December 2017 increased its market share in loans and deposits reaching 9.6% and 9.8% respectively. BCP Bolivia is fourth with respect to loan market share and fifth with respect to deposit market share in the Bolivian banking system.
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We apply uniform credit policies and approval and review procedures, which are based on conservative criteria adopted by BCP, to all of BCP subsidiaries. Our Chief Operating Officer (COO) is in charge of setting the general credit policies for our different business areas. These policies are set within the guidelines established by the laws and regulations of the markets in which we operate (see “Item 4. Information on the Company – 4.B Business Overview - (9) Supervision and Regulation”) and the guidelines set forth by our Board of Directors.
Our deposit-taking operations are principally managed by BCP’s RB&WM group and ASB’s private banking group. See “Item 4. Information on the Company – 4.B Business Overview - (10) Selected Statistical Information — 10.4 Deposits”.
1.1.1 BCP and Subsidiaries
(1) General
BCP Consolidated consists of a group of subsidiaries offering specialized financial services, which complement BCP’s commercial banking activities. In addition to its local subsidiaries, BCP has an agency in Miami and a branch in Panama. See Item 4. Information on the Company – 4.C Organizational Structure – (2) BCP.
BCP’s activities include wholesale banking, retail banking and wealth management and treasury. As of December 31, 2017, the consolidated operations of BCP ranked first among Peruvian banks in terms of total assets (S/ 139.5 billion), total loans (S/ 91.6 billion), deposits (S/ 85.5 billion) and net equity (S/ 15.6 billion).
As of and for the year ended December 31, 2017, BCP contributed with 81.9% of our total assets, 71.8% of our net income and 70.8% of our net equity attributable to Credicorp’s equity holders. BCP’s operations are supervised and regulated by the SBS and the Peruvian Central Bank.
The following table shows the client segmentation of BCP and Mibanco. This segmentation was a result of an analysis, which addressed multiple factors such as the size and volume of activity for each client, our clients’ affiliation with other companies or groups, the degree of follow-up required, and their credit ratings.
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| Client Segmentation | ||||||
| Subsidiary | Business | Group | Income/Sales/Total debt | |||
| Banco de Credito del Peru | Wholesale Banking Group (WBG)(1) | Corporate | Annual sales higher than $100 million | |||
| (equivalent to S/324 million) | ||||||
| Middle-Market | Annual sales from $10 million to $100 million | |||||
| (equivalent to S/32 million to S/324 million) | ||||||
| Retail Banking Wealth Management Group (RB&WM) | Private Banking | Over US$ 1 million in AuMs (Do not include CTS) | ||||
| Enalta | Individual monthly income at least S/20,000; or more than US$ 200,000 in AuMs (Do not include CTS). | |||||
| Affluent | Individual monthly income from S/5,000 to S/20,000 | |||||
| Consumer | Focus on medium-low income individuals | |||||
| SME - Business | Annual sales from S/5.6 million to S/32 million; or | |||||
| Total debt from S/1.2 million to S/10 million | ||||||
| SME- Pyme |
Annual sales up to S/5.6 million; or Total debt up to S/1.2 million | |||||
| Mibanco (2) | SME & Microlending | SME – medium (3) | Annual sales up to S/20 million. | |||
| Total debt higher than S/0.3 million and not issued debt in the capital market. | ||||||
| SME – small (4) | Total debt from S/0.02 million to S/0.3 million. | |||||
| Micro-Business (5) | Total debt up to S/0.02 million. | |||||
| Consumer (6) | Focus on debt unrelated to business. | |||||
| Mortgage (7) | Focus on individuals for acquisition, construction of homeownership and granted with mortgages. | |||||
| (1) | Converted into Soles at the exchange rate of S/3.241 per U.S. Dollar, December 31, 2017 - SBS. |
| (2) | As of December 31, 2017, Mibanco registered 958,262 clients. |
| (3) | SME – Medium segment is focused on financing production, trade or service activities, granted to companies, which (1) total debt in the last 6 months was higher than S/300,000, (2) annual sales up to S/20 million in the last 2 consecutive years and (3) that have not participated in the capital markets. This segment represents 2% of total loans in Mibanco and registered 1,861 clients. |
| (4) | SME – Small segment is focused on financing production, trade or service activities, granted to companies, which total debt is between S/20,000 and S/300,000 in the last 6 months (without including mortgage loans). This segment represents 57% of total loans in Mibanco and registered 152,781 clients. |
| (5) | Micro-Business loans focus on financing production, trade or service activities, granted to companies, which total debt is up to S/20,000 in the last 6 months (without including mortgage loans). Micro-Business loans represent 29% of total loans in Mibanco and registered 595,914 clients. |
| (6) | Consumer loans focus on financing individuals to cover payments of goods and services or expenses no related to business. Consumer loans represent 7% of total loans in Mibanco and registered 205,142 clients. |
| (7) | Mortgage loans focus on financing individuals for the acquisition, construction, renovation, remodeling, expansion, improvement and subdivision of homeownership. Mortgage loans represent 5% of total loans in Mibanco, and registered 5,704 clients. Mibanco’s mortgage segment has an LTV up to 90% approximately. |
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(2) BCP Stand-alone - business segments
(2.1) Wholesale Banking Group (WBG)
Our Wholesale Banking Group competes with local and foreign banks. BCP Stand-alone’s traditional long-term relationships with medium-sized and large corporate companies provide WBG with a competitive advantage.
WBG obtained lower loan growth, posting average daily balances of S/ 39,029 million in 2015 (a 21.8% year-over-year increase), S/ 41,793 million in 2016 (a 7.1% year-over-year increase) and S/ 40,964 million in 2017 (a -2.0% year-over-year decrease). It also maintained its leadership in the wholesale banking market with a 39.7% market share[3] in loans. It has also established longstanding client relationships with virtually all of the major industrial and commercial groups in Peru. WBG provides its customers with cash management solutions, short- and medium-term loans in local and foreign currencies, foreign trade-related financing and lease and project financing.
WBG is divided into the following two divisions:
(i) Corporate and International Division (CID)
| • | CID provides loans and other credit and financial services, focuses on serving large-sized companies that have an annual turnover of over US$100 million, corporate governance, audited financial statements and dominant market positions in their particular brands or product areas. Even if clients do not meet any of these criteria, the CID may provide services to firms under this category if they belong to a large economic group of an industry that is important to Peru’s economy. |
| • | International banking and leasing subdivision manages the relationship with financial institutions (locally and abroad), trade products, international operational services and financial leasing products. |
| • | Cash management and transactional services subdivision develops products and services to support clients’ daily activities of cash management, collections, payments, and investments, among others. |
3 Source: Superintendence of Banking, Insurance and Pension Funds for all market share figures showed in this document for BCP Stand-alone and considering (i) total Peruvian Financial System, excluding Banco de la Nacion (Estate-owned bank); and (ii) using BCP’s client segmentation.
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BCP Stand-alone continues to meet the needs of its corporate clients, assisting them with financial services, cash management solutions and short- and medium-term financing through the CID. As a result, BCP Stand-alone’s corporate banking loans grew from S/ 25,747 million in 2015 to S/ 28,162 million in 2016, but decreased to S/ 26,807 million in 2017.
The lower pace of the CID’s growth is due to (i) intense competition from foreign banks, which finance their operations at lower costs due primarily to the fact that our monetary authority has high reserve requirements for foreign currency for local banks and (ii) the problems derived from the “Lava Jato” case and from the effects of El Niño, which caused a lower economic growth. Nevertheless, BCP has a leading position in the Peruvian banking system with the 42.8% of the market share for loans.
The CID offers a broad range of products and tailors its product offerings to meet each client’s unique requirements. In general, this division is expected to offer high-value-added products, advisory and financial services, particularly cash management solutions, at competitive prices.
The CID’s financing is provided to fund capital expenditures and investments, sales, international trade and inventories. To finance capital expenditures, the CID offers medium and long-term financing, financial lease and project finance.
(ii) Middle-Market Banking Division (MMD)
| • | MMD serves mid-sized companies. MMD’s clients have annual revenues that vary from US$10 million to US$100 million, and are serviced nationwide by 13 BCP regional managers. |
| • | Additionally, there is an Institutional Banking subdivision focused on serving profit and non-profit organizations, state-owned companies and other major institutions. |
MMD provides banking services targeted to medium-sized companies from various economic sectors. The products offered to middle-market clients are similar to those offered to corporate banking clients. The major types of products are:
| • | Revolving credit lines to finance working capital needs and international trade financing; |
| • | Stand-by letters of credit and bond guarantees; |
| • | Structured long-term and medium-term financing, through loans or financial leasing; and |
| • | Cash Management, Transactional products and electronic banking. |
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The MMD has continued to make progress toward implementing its strategic goals by:
| • | Creating dedicated points of contact to meet the needs of its customers more efficiently; |
| • | Streamlining its lending processes to provide middle-market customers with prompt service; |
| • | Introducing new electronic financial products to make its services more accessible to customers; |
| • | Incorporating sophisticated technical tools in order to implement a risk-based pricing model; |
| • | Focusing on fee income and loan portfolio growth; |
| • | Introducing a new commercial planning model that employs an efficient and standardized methodology; and |
| • | Maintaining risk controls using sophisticated tools created by BCP’s Risk Management Unit. |
The MMD loan portfolio reached S/ 13,282 million in 2015, S/ 13,631 million in 2016 and S/ 14,157 million in 2017. As of December 31, 2017, BCP had a market share of 35.3% in this segment.
We believe that middle-market companies have benefited from the overall economic improvements in Peru over the past few years. Loan quality problems have been addressed through procedures and organizational changes that have focused on improving the loan approval and credit-risk assessment processes.
(iii) Support areas
International banking unit
The International Banking Unit focuses on obtaining and providing short-term funding for international trade. Medium-term lines of credit funded by international commercial banks and other countries’ governmental institutions are also provided to clients. In addition, this unit earns fees by confirming letters of credit and guarantees issued by international banks and other fees as a result of the international payment and trade finance business. The International Banking Unit also promotes international trade activities with its local clients by structuring trade products and services, organizing and sponsoring conferences and advising customers through a wide range of trade products.
BCP maintains business relationship with correspondent banks, development banks, multilateral and export credit agencies in different countries around the world. At present, BCP manages credit lines for foreign trade transactions, working capital and medium and long-term investment projects.
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BCP’s import business volume amounted to S/ 38.8 billion in 2015, S/ 46.1 billion in 2016 and S/ 51.2 billion in 2017 and the export business reached a volume of S/ 45.8 billion in 2015, S/ 57.2 billion in 2016 and S/ 64.2 billion in 2017.
Cash management and transactional services unit
Our Cash Management and Transactional Services Unit is in charge of developing transactional services that handle the exchange of information and money transfers among corporations, midsized companies, institutions and micro-business companies. Services managed by this unit include collections (automated trade bill collection), automated payments (loans to personnel and suppliers’ accounts, reverse factoring and money transfers), electronic office banking, electronic lending solutions and cash management through checking accounts with special features.
(2.2) Retail Banking & Wealth Management Group (RB&WM)
At the end of 2017, RB&WM related loans represented 46% of BCP’s total loans, while deposits accounted for 63% of BCP’s total deposits.
With the segmentation of its retail client base, BCP is able to focus on cross-selling its products and improving per-client profitability. The RB&WM Group has undertaken several projects to improve one-on-one marketing techniques and tools for the sale of its products to profitable market segments. BCP’s management expects the RB&WM businesses to continue being one of the principal growth areas for BCP’s activities.
| (i) | Wealth management |
The affluent segments are targeted by the Wealth Management Division and are divided between BCP’s private banking unit (“BCP Banca Privada”) and BCP´s super affluent unit (“Enalta”).
| § | BCP Banca Privada services include investment advisory, securities-based lending, financial planning, wealth planning, family office and day to day banking services including loans and cash accounts. Clients benefit of customized products, three exclusive branches and dedicated experts. BCP Banca Privada has approximately 2,749 clients. |
| § | Enalta services include investment advisory, securities-based lending, financial planning and day to day banking services including loans and cash accounts. Enalta clients have access to twelve exclusive branches and benefit of personalized advice from investment, insurance and loan experts. Enalta has approximately 33,938 clients. |
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| (ii) | Banca Exclusiva (BEX) |
Customers in BCP’s “mass affluent” segment receive a differentiated value proposition that includes: dedicated customer services channels, such as specialized account managers, preferential service by tellers at branches and call center phone banking, and preferential interest rates on loans. Approximately 50% of the mass affluent clients are serviced through specialized account managers responsible for improving per-client profitability and achieving long-term relationships through personalized service, cross-selling and share of wallet strategies. BCP has approximately 352,074 mass affluent customers.
| (iii) | Consumer Banking |
Our Consumer Banking Division is in charge of developing strategies for the retail customers who are not included in affluent banking or small business banking. Its customer base consists of approximately 7 million medium to low income individuals. Consumer Banking focuses on customers who receive their payroll through BCP (which represent slightly more than 1.1 million clients). Its strategies vary from basic acquisition of new accounts for wage-earners with special terms regarding fees and interest rates, to more sophisticated, aggressive cross-sell and retention programs that expand benefits to non-banking products (i.e., access to discounted products) and access to payroll advances.
| (iv) | SME-Business and SME-Pyme |
BCP’s SME-Business and SME-Pyme Banking Segments serve approximately 589,270 clients. Customers are divided into two groups with different business models, services levels, and product access. SME-Business serves approximately 14,332 clients directly managed by the bank and SME-Pyme serves approximately 574,938 small business clients.
| (v) | Mortgage |
As of December 31, 2017, BCP was the largest mortgage lender in Peru with a market share of 30.31%. This was largely the result of the consolidation of major process improvements in credit disbursement started in 2016, extensive marketing campaigns and a deeper integration with BCP’s real estate business.
BCP expects the mortgage lending business to continue growing because of:
| · | increasing housing demand, especially in the middle income segment; |
| · | low levels of penetration in the financial market; |
| · | availability of funds from the Peruvian government allocated to MiVivienda housing program; and |
| · | current economic outlook for controlled inflation and economic growth in Peru. |
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As of December 31, 2017, mortgage loans accounted for 16% of Credicorp’s total loan portfolio, with an average LTV (loan-to-value) of 67%. All of our mortgage-financing programs are available to customers with a minimum monthly income of S/1,500. The maximum maturity of the mortgage loans BCP offered was 25 years.
One of the product lines responsible for present and future growth is MiVivienda. MiVivienda program provides government funded loans to purchasers of properties valued up to S/405,000. Under the program, BCP extended mortgages with a maximum amount up to 90% of the appraised value of a property (in local currency) and monthly mortgage payments that did not exceed 40% of the client’s stable net income. With this program, BCP is targeting middle income customers who buy their first home and offer the customers access to government assistance with their down payment. Mortgage loans to this sector represent approximately 16.3% of Credicorp’s total mortgage loans and 2.6% of Credicorp’s total loans.
Mortgage loans are associated with low losses because of their low LTV, and they have the added benefit of generating opportunities for cross selling other banking products, which has had a positive impact on Credicorp’s results.
| (vi) | Credit card and installment loans |
BCP´s outstanding balances grew S/ 130 million between 2015 and 2017, but decreased 1.2% between 2016 and 2017. As of December 31, 2017, BCP maintained market share at 21.5% and 2018 is expected to be a year of growth based on a higher demand for loans. In addition to interest income, BCP derives income from maintenance, retailer transaction merchant, finance and credit card penalty fees.
In the credit card business, BCP continued to apply segmented strategies. BCP offers value to low-end customers by giving them access to credit and value to its medium and high-end customers through loyalty programs such as the partnership with LATAM airline. The loyalty programs in the high-end customers have very good results, both in points that clients gained and in the points redemeed, increasing customer loyalty and credit card use.
To keep a healthy credit card portfolio, very strict policies of activation and use and enforced, eliminating credit cards that do not generate value to BCP and allowing for a more efficient use of capital and reducing IT costs. At the end of 2017 we had 683,245 of primary credit cardholders.
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In regards to installment loans, outstanding balances grew S/ 204 million. Between 2015 and 2016 growth was 1.4%. In addition to interest income, BCP earns non-interest income. In order to increase penetration in the lower income segments, in 2017 BCP offered loans in lower amounts and short debt maturities, as part of a low and grow strategy which allows to serve these segments and permits to explore the segments in a profitable way. For a second year BCP has improved prospecting techniques, income forecasting and optimized scoring models allowing it to increase pre-approved and approved loans. 80% of sales of credit cards and installment loans are the result of pre-approved operations which facilitates proactive sale on cost effective distribution channels.
In 2017 we launched the digital channel for the distribution of installment loans. Through the digital channel we sold approximately 11% of the total installment loans originated in the year.
(2.3) Treasury
Treasury, Foreign Exchange, Derivatives and Proprietary Trading
BCP’s Treasury function is managed through three different units in order to have strong governance, the Assets and Liabilities Management (ALM) group, the trading unit (comprised of the Foreign Exchange, Derivatives and Proprietary Trading units) and the Foreign Exchange and Derivatives Distribution Unit.
The ALM group is responsible for managing BCP’s balance sheet and for taking reasonable interest rate and liquidity risks under the oversight of our Asset and Liabilities Committee (ALCO). ALM is also responsible for maintaining our liquidity asset portfolio and compliance with Liquidity Coverage Ratio (LCR) and Common Equity Tier 1 (CET1) ratio under Basel III standards. In addition, the ALM group is an active participant in money and debt capital markets, oversees reserve requirements, manage BCP’s liquidity and the bank’s balance sheet. The ALM group has been active in auctions held by the Peruvian Central Bank for certificates of deposit as well as in financing its funding needs through certificates of deposit, interbank transactions and guaranteed negotiable notes, among other instruments.
BCP’s Foreign Exchange (FX) Unit offers spot FX operations for its clients in Soles, G-10 and, Latin-America currencies and actively participates in FX transactions related to the different instruments designed by the Central Bank of Peru in the local currency market.
BCP’s Derivatives Unit offers FX forwards, FX options, interest rate swaps, cross currency swaps, as well as tailor-made derivatives for our customers in Peru and Latin-America. A strong team of highly trained market professionals, with years of experience in various markets, allows BCP to provide sounds and cost-effective financial solutions to its customer base. To minimize risks, BCP’s Derivatives Unit is closely monitored by BCP’s Treasury Risk Unit.
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BCP’s proprietary trading consists of short-term investments in securities (corporate and governmental), which includes instruments from various countries. In the case of Peru, BCP is one of the main liquidity providers in the government bond local market where it is part of the Market Maker Program of the Ministry of Economy of Peru.
BCP’s FX and Derivatives Sales Unit helps both individuals and companies with their foreign exchange needs (spot and hedging) through all BCP’s channels (sales desk, branch network, agents and electronic channels). The broad portfolio of foreign exchange products provided to its ample client base has allowed the Unit to position itself as the most important in the FX business in the Peruvian market.
(2.4) Lending policies and procedures
The Bank has adopted a risk appetite framework and established objective metrics and thresholds to periodically monitor the Bank’s evolving risk profile. The framework was approved by the Board of Directors, and will be managed and monitored by the Risk Management Unit within the Bank’s Central Risk Management Group. The adoption of a risk appetite framework reflects the Bank’s commitment to aligning its forward-looking business strategy with its corporate risk vision.
BCP’s uniform credit policies and approval and review procedures are based upon conservative criteria and are uniformly applied to all of its subsidiaries. These policies are administered in accordance with guidelines established by the Peruvian financial sector laws and SBS regulations. See “Item 4. Information on the Company – 4.B Business Overview - (9) Supervision and Regulation – 9.2 BCP and Mibanco”.
BCP’s credit approval process is based primarily on an evaluation of each borrower’s repayment capacity and commercial and banking references. BCP determines a corporate borrower’s repayment capacity by analyzing the historical and projected financial condition of the company and of the industry in which it operates. Other important factors that BCP analyzes include the company’s current management, banking references, past experiences in similar transactions, and the quality of any collateral to be provided. In addition, BCP’s credit officers analyze the corporate client’s ability to repay obligations, determine the probability of default of the client using an internal risk rating model, and define the maximum credit exposure that BCP wants to hold with the client.
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BCP’s individual and small business borrowers are evaluated by considering the client’s repayment capacity, a documented set of policies (including, among other issues, the client’s financial track record and the degree of knowledge of the client), and credit scores, which assign loan-loss probabilities relative to the expected return of each market segment. In BCP, about 80% of credit card and consumer loan application decisions, and about 50% of SME loan application decisions, are made through automatic means. Mortgage and the remaining portions of small business and consumer loan application decisions are made by credit officers who use credit scores and profitability models as inputs for their evaluations and report to a centralized unit.
Our success in small business and personal lending areas depends largely on BCP’s ability to obtain reliable credit and client information about prospective borrowers. BCP counts with a vast transactional information that is heavily used in credit risk models. On the other hand, the SBS has an extensive credit bureau, which has expanded its credit exposure database service to cover businesses and individuals that have borrowed any amounts from Peruvian financial institutions. This database includes risk classifications for each borrower: “Normal,” “Potential Problem,” “Substandard,” “Doubtful” and “Loss.”
BCP has a strictly enforced policy that limits the lending authority of its loan officers. It also has procedures to ensure that these limits are adhered to before a loan is disbursed. Under BCP’s credit approval process, the lending authority for Wholesale Banking is centralized into a specialized credit risk analysis division; and there exists another specialized credit risk analysis division for Retail Banking. These divisions are operated by officers that have specific lending limits. In addition to the controls built into the loan approval workflow systems, the credit divisions and BCP’s internal auditors regularly examine credit approvals to ensure that loan officers and credit analysis officers are complying with lending policies.
In accordance with international standards, BCP has established the limit of the lending authority based on risk rating (probability of default) and particular guarantees of the borrower. Requests for credit facilities in excess of the limits set for Credit Officers are reviewed by the Chief Operating Officer, Credit Risk Committee, Executive Committee or, if the amount requested is sufficiently large, by the Board of Directors.
In addition, BCP has approved concentration limits by industry, based on its target market share and loan portfolio participation.
BCP believes that an important factor to maintain the quality of its loan portfolio is the selection and training of its loan and risk officers. BCP requires loan officers to have degrees in economics, accounting, business administration or related fields from competitive local or foreign universities. In addition, training at the very beginning is based on a three-month “Bank Specialization Program”. Trainees in this program are taught all aspects of banking and finance. After the training program finishes, trainees are hired as loans officers and receive specialized training in credit risk. Loan officers also receive training in specific matters throughout their careers at BCP and also through a comprehensive training program called “Triple A”. Laterally-hired officers generally are required to have prior experience as loan officers.
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BCP operates in substantial part as a secured lender. As of December 31, 2017, approximately S/41.9 billion of our loan portfolio and off-balance-sheet exposure were secured by collateral, which represents 44.9% of the total loan portfolio based upon our unconsolidated figures (excluding BCP Panama and BCP Miami, branch offices located overseas), as compared to 48.6% in 2016 and 54.0% in 2015.
Liquid collateral is a small portion of BCP’s total collateral. In general, when BCP requires collateral for the extension of credit, it requires collateral valued at between 110% and 150% of the principal amount of the credit facility granted. The appraisal of illiquid collateral, in particular real estate assets, machinery and equipment, is performed by independent experts.
Pursuant to a Peruvian regulation (Article 222° under Law No. 26702) that became effective in December 1998, the existence of collateral does not affect the loan classification process. For Peruvian accounting purposes, secured loans (or the portion of any loans covered by collateral) that are classified in Class “B”, “C,” or “D” risk categories or that are otherwise classified as substandard loans (see “Item 4. Information on the Company - 4.B Business Overview - (10) Selected Statistical Information – 10.3 Loan Portfolio – 10.3.7 Classification of the Loan Portfolio”) have a lower loan loss provision requirement than similar unsecured loans. If a borrower is classified as substandard or below, then BCP’s entire credit exposure to that borrower is so classified.
BCP’s internal audit division conducts selected revisions and analyses on borrower’s financial statements, consistent with the local banking regulations of the jurisdictions in which it operates.
(2.5) Transformation
In October 2015 the InnovaCXion Center was launched with the mission of improving customer experience through digital innovations.
At the end of 2016, BCP decided to launch a Digital Transformation initiative that included, besides the InnovaCXion Center, the following units: IT Division, Customer Experience Area, Strategic Information Analysis and Governance Area, and Change Management.
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During 2017, BCP chose to merge its Digital Transformation initiative and its Cultural Transformation initiative, Samay, both of which were developing on their own track. The objective was to manage a single Transformation initiative, so the bank could “Bring our customers’ dreams to live”.
In order to accelerate our Transformation initiative, new work streams were incorporated: Digital Risk, Digital Operations, Distribution Channels, and Governance.
| (2.5.1) | Information technology (IT) |
BCP considers its technology platform as one of its main competitive strengths and continues to invest in this area to maintain a competitive position in the banking sector. During 2012, IT changed its operating model, outsourcing the administration and operation of the IT infrastructure, application development and maintenance of some of the applications to three companies, who are leaders in their field: IBM, Tata Consulting Services and Everis. During the following years, IT has continued to expand the scope of its services. As a result, in 2017, IT maintained the delivery level for projects/requirements compared to 2016 (delivering 73% more than in 2011), met its time-to-market objectives (since 2011), and strengthened its contingency and business continuity plan. Today IT is focused on accompanying the business in its digital transformation, incorporating into its processes the use of agile methodologies to achieve the speed and early feedback the environment demands. Under this new approach, 30% of the most significant projects of BCP applying agile methodologies.
BCP’s investments in IT reached S/185.2 million in 2015, S/227 million in 2016 and S/260.5 in 2017. BCP’s expenses on IT totaled S/648.1 million in 2015, S/702 million in 2016 and S/705.2 in 2017. Although the bank has been making important investments related to its digital transformation, continuous control and optimization efforts have led us to obtain similar expenses levels than 2016. Finally, as a result of the new operating model, our ratio of IT expenses as a percent of revenues improved from 9.4% in 2011, to 8.13% in 2016 and 8.09% in 2017.
| (2.5.2) | InnovaCXion Center and Customer Experience Area |
The InnovaCXion Center is focused on changing the way we work through Agile and learning new human centered design methodologies to achieve a WOW! experience in our customer journeys, which refer to the set of touchpoints with the bank before, during, and after the experience of a product or service. A WOW experience means that we are focused on make our clients feel a high level of client satisfaction when using our products and services, and in general when they interact with us. During 2017, we developed further on the following i) digital performance bonds, which reduced the time for delivering the product to clients from 2 days to a few hours; ii) the loans project, which is a platform that evaluates customers’ credit needs online; iii) peer-to-peer payments App YAPE; and iv) the Remote Investment Advisory, a digital platform that enables clients to get investment advisory.
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The Customer Experience Area focuses on improving customer journeys’ satisfaction through non-digital tools. Currently, 7 key customer journeys have been identified and 3 of them have already been addressed with positive results.
| (2.5.3) | Strategic Analysis and Governance Area |
This area comprises the following teams:
| i. | Strategic Analysis |
The main objective of our Strategic Analysis team is to optimize processes, products or services in the organization based on data analysis, and techniques such as statistics and data processing. In 2017, the team continued to develop use cases and advanced statistical models such as pricing optimization, fraud detection, demand projection, and installed capacity optimization for our call center.
| ii. | Customer Relationship Management (CRM) |
BCP continues to develop strategies to approach different retail customer groups through our customized outreach strategy known as Customer Relationship Management (CRM). This has enabled BCP to reach customers proactively and provide them with personalized offers and terms, in a timely manner while using cost effective channels and maximizing efficiency.
The CRM team is responsible for developing and distributing an adequate service through the different channels such as telemarketing, sales forces, Sales and Service Advisors, ATM, and Online Banking. During 2017, the team continued to increase the volume and complexity of the operations, starting the CRM Transformation project that will enable a customer 360 view and real-time campaigns.
| iii. | Architecture and Data Governance |
This team develops projects that enable us to process large volumes of information, of varied typologies, and at a great speed. In 2017, the team continued the project to transform the Data Architecture, having already implemented the new big data technologic platform.
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| iv. | Big Data Laboratory |
In April 2017, Crecemas BCP was launched, the first big data product of BCP that provides analytical information to businesses about their customers, competitors, and economic sector.
| v. | eBusiness and Digital Marketing |
The team focuses on maximizing the sales through digital channels and optimizing digital marketing efforts. Big data and web analytics are used for granular analysis of all the activities that are implemented.
| vi. | Center of Excellence |
In 2017, our Center of Excellence built a data lake, a storage repository holding a vast amount of raw data . Currently, the Center of Excellence has been working on populating the data lake, an asset that in the future will enable us to develop better use cases.
1.1.2 BCP Bolivia
BCP Bolivia’s activities include wholesale banking and retail banking. As of December 31, 2017, the operations of BCP Bolivia in terms of total assets (S/9,118.3 million), total net loans (S/6,089.3 million), deposits (S/8,048.3 million) and net equity (S/636.7 million).
At the end of 2017, BCP Bolivia’s loans represented approximately 9.6% of total loans in the Bolivian financial system. BCP Bolivia’s deposits represented approximately 9.8% of total deposits in the Bolivian financial system.
The following table shows the client segmentation of BCP Bolivia. This segmentation was a result of an analysis, which addressed multiple factors such as the size and volume of activity for each client, our clients’ affiliation with other companies or groups, the degree of follow-up required, and their credit ratings.
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| Client Segmentation | ||||||
| Subsidiary | Business | Group | Income/Sales/Total debt | |||
| Wholesale Banking |
Large companies (2) Medium companies (3) |
Annual sales higher than approximately S/49 million Annual sales from approximately S/6 million to S/49 million | ||||
| BCP Bolivia (1) |
Retail Banking (4) |
Small Business (5) Micro Business (5) Consumer (6) Mortgage Banking (7) |
Annual sales from approximately S/0.1 million to S/6 million Annual sales of at least approximately S/0.1 million Payroll workers and self-employed workers Payroll workers, independent professionals and business owners | |||
| (1) | Converted into Soles at the exchange rate of S/0.47245 per Boliviano, December 31, 2017 - SBS. |
| (2) | Loans to Large companies account for 32.0% of BCP Bolivia’s total loans. This segment accounts for approximately 690 customers. |
| (3) | Loans to Medium companies account for 11.0% of BCP Bolivia‘s total loans. This segment accounts for approximately 1,450 customers. |
| (4) | At the end of 2017, retail banking loans accounted for 57.0% of total loans of BCP Bolivia, while retail banking deposits accounted for 27.0% of BCP Bolivia's total deposits. |
| (5) | Small and Micro business banking accounts for 16.0% of total loans of BCP Bolivia, small business banking serves approximately 10,900 clients while Micro Business serves approximately 9,400 business clients. |
| (6) | Consumer banking accounts for 11.0% of total loans of BCP. Its customer base consists of approximately 45,400 Payroll and self-employed workers. Our strategies are based on cross-selling and retention programs that expand benefits to non-banking products. |
| (7) | This segment serves 9,100 customers, representing 30.0% of BCP Bolivia’s total loans. BCP Bolivia’s mortgage segment has an average LTV of 80% and represents less than 2% of Credicorp’s total loans. |
1.1.3 Atlantic Security Bank (ASB)
ASB is a Cayman Islands licensed bank that engages in private banking, asset management and proprietary investment. It was incorporated in September 1984 in the Cayman Islands and principally serves Peruvian-based customers. ASB has an international licensee branch in Panama, through which it conducts all commercial business
As of December 31, 2017, ASB had total assets of S/6,651.7 million and shareholders’ equity of S/874.1 million. Furthermore, as of December 31, 2017, ASB had approximately 2,759 customers, 93% of whom were Peruvian. ASB deposits reached S/5,218.4 million in 2017.
At the end of November 2017, ASB concluded the acquisition of Correval Panama, S.A., a subsidiary of a group related party, Credicorp Capital Colombia S.A. Correval Panama serves as a brokerage company with operations in Panama and the international market. Its activities are regulated by the “Superintendencia de Mercado de Valores de Panama”. With this acquisition, ASB looks to improve and consolidate processes, services and operations in its Panamanian branch and also improve its services and products related to brokerage activities.
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ASB trades on its own account primarily by making medium-term investments in investment grade fixed-income securities and sovereign debt. Non-investment grade fixed-income securities fall behind investment grade securities in terms of portfolio allocation, while equity and hedge-fund positions, though present, are less relevant. As of December 31, 2017, ASB’s investment portfolio was S/3,242.7 million.
Third-party asset management is an important activity for ASB. Total assets under management (AuM) reached S/17,608.2 million as of December 31, 2017, compared to S/14,921.3 million as of December 31, 2016 and S/12,359.8 million as of December 31, 2015. These assets comprise a range of unsolicited securities and ASB acts as an intermediary in the management and custody of such assets in fixed income and variable income securities.
ASB also maintains total loans, which amounted to S/2,638.7 million at year-end 2017, and approximately 93% of these loans were guaranteed by customers’ deposits and investments.
ASB’s overall investment strategy, the general profile of its investment portfolio and its specific investment decisions, are reviewed on a monthly basis by an investment committee. Its credit risk by counterparty, including direct and indirect risk, is evaluated on a consolidated basis and covers all activities that generate credit exposure such as interbank placements, commercial loans and securities investment. Market, liquidity and operational risks are monitored by ASB’s Risk Management Unit, which in turn reports to and is supervised by a Corporate Risk Committee, an Asset-Liability Committee and the Board of Directors.
1.2 Insurance
We conduct our insurance business exclusively through Grupo Pacifico that operates in Peru and Bolivia, which is the second largest Peruvian insurance company in terms of premiums. Grupo Pacifico provides a broad range of insurance products focusing on three business areas: property and casualty (P&C), life and pension through Pacifico Seguros, and health insurance through Pacifico EPS, which also conducts private hospital operations. Grupo Pacifico, like other major Peruvian insurance companies, sells its products both directly and through independent brokers, agents, banking channels and sponsors.
In 2015, Grupo Pacifico signed an agreement with Banmedica to participate as equal partners in the health insurance business. This association includes the private health insurance business managed by Pacifico Seguros, the corporate health insurance for employees sold by Pacifico EPS, and medical subsidiaries that provide medical services.
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As a result, Grupo Pacifico transferred the majority control of Pacifico EPS to Banmedica. Therefore, Pacifico EPS and the medical subsidiaries no longer consolidate with Pacifico Seguros for accounting purposes, and are reported as an investment in associates. Nevertheless, at the end of January 2018, UnitedHealth Group Inc signed a definitive agreement to buy Chilean healthcare company Banmedica SA for US$2.8 billion. With the closing of the transaction, UnitedHealth Group now owns 96.8% of Empresas Banmedica.
On August 1, 2017, the merger between Pacifico Vida and Pacifico Seguros Generales went into effect after the approval of the Superintendence of Banking, Insurance and AFP (SBS) and the subscription of the respective Public Deed.
Therefore, Pacifico Vida has acquired all of the rights and obligations of Pacifico Seguros Generales. Additionally, the resulting company shall be named Pacifico Compañia de Seguros y Reaseguros, with abbreviated name "Pacifico Seguros". This merger allows Pacifico Seguros to strengthen its assets and improve solvency and regulatory indicators, providing greater support for its obligations.
1.3 Pension funds
Credicorp conducts all of its pension fund activities through its private pension fund administrator Prima AFP. Prima AFP manages pension funds through individual capitalization accounts, providing its affiliates with retirement, disability, survival and burial benefits. See “Item 4. Information on the Company - 4.B Business Overview - (5) Review of 2017 – 5.2.5 Prima AFP” and “Item 4. Information on the Company - 4.B Business Overview - (9) Supervision and regulation – 9.7 Prima AFP” for more information about this business.
1.4 Investment banking
The integration of Latin American markets is a strategic focus for Credicorp. The creation of MILA (by its Spanish initials), a Latin American integrated market shared among Chile, Colombia and Peru, has opened up opportunities to further integrate asset management, brokerage and corporate finance cross-border operations. This can offer benefits for companies that have a significant presence in these markets. Since the formation of MILA, Credicorp’s investment banking business units grouped under Credicorp Capital have been very active. Credicorp Capital carries out its operations in the region through Credicorp Capital Peru, Credicorp Capital Colombia and Credicorp Capital Chile, holding a considerable market share in the Peruvian, Colombian and Chilean markets, respectively. Our main business lines are asset management, sales & trading and corporate finance.
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Asset management
Through the regional platform provided by MILA, we offer a wide array of products, including mutual funds, alternative funds and portfolio management, as well as structured products, to a broad base of clients, including clients in our retail, private and high net worth, corporate and institutional segments.
Sales & trading
Our regional investment banking platform has an active role in secondary markets, particularly equity and fixed income products, as well as exchange rate products and derivatives. Participation in the placement of equity and debt instruments, vis-à-vis our corporate finance team, is becoming equally relevant.
Corporate finance
Corporate finance provides advisory services to structure mid- and long-term financing and structure and place equity and fixed income instruments in capital markets. It also offers a wide range of financial advisory services and advisory services for mergers and acquisitions.
(2) Corporate compliance
Our Corporate Compliance programs cover all Group companies and have been developed under a comprehensive approach based on international best practices and the principles and ethical values of the corporation.
Compliance is responsible for managing the following corporate programs:
| · | Anti-Money Laundering |
| · | International Control Lists |
| · | Fiscal Transparency |
| · | Regulatory Compliance |
| · | Ethics and Conduct |
| · | Anti-Corruption |
| · | Market Abuse Prevention |
| · | Protection of Personal Information |
| · | Occupational Safety and Health |
| · | Consumer Protection |
The management model of the corporate program includes the appointment of Compliance Officers in each company of the Credicorp Group, each of whom reports to the Corporate Compliance Officer of Credicorp, who in turn reports to the Board of Directors and has full autonomy to carry out its duties independently.
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The Corporate Compliance Division establishes policies, guidelines and controls that regulate compliance programs to provide reasonable assurance of compliance with local and international standards, mitigation of conduct risks and strengthening of the ethical behavior and values of Credicorp, all with the aim of protecting the reputation and business of Credicorp.
In 2017, the Corporate Compliance Division focused on developing an advanced management model integrating compliance processes into the business and the culture of the organization. This allows us to provide immediate business advice, generate value and provide alternative solutions, and to be innovative in how we apply the benefits of big data and analytics to improve efficiency and effectiveness in the identification of financial crimes and the reduction of non-financial risk.
Fiscal Transparency
Fiscal Transparency oversees the implementation of Foreign Account Tax Compliance Act (FATCA) & Common Reporting Standard (CRS), regulations for Exchanging Tax Information that apply to all Credicorp Financial Institutions. Understanding FATCA & CRS requirements and having a comprehensive FATCA & CRS compliance program is essential for financial institutions (FI) to limit non-compliance risk and meet the obligations set out by the relevant Intergovernmental Agreements (IGAs), the Internal Revenue Service (IRS) and the Organization for Economic Co-operation and Development (OECD). Beyond compliance, Fiscal Transparency initiatives represent a prime opportunity for FI´s to enforce a business culture that promotes the reduction of tax evasion globally.
FATCA implementation at Credicorp: Credicorp has FI´s located in countries under IGA Model I (Bahamas, Luxembourg, Colombia, Cayman Islands and Panama), IGA Model II (Bermuda and Chile), and General Regulation (Bolivia). Obligations of FIs in those locations include complying with Client Due Diligence, Client Annual Reporting and Financial Counterparties Exchange of Status Information.
In the case of Peru, it still holds the category of “Country with an agreement in substance” while the Peruvian government and the Department of Treasury of the US continue with the negotiations to subscribe an IGA. However, the jurisdiction is treated as having an In-Effect agreement and all Peruvian FIs must comply with FATCA obligations.
CRS implementation at Credicorp: Credicorp has FIs located in countries that started CRS implementation in 2016 and that issued their first multiple report in 2017 (Colombia, Cayman Island and Luxembourg). Panama and Chile initiated Client Due Diligence obligations in 2017 and are expected to begin Client Annual Reporting in 2018.
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In the case of Peru, in 2017 the Ministry of Economy and Finance (MEF) announced his the intention to subscribe to a CRS agreement; however, to do so, Peru first must become a member of the Organization for Economic Cooperation and Development (OECD). Meanwhile, the Peruvian government is working to promote legislative changes to make possible to meet the OECD requirements to acquire the full member status.
(3) Internal Audit
According to our mission, during 2017 we focused on creating a permanent framework through which we evaluate the effectiveness and efficiency of Credicorp's risk management, control and governance processes, with the aim of improving and protecting the value of the corporation, providing assurance, advice and analysis based on risk. For this purpose, the audit unit formulates the Annual Audit Plan using the Risk Based Audit methodology, which is aligned with the Rules of the IIA Institute of Internal Audit Global and approved by the Peruvian Superintendency of Banks, Insurance and Pension Funds.
During 2017 the result of the internal evaluation, in compliance with Standard 1311 of the IIA for the sixth consecutive year, was "Generally Compliant" (highest possible rating according to the IIA) as a result of the Quality Assurance and Improvement Program. It should be noted that in September 2013, we obtained the International Quality Certification for the Internal Audit Activity with a "Generally Compliant" rating granted by the IIA in the External Quality Assessment, in accordance with Rule 1312 of the IIA. This shows that it complies with the International Standards for Professional Practice, the Fundamental Principles and the IIA Code of Ethics. Currently the Internal Audit Unit (UAI) is managing the new external evaluation (after 5 years) with the Global IIA, which demonstrates its commitment to continuous improvement and compliance with the standard.
In 2017 the Internal Corporate Auditor (CAE) participated as a member of the Financial Services Guidance Committee (FSGC) of the IIA, whose mission is to strategically direct the development of the International Framework for Professional Practice of Internal Auditing (IPPF for its acronyms in English) to support the advancement of professional auditing practice in the global financial services industry by identifying, prioritizing, launching and, ultimately, approving guidelines specifically geared to the special needs of internal auditors who provide services to the financial services industry. In December 2017, the Committee published the first specialized Guide on the Audit of Liquidity Risk.
In September 2017, the Manager of the Internal Audit Unit of the Pacific Group, Mr. Guillermo Zegarra, was appointed as Chaiman of ISACA Lima - Chapter, an association that brings together professionals in information technology (IT) in fields such as information security, IT management, IT risks, IT audit and cybersecurity.
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During 2017, 14,572 hours of training were provided with an average of 72 hours / per auditor (above the 40 hours / per auditor recommended by the international practices) in topics related to fraud prevention, the new IFRS 9 on recognition and measurement of financial instruments, new cybersecurity frameworks such as the one of IIA, NIST or the FFIEC, internal quality assessment, data analytics, money laundering, validation of models and other topics of financial and operational audit.
(4) Strategy
Credicorp was established to create a financial group that benefits from synergies among the Group’s companies and our companies’ boards.
Credicorp endeavors to become a leader in each market where we operate. In December 2017, we announced to the market that to enhance the management of Credicorp’s subsidiaries, the Board of Directors unanimously resolved, at its meeting held on Wednesday, December 20 to organize Credicorp’s subsidiaries in four Lines of Business:
1. Includes Banco de Credito del Peru-BCP and Banco de Credito de Bolivia
2. Includes MiBanco and Encumbra
3. Includes Grupo Pacifico and Prima AFP
4. Includes Credicorp Capital, Wealth Management of BCP and Atlantic Security Bank.
This change was effective since April 1st, 2018.
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We have an international presence, offering a diversified business portfolio:
Furthermore, our long-term strategy consists of four strategic pillars: efficient growth; adequate risk management; focus on client satisfaction; and profitability. We seek to achieve an optimal balance of market share, profitability and operating efficiency.
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Long-term strategy
Focus on client satisfaction: We are highly dedicated to providing products and services that offer strong value propositions for the clients we serve through each of our businesses. Our main value proposition will be a digital banking initiative that would allow us to get to know and satisfy our customers through a prompt digital solution.
We will continue to educate, and inform our customers by helping them understand the different financial products and services they can access through our distribution channel network and sales force.
We have improved our communication with clients to keep them well informed of the products and services we launch and the product enhancements we implement. We continuously upgrade our platform in response to questions, complaints and requests from customers.
Adequate risk management: This strategic pillar of Credicorp’s strategy is based on the corporate principles approved by the Corporate Governance Committee: involvement of executive management; independence of the risk functions; corporate governance, including risk appetite, corporate risk policies, and risk-adjusted performance measures; and sufficiency and quality of resources dedicated to the risk management role.
Credicorp is committed to applying best practices to assess, quantify and manage the different risks to which we are exposed to, such as credit, market, compliance and operational, reputational, and insurance underwriting risks. We are constantly fine-tuning our models for risk management and our stress-testing methodologies. Our strategy is based on implementing an advanced and fully integrated risk management approach to achieve sustainable growth and enhanced profitability.
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In the area of credit risk management, we have implemented enhanced risk-adjusted pricing models and in-house credit models (origination, scoring, behavioral and collection models) that maximize the use of our proprietary information and knowledge about the Peruvian system. These are essential sources of competitive advantage. We have also developed a risk monitoring process that provides a timely and comprehensive picture of risk exposures across risk types and from multiple business lines.
Efficient Growth: Credicorp promotes consciousness in our management of expenses and investments based on: i) productivity management; ii) the establishment of new mechanisms for approving, managing and reporting budget execution; and iii) process improvement. Our efficient growth will be based on the Jaw concept; this means it will be focused on managing the gap between income growth and expenses growth, in an effort to achieve higher growth in income than in expenses.
Profitability: We will continue to manage our businesses with the objective of maximizing our shareholders’ sustainable return on equity.
(5) Review of 2017
The following table provides certain financial information about our principal business segments as of and for the year ended December 31, 2017 (see Note 29 to the Consolidated Financial Statements):
| As of and for the Year ended December 31, 2017 | ||||||||||||||||||||||||
| Total Income | Operating Income(1) | Total Assets | ||||||||||||||||||||||
| (Soles in millions, except percentages) | ||||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % Total | |||||||||||||||||||
| Banking | 14,071 | 79.4 | 8,154 | 93.0 | 145,999 | 85.6 | ||||||||||||||||||
| Insurance | 2,474 | 14.0 | 619 | 7.1 | 10,988 | 6.4 | ||||||||||||||||||
| Pension fund | 392 | 2.2 | 1 | - | 798 | 0.5 | ||||||||||||||||||
| Investment Banking | 791 | 4.4 | (12 | ) | (0.1 | ) | 12,687 | 7.5 | ||||||||||||||||
| Credicorp | 17,728 | 100.0 | 8,762 | 100.0 | 170,472 | 100.0 | ||||||||||||||||||
| (1) | Operating income includes the net interest income from banking activities in the Banking operating segment; the amount of the net earned premiums, less insurance claims plus net interest income in the Insurance operating segment; the net interest income in the Pension Fund and in the Investment Banking operating segments. |
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5.1 Consolidated contributions
The following table sets forth the contribution to the consolidated net income attributable to our equity holders by each of our principal subsidiaries:
| 2015 | 2016 | 2017 | ||||||||||||||||||||||
| (Soles in millions, except percentages) | ||||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % Total | |||||||||||||||||||
| BCP (1) | 2,420 | 78.3 | 2,708 | 77.0 | 2,937 | 71.8 | ||||||||||||||||||
| BCB (2) | 57 | 1.8 | 81 | 2.3 | 75 | 1.8 | ||||||||||||||||||
| ASHC | 133 | 4.3 | 143 | 4.1 | 175 | 4.3 | ||||||||||||||||||
| Grupo Pacifico (3) | 345 | 11.2 | 299 | 8.5 | 321 | 7.8 | ||||||||||||||||||
| Prima AFP | 162 | 5.2 | 155 | 4.4 | 140 | 3.4 | ||||||||||||||||||
| Credicorp Capital (4) | - | - | 79 | 2.2 | 69 | 1.7 | ||||||||||||||||||
| Others (5) | (25 | ) | (0.8 | ) | 50 | 1.5 | 375 | 9.2 | ||||||||||||||||
| Total | 3,092 | 100.0 | 3,515 | 100.0 | 4,092 | 100.0 | ||||||||||||||||||
| (1) | Includes Mibanco, which contributed S/380.6 million in 2017, S/320.4 million in 2016, S/212.4 million in 2015. Also includes BCP Emisiones Latam 1 S.A. and Solucion EAH (merged with Edyficar Peru S.A). For comparative purposes, BCB 2015 net profit is shown on the BCB line. |
| (2) | Until May 12, 2016, BCB was a subsidiary of BCP. For comparative purposes, the net profit of the BCB for the period 2015 was separated from the net profit of the BCP and presented in this line. |
| (3) | Includes Crediseguro S.A. Seguros Personales y Crediseguro S.A. Generales (incorporated in 2017). |
| (4) | Credicorp Capital Ltd, which mainly includes Credicorp Capital Holding Chile, Credicorp Capital Holding Colombia, Credicorp Capital Securities and Credicorp Capital Holding Peru (which includes Credicorp Capital SAF, Credicorp Capital SAB, Credicorp Capital Sociedad Titulizadora and Credicorp Capital Servicios Financieros). |
| (5) | Includes Credicorp Ltd. which mainly includes expenses and the tax withheld in connection with the estimation of the dividends to be distributed to us by our Peruvian subsidiaries (BCP and Grupo Pacifico); and others. In 2017 includes the profit of the sale of 50% of BCI shares to a third party, additionally includes the sale of the shares of ENEL (profit of the sale of 50% of BCI shares to a third party in 2016). |
The following table shows our main subsidiaries’ percentage contribution to our total assets, total revenues, net income and net equity attributable to Credicorp´s equity holders for the year ended December 31, 2017:
| As of and for the Year ended December 31, 2017 (1) | ||||||||||||||||
| Total Assets | Total Revenue | Net Income / (Loss) | Equity attributable to Credicorp´s holders | |||||||||||||
| BCP (2) | 81.9 | % | 73.9 | % | 71.8 | % | 70.8 | % | ||||||||
| BCB | 5.3 | % | 3.5 | % | 1.8 | % | 2.9 | % | ||||||||
| ASHC | 4.1 | % | 1.8 | % | 4.3 | % | 3.8 | % | ||||||||
| Grupo Pacifico | 6.7 | % | 13.9 | % | 7.8 | % | 13.0 | % | ||||||||
| Prima AFP | 0.5 | % | 2.2 | % | 3.4 | % | 2.8 | % | ||||||||
| Credicorp Capital (3) | 2.2 | % | 3.4 | % | 1.7 | % | 3.6 | % | ||||||||
| Others (4) | (0.7 | )% | 1.3 | % | 9.2 | % | 3.1 | % | ||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| (1) | Percentages determined based on the Consolidated Financial Statements. |
| (2) | Includes Mibanco, BCP Emisiones Latam 1 S.A. and Solucion EAH. |
| (3) | Credicorp Capital Ltd, which mainly includes Credicorp Capital Holding Chile, Credicorp Capital Holding Colombia, Credicorp Capital Securities and Credicorp Capital Holding Peru (which includes Credicorp Capital SAF, Credicorp Capital SAB, Credicorp Capital Sociedad Titulizadora and Credicorp Capital Servicios Financieros). |
| (4) | Includes Grupo Credito S.A., CCR Inc, Inversiones Credicorp Bolivia and others. |
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The following table shows the main subsidiaries’ percentage contribution of BCP Consolidated to its total assets, total revenues, net income and net equity attributable to BCP’S Consolidated for the year ended December 31, 2017:
| As of and for the Year ended December 31, 2017 (1) | ||||||||||||||||
| Total assets | Total revenue | Net Income/(Loss) | Net equity | |||||||||||||
| BCP Stand-alone | 93.0 | % | 81.4 | % | 86.7 | % | 88.4 | % | ||||||||
| Mibanco | 6.9 | % | 18.4 | % | 13.1 | % | 11.0 | % | ||||||||
| Others (2) | 0.1 | % | 0.2 | % | 0.2 | % | 0.6 | % | ||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| (1) | Percentages determined based on BCP’s consolidated financial statements of and for the year ended December 31, 2017. |
| (2) | Includes Solucion Empresa Administradora Hipotecaria S.A and BCP Emisiones Latam 1 S.A. |
5.2 Financial performance
In 2017, we recorded net income after non-controlling interest of S/ 4,091.8 million (S/ 3,514,6 million in 2016 and S/ 3,092.3 million in 2015). This represented a 16.4% increase compared to 2016, which led to a ROAE of 19.8% (19.6% in 2016 and 20.5% in 2015) and ROAA of 2.5% (2.3% in 2016 and 2.1% in 2015).
The results of 2017 include some non-recurring income, which totaled approximately S/ 444.7 million. The recurring net income totaled S/ 3,647.1 million, which represented a 6.1% increase compared to 2016. As such, excluding the effect of non-recurring items, ROAE and ROAA at Credicorp in 2017 were 17.8% and 2.2%, respectively (vs 19.3% and 2.2% in 2016, respectively).
The main non-recurring income and expenses net of tax are:
| § | Non-financial income due to the sale of BCI shares for S/ 281.0 million; and |
| § | Non-financial income due to the sale of ENEL shares for S/ 164.0 million. |
The main factors behind Credicorp’s results were:
| § | Growth of 2.5% in net interest income in comparison to the level posted in 2016. The increase was primarily attributable to expansion in interest income on securities and interest income on loans, which contributed to the increase of 2.9% compared to the level posted in 2016, all of which offset the increase in interest expenses (4.2% above the level in 2016). The NIM for 2017 was 5.33%, 13 basis points below our NIM for 2016. This indicator was affected by strong growth year-over-year in average interest-earning assets. |
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| § | Although gross provisions reduced 0.3% in 2017, net provisions for loan losses increased 0.2% year-over-year due to a lower level of recoveries and reversals during the year in comparison to the level posted in 2016. However, due to strong loan growth in year-end balances, the cost of risk improved and reached a level of 1.78%, comparing favorably to the 1.88% posted in 2016. The credit quality ratios are explained below in section “5.2.1 Assets Structure - (i) Portfolio quality”. |
| § | The 17.9% year-over-year increase in non-financial income was due to growth in net gain on sale of securities (131.9%) and fee income (4.7%). The former was attributable to extraordinary income from our sale in 2017 of shares of BCI and ENEL. |
| § | Net earned premiums increased 1.4% as a result of higher net earned premiums in the Life Insurance Business and, to a lesser degree, in the Property and Casualty business. |
| § | Operating expenses grew 3.4% due to the expansion of salaries and social benefits, and administrative, general and tax expenses, mainly as a result of higher expense on consultants and marketing campaigns due to the Transformation project. |
See Item 5.Operating and financial review and prospects – 5.A. Operating results – (2) Historical Discussion and Analysis - 2.1 Results of Operations for the Three Years Ended December 31, 2015, 2016 and 2017.
(i) Main ratios
| 2015 | 2016 | 2017 | 2016 - 2015 | 2017 - 2016 | ||||||||||||||||
| basis points | ||||||||||||||||||||
| ROAE (1) | 20.5 | % | 19.6 | % | 19.8 | % | (90 | ) | 20 | |||||||||||
| ROAA (2) | 2.1 | % | 2.3 | % | 2.5 | % | 20 | 20 | ||||||||||||
| Net interest margin (3) | 5.45 | % | 5.46 | % | 5.33 | % | 1 | (13 | ) | |||||||||||
| Funding cost (4) | 2.0 | % | 2.1 | % | 2.1 | % | 10 | 0 | ||||||||||||
| Cost of risk (5) | 2.08 | % | 1.88 | % | 1.78 | % | (20 | ) | (10 | ) | ||||||||||
| Loan to deposit (6) | 101.9 | % | 110.3 | % | 103.4 | % | 840 | (690 | ) | |||||||||||
| Internal overdue ratio (7) | 2.56 | % | 2.77 | % | 3.01 | % | 21 | 24 | ||||||||||||
| Non-performing loan ratio (8) | 3.41 | % | 3.66 | % | 3.92 | % | 25 | 26 | ||||||||||||
| Coverage of Internal overdue loans (9) | 166.2 | % | 160.6 | % | 149.0 | % | (560 | ) | (1,160 | ) | ||||||||||
| Coverage on NPL (10) | 124.7 | % | 121.4 | % | 114.3 | % | (330 | ) | (710 | ) | ||||||||||
| Operating efficiency (11) | 43.5 | % | 43.3 | % | 44.0 | % | (20 | ) | 70 | |||||||||||
(1) Net income attributable to Credicorp / Average* equity before non-controlling interest.
(2) Net income attributable to Credicorp / Average* assets.
(3) Net interest margin / Average* interest earning assets.
(4) Interest expense / Average* liabilities
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(5) Provisions for loan losses, net of recoveries / Total loans.
(6) Total loans / Total deposits.
(7) Internal overdue loans / Total loans. For the definition of Internal overdue loans See ITEM 3. KEY INFORMATION, 3. A Selected financial data, Note (14).
(8) Non-performing loans / Total loans. Non-performing loans = Internal Overdue Loans + Refinanced Loans + Restructured Loans
(9) Allowance for loan losses / Internal overdue loans.
(10) Allowance for loan losses / Non-performing loans.
(11) (Operating expenses - Other expenses + Acquisition cost) / (Net interest income + Fee income + Net gain on foreign exchange transactions + Net gain from associates + Net earned premiums + Gross margin from medical services).
* Averages are determined as the average of period-beginning and period-ending balances.
5.2.1 Assets structure
Our total assets amounted to S/ 170.5 billion at year end 2017 (S/ 156.4 billion in 2016 and S/ 155.5 billion in 2015). The 9.0% increase in total assets in 2017 as compared to 2016 was a result of: (i) a 30.7% increase in investments available-for-sale (a decrease of 0.4% in 2016 and an increase of 19.2% in 2015) (ii) the growth of our loan portfolio, which grew by 6.0% in 2017 (4.9% in 2016 and 13.6% in 2015), and (iii) a 39.5% increase of cash (which includes cash collateral, reverse repurchase agreements and securities borrowings) mainly at BCP, primarily associated with an increase in cash and reserves held at BCRP (a decrease of 25.7% in 2016 and an increase of 3.2% in 2015). See Item 5.Operating and financial review and prospects – 5.A. Operating results –(3) –Financial Position.
As of December 31, 2017, Credicorp’s total loans increased 6% year-over-year (4.9% and 13.6% in 2016 and 2015, respectively), which represented an expansion of 7.5%, after excluding the impact of the U.S. Dollar depreciation on our loan book (currency-adjusted growth).
In terms of average daily balances, Credicorp’s loan book expanded 1.9% year-over-year, which represents a 3.3% currency-adjusted growth rate. This growth was, primarily due to:
| § | The 3.1% year-over-year increase of our Retail Banking’s loan book, which represented a currency-adjusted growth rate of 3.8% year-over-year; and |
| § | BCP Bolivia and Mibanco’s expansion of their loan books by 15.5% and 8.6%, respectively; which represented currency-adjusted growth rates of 19.2% and 8.8%, respectively. |
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The growth was offset by the following segments:
| § | The 1.1% year-over-year decrease of our Wholesale Banking’s loan book, which represented a slight currency-adjusted growth rate of 0.6% year-over-year; and |
| § | ASB’s decrease of 11.1%, which represented a currency-adjusted decrease of 8.3% year-over-year. |
(i) Portfolio quality
In terms of portfolio quality, our internal overdue ratio (which includes loans under legal collection) was 3.01% at the end of 2017, 24 basis points higher than the 2.77% ratio recorded at the end of 2016 (2.56% at the end of 2015). The increase reported in our internal overdue ratio over the last year reflects deterioration in segments such as SME-Pyme, Mortgage, and Wholesale Banking. It is important to keep in mind that traditional delinquency indicators like internal overdue loan ratio 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 although they are fully provisioned given that it is necessary to first undergo a judicial process to execute foreclosure and liquidate the collateral, which takes on average five years. SME-Pyme and Mortgage were affected by this distortion since approximately 50% of the SME-PYME loans have real estate collateral and all mortages have real estate collateral.
An analysis of the internal overdue ratio by business segment shows that:
| § | Wholesale Banking closed the year with an internal overdue ratio that was higher than the ratio reported last year (0.47% in 2017, 0.29% in 2016 and 0.32% in 2015). However, the ratio continued to reflect the low levels that are typical of this business line. The internal overdue loan portfolio growth rate outpaced the growth rate of the total Wholesale portfolio in a macroeconomic scenario characterized by very low growth, low demand for credit and aggressive competition for good clients, like the clients in this segment. |
| § | In the SME-Business segment, the internal overdue ratio increased 10 basis points as compared to 2016 level (4.59%, 4.49% and 5.21% in 2017, 2016 and 2015, respectively). This was due to low loan growth, measured in year-end balances. It is important to note that the risk of the segment remained within the organization’s risk appetite. This increase was due to the higher growth rate in internal overdue loans compared with the growth of the total SME-Business book. The clients in the SME-Business segment have a high level of real estate coverage, which is currently at approximately 70%. |
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| § | The SME-Pyme segment reported a slight increase in its internal overdue ratio (12.61%, 12.41% and 11.10% in 2017, 2016 and 2015, respectively); nonetheless, it is important to note that in March 2017, the ratio hit a peak of 13.14%, mainly due to the impact that the El Niño Phenomenon had on some clients. This point marked a turning point given that in the second half of the year delinquency decreased. It is worth mentioning that the level of real estate guarantees in this segment is approximately 50%, which means that loans that are more than 150 days overdue cannot be written-off. |
| § | The Mortgage segment reported an increase in its internal overdue ratio (3.14%, 2.66% and 2.10% in 2017, 2016 and 2015, respectively), due to the distortion created by the existence of real estate collateral. |
| § | The Consumer segment’s internal overdue ratio in 2017 was 2.93%, a decrease from 3.02% in 2016 (2.62% in 2015). This was due to the reduction in internal overdue loans (in value), which in turn was reinforced by loan growth in the segment. It is important to note that, at the end of 2017, 75% of the portfolio corresponded to vintages from 2016 or later that present a better risk profile than those associated with vintages from 2015 or before, which generated the delinquency problem. The new composition of the portfolio reflects a calibrated profile after policies for risk acceptance were changed, which means that lower level of provisions is required. |
| § | The Credit Card segment’s internal overdue ratio in 2017 was 4.79%, which was an increase from 4.65% in 2016 and 4.17% in 2015. This increase is in line mainly with the delinquency problems faced by some clients in El Niño Phenomenon disaster areas, which was accentuated by the slowdown in loan growth during 2017. |
| § | Mibanco’s internal overdue ratio was 4.68% at the end of 2017 (4.39% in 2016 and 4.76% in 2015). This level is slightly higher than Edyficar’s historic level (approximately 4%), in line with the expiration of the skip program offered to clients affected by El Niño. |
| § | Delinquency ratios at BCP Bolivia have remained at very low levels this year (1.88% in 2017, 1.80% in 2016 and 1.57% in 2015). The increase in internal overdue loans came mainly from SME-Business segment. |
The skip program implemented by BCP and Mibanco due to El Niño was defined in coordination with the SBS of Peru in order to proactively contact customers to offer the re-scheduling of their debt through measures such as: suspending payment of scheduled loan installments for up to six months, and/or extending the tenor of loans for up to an additional year. These efforts were intended to allow clients to focus on their immediate personal needs. The re-scheduling option did not imply a downgrade of the clients’ risk rating; as such their credit history was protected.
Provisions for loan losses (the P&L account) were almost flat (increased by 0.2%). The latter, coupled with portfolio growth resulted in the cost of risk to improve, reaching a 1.78% level in 2017 (1.88% level in 2016 and 2.08% in 2015). This result was even more noteworthy if we consider the provisions set aside in 2017 for the El Niño Phenomenon and the Lava Jato case. The latter reflects the improvements made over the last 3 years in commercial and risk management capabilities, that resulted in new loan vintages with better risk quality since 2016. The internal overdue loan ratio does not show the improvement given that some of these loans, despite being fully provisioned, cannot be charged-off due to the existence of real estate guarantees that require five years on average to liquidate.
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At the end of 2017, the coverage ratio was 149.0%, which was a drop from the 160.6% recorded at the end of 2016 (166.2% at the end of 2015), given that growth in the internal overdue loan portfolio outpaced the increase in the allowance for loan losses.
5.2.2 Funding structure
At the end of 2017, Credicorp’s total liabilities were S/148.2 billion, which represents a 8.9% increase as compared to 2016’s figure (S/ 136.3 billion and S/138.8 billion at the end of 2016 and 2015, respectively). See Item 5.Operating and financial review and prospects – 5.A. Operating results – (3) –Financial Position. The increase in total funding was in line with a context marked by low loan growth, which registered a recovery by the end of 2017, and the strategy to maintain internal limits for asset and liability mismatch in terms of both duration and currency. Credicorp’s funding structure, throughout 2017, was characterized by an increase in Deposits’ share of total funding and, in a lesser extent, by an increase in Bonds and notes issued (1.8%).
Deposits continued to represent the main source of financing within total liabilities, with a share of 65.6% for fiscal year 2017 (63% in 2016 and 63.9% in 2015). Increase in deposits was mainly associated with a higher level in time deposits (33.8%) and saving deposits (7.3%).
The increase in time deposits and saving deposits reflected both the positive impact of the Temporary Regimen for Capital Repatriation (tax amnesty that was implemented to achieve capital repatriation of non-declared income) and the initiatives to capture deposits that were rolled out throughout the year. At the subsidiary level and by client type, growth in deposits in 2017 was associated primarily with deposits from individuals through BCP Stand-alone.
Bonds and notes issued maintained their share of BAP’s total funding mix, which was in line with the new debt issuances of BCP Stand-alone during year 2017.
However, the accounts payable related to repurchase agreements and security lending activities, which includes BCRP instruments, posted a drop of -11.3% and represented 9.1% of BAP’s total funding at the end of 2017 (11.1% at the end of 2016 and 10.5% at the end of 2015). The aforementioned was due primarily to the lower volume of repurchase agreements for expansion and substitution repos with BCRP mainly at BCP.
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5.2.3 Distribution channels
Credicorp’s distribution network had 9,967 points of access for our clients at the end of 2017, which represented a 3% increase with regard to 2016’s level. This increase was due primarily to efforts to implement Agentes BCP in 2017, which reflected the banking penetration strategy and migration to cost-efficient channels. In the case of BCP Bolivia, the increase in points of contact was due to growth in Agentes BCP, which was in line with the goal to implement 200 agents by the end of 2017.
The table below shows the evolution of the points of contact (branches, ATM, Agentes BCP) of each of Credicorp’s subsidiaries:
| 2015 | 2016 | 2017 | ||||||||||
| BCP | 8,489 | 8,880 | 9,087 | |||||||||
| Mibanco | 323 | 316 | 324 | |||||||||
| BCP Bolivia | 354 | 464 | 555 | |||||||||
| Grupo Pacifico | 150 | 127 | 117 | |||||||||
| Prima AFP | 17 | 18 | 18 | |||||||||
| Credicorp Capital | 15 | 16 | 19 | |||||||||
| Credicorp | 9,348 | 9,821 | 10,120 | |||||||||
5.2.4 Grupo Pacifico
Grupo Pacifico is the second largest Peruvian insurance company, with a market share of 28.88% based on written premiums in 2017 (27.43% in 2016). This market share calculation includes gross written premiums from Pacifico Seguros and Pacifico EPS and represents our total market share in the insurance market and the healthcare sector. Additionally, the company registered the highest growth rate of the Peruvian insurance market, which generated an increase of 1.2 percentage points in market share.
Grupo Pacifico achieved net income of S/ 325.0 million in 2017, 7.17% higher than the S/ 303.3 million reported in 2016 (S/349.5 million in 2015). The aforementioned is a result of a higher net financial income due to (i) extraordinary income from the sale of investments in fixed income, equity and real estate, and (ii) an optimal investment management in terms of profitability and control. Additionally, the annual results include exceptional income from operational activities and a decrease in income tax rate.
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These favorable effects offset the lower underwriting result that is explained by i) higher claims associated with El Niño damages, and ii) higher acquisition costs due to an increase of written premiums in the life insurance business.
Gross Written premiums
| S/. in Thousands | 2015 | 2016 | 2017 | |||||||||
| GROSS WRITTEN PREMIUMS (¹) | 2,719,810 | 2,757,044 | 2,943,861 | |||||||||
| Medical Assistance (²)(³) | 360,481 | 381,730 | 393,736 | |||||||||
| Individual Annuity Line | 378,763 | 222,074 | 358,481 | |||||||||
| Automobile | 336,667 | 360,869 | 347,749 | |||||||||
| Credit Life | 300,363 | 354,841 | 415,728 | |||||||||
| Individual Life | 300,117 | 325,031 | 332,781 | |||||||||
| Fire and Allied Lines | 241,487 | 271,742 | 257,288 | |||||||||
| Group Life | 193,952 | 209,093 | 217,577 | |||||||||
| Others | 607,980 | 631,664 | 620,521 | |||||||||
| (1) | Without eliminations. Includes premiums assumed from other companies |
| (2) | Since 2015, corporate health insurance business and medical services (network of clinics, medical centers and laboratories) are excluded from Grupo Pacifico consolidated financial statements. Since 2015, Health insurance only includes Medical Assistance. |
| (3) | The joint venture agreement with Banmedica stipulates that the corporate health insurance business and medical services (network of clinics, medical centers and laboratories) must be reported as an investment in associates. Both businesses are managed by Banmedica and Grupo Pacifico receives 50% of net earnings. In that way, EPS does not consolidate |
Pacifico Seguros reported written premiums of S/ 2,943.9 million in 2017, which represent a 6.7% increase compared to 2016. In that way, the company registered the highest growth rate of the Peruvian insurance market, reaching an increase in market share from 24.4% in 2016 to 25.9% in 2017.
The higher written premiums were mainly due to the increase in the life insurance business, in all its lines, especially in Individual Annuities, Credit Life, and Disability and Survivorship. It is important to mention that the increase in Individual Annuities was due to the higher sales of Vida Garantizada Flex and Renta Flex. These products are focused on collect AFP affiliates surplus as a result of reforms in the private pension system. The aforementioned is related with the release of Law N° 30425 which allows affiliates over the age of 65 years old to choose between receiving a pension or requesting AFPs to free up to 95.5% of their funds.
Nevertheless, written premiums on P&C business registered a decrease, especially in commercial P&C and personal lines due to (i) a market contraction associated with the lower country economic growth, (ii) downward pressure on market rates and (iii) the exchange rate appreciation which affects the accounting of dollar premiums in local currency. In term of market share, Grupo Pacifico maintain stable in the P&C segment with 24.7%.
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Claims and Reserves
In 2017, Grupo Pacifico’s net loss ratio was 46.1%, which represented a decrease compared to the 48.5% net loss ratio recorded in 2016.
| Net Loss Ratio(1) | 2015 | 2016 | 2017 | |||||||||
| Property and Casualty | 52.4 | % | 51.4 | % | 54.5 | % | ||||||
| Life business | 39.8 | % | 46.6 | % | 40.7 | % | ||||||
| Health business | - | - | ||||||||||
| Grupo Pacifico(2)(3) | 45.0 | % | 48.5 | % | 46.1 | % | ||||||
| (1) | Net claims / Net earned premiums: Net earned premium does not include the life insurance mathematical reserves estimated for long-term policies. This effect applies for 2015-2016-2017. |
| (2) | 2015 figure does not include Pacifico EPS results due to the agreement with Banmedica |
| (3) | Figures do not include eliminations for Credicorp’s consolidation purposes |
The decrease was caused by a reduction in the life insurance business, especially in Disability and Survivorship, due to the quota share contract (reinsurance contract which Pacifico cedes 50% of claims) that went into effect in January 2017. In contrast, the increase in P&C business is attributable to two lines of business: (i) Commercial P&C, due to the damages caused by El Niño and (ii) Personal Lines, due to the higher claims in Personal accident and homeowners insurance.
Underwriting, clients and reinsurance
Underwriting guidelines for substantially all P&C and health insurance risks are developed by profit centers in collaboration with the actuarial staff. Grupo Pacifico’s P&C unit has an engineering staff which inspects most medium and medium-to-large commercial property insured risks prior to underwriting, whereas third party surveyors are employed to inspect smaller risks and/or lower risk property. Pricing and underwriting guidelines, rates and approval thresholds for these risks are periodically reviewed by the profit centers with the actuarial staff, and informed to the risk committee. Conditions are monitored continuously to ensure they are within competitive market conditions and profitability targets.
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Grupo Pacifico’s P&C business transfers risks to reinsurers in order to limit its maximum aggregate potential losses and minimize exposures on large individual risks. Reinsurance is placed with reinsurance companies based on the evaluation of the credit quality of the reinsurer, terms of coverage and price. The P&C business acts as a reinsurer on a very limited basis, providing excess facultative reinsurance capacity to other Peruvian insurers that are unable to satisfy their reinsurance requirements and/or the interests of Peruvian clients in the Latin American region.
Historically, Grupo Pacifico’s P&C business has obtained reinsurance for a substantial portion of its earthquake-related insurance portfolio through excess loss reinsurance treaties. In 2012 Grupo Pacifico’s P&C business negotiated proportional reinsurance support for this portfolio, which it maintains as of December 31, 2017. Grupo Pacifico’s P&C business has property catastrophe reinsurance coverage in place that covers its probable maximum loss under local regulatory requirements. However, there can be no assurance that a major catastrophe would not have a material adverse impact on Grupo Pacifico’s financial condition and/or its operations.
Heavy rains caused by El Niño in early 2017 generated losses in Grupo Pacifico’s P&C business of approximately US$119.2 million. Of these approximately US$119.2 million in losses, 95% was ceded to reinsurers and 5.0% were net retained losses, which were within the risk appetite and risk tolerance parameters set by Grupo Pacifico’s risk management unit and approved by the Risk Management Committee.
Pacifico Vida holds excess of loss reinsurance contracts for Individual Life, Personal Accident, Group Life and Credit Life products; and in the case of Work Compensation Risk Insurance and disability and survivorship, these hold a quota share contract. Catastrophic reinsurance contracts cover all the company’s lines (Individual Life, Personal Accident, Group Life, Credit Life, SCTR and D&S), except for the Individual Annuity line. Premiums ceded to reinsurers represented less than 6.9% of written premiums in 2017.
Investment portfolio
Grupo Pacifico’s investments are made primarily to meet its solvency equity ratio and to provide reserves for its claims. Investments are managed by product within the property and casualty lines, and the life and annuities lines, designed to contain sufficient assets to match the company’s liabilities and to comply with the specific technical requirements of each business line. Grupo Pacifico has adopted strict policies related to investment decisions that are reviewed and approved by Grupo Pacifico’s Board of Directors. Its investment strategy is reviewed by the Investment Committee and the Board of Directors on a monthly basis. Grupo Pacifico invests in local and international markets, emphasizing investments in Peru, the U.S. and Latin America.
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As of December 31, 2017, the market value of Grupo Pacifico’s investment portfolio was S/ 8,949 million, which included mainly S/543 million in equity securities, S/1,074 million in investment properties, and S/7,332 million in fixed income instruments. The portfolio is well diversified and it follows an asset-liability management strategy focused on cash flow matching, duration matching and currency matching of assets (portfolio) and liabilities (reserves), and improving the capital structure of the company. Grupo Pacifico’s financial income increased 11.5% in 2017 (S/489.6 million in 2017, S/ 432.0 million in 2016, and S/337.6 million in 2015).
5.2.5 Prima AFP
In 2017, Prima AFP managed 1.7 million affiliate accounts of the Private Pension System (SPP), 0.2 million more than the number of affiliate accounts managed in the previous year, representing 25.5% of market share.
In 2017, Prima AFP’s Funds under Management (FuM) reached S/49.3 billion (S/43.2 billion in 2016 and S/39.3 billion in 2015), which represented a market share of 31.5%. The returns of our funds in the 12 months ended on December 31, 2017 were 4.4%, 9.6%, 12.2% and 12.1% for Funds 0, 1, 2 and 3, respectively.
Given that pension funds are long-term investments, it is best to review their returns over a long-term period. For the 11 years ended December 31, 2017 (since Prima AFP’s entry into the SPP), our funds’ nominal annual profitability were 6.8%, 7.9% and 7.2% for Funds 1, 2 and 3, respectively (not considering the Fund Type Zero). These returns place the company above the SPP in fund’s performance in Funds 1 and 2.
In 2017, Prima AFP recorded revenues of S/384.4 million (S/407.2 million in 2016 and S/402.2 million in 2015) and net income of S/140.1 million (S/155.8 million in 2016 and S/162.1 million in 2015). This decline of financial results is due to reductions in administration fees as explained below.
In December 2016, Prima AFP won the third public tender by offering the lowest mixed-commission scheme fees: 0.18% of monthly income and an annual fee of 1.25% over the client’s funds. This tender process requires that all workers who enter to the SPP for the first time become members of Prima AFP exclusively between June 2017 and May 2019.
In addition, due to the 2012 Pension System Reform, the monthly salary component of the mixed-commission fee scheme dropped from 1.19% to 0.87% in February 2017, and due to the third tender process decreased to 0.18% in June 2017. The fees apply to new and existing affiliates under the mixed-fee scheme.
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On the other side, the administration fee of the remuneration based scheme remained in 1.6%, and hasn’t changed since 2012. This fee hasn’t been included in the tender processes held to date.
5.2.6 Credicorp Capital
Credicorp Capital registered Net Income in 2017 of S/. 77.3 million. In a difficult year for the investment banking business, we were able to maintain our leadership position in asset intermediation and financial advisory for the main companies in the region, as well as to grow in our asset management businesses, thereby exceeding the non-financial income obtained in 2016 (growth of 6.4% to S/. 569.2 million).
| § | In Corporate Finance, in a context of lower investments than expected, the pipeline of projects was lower than that observed in previous years. However, we continue with the strengthening of the teams and consolidating our presence in the region, especially in the face of a greater number of cross-border financial consultancies demanded by clients. |
2017 stood out especially for an increased activity in the bond structuring business of Peruvian issuers for the international market, with outstanding examples such as Orazul Energy and Cerro del Aguila. We also had an important participation in the structuring of local bond issuances, allowing us to maintain a leading position in Peru and Chile. On the Equity Capital Markets (ECM) side, we also participated in important transactions, such as the IPO of Nexa Resources and the takeover bid launched by Glencore for Volcan shares.
| § | The Asset Management business had an excellent year in terms of growth in traditional proprietary funds, highlighting the entry of institutional clients in the three countries. Likewise, the commercial approach to more private banking clients, especially in Chile, generated a significant increase in assets managed during the year. |
Also, we continued the expansion of the operations of Credicorp Capital's alternative funds at the regional level, with advances in the development of Infrastructure and Private Debt funds. Within our operations of the year, the sale of Mall Paseo Viña in Chile stood out, which generated a success fee of approximately S/14.6 million.
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With respect to Assets under Management (AuM), we have reached approximately S/.58 billion, an increase of 21% compared to 2016. This amount includes assets managed in both proprietary and third-party funds.
| 2015 | 2016 | 2017 | ||||||||||
| Soles in millions | ||||||||||||
| AuM – Credicorp Capital Peru (1) | 17,348 | 23,970 | 24,641 | |||||||||
| AuM – Credicorp Capital Colombia | 5,423 | 7,530 | 10,717 | |||||||||
| AuM – Credicorp Capital Chile | 7,505 | 16,911 | 23,112 | |||||||||
| Total AuM - Credicorp Capital | 30,276 | 48,411 | 58,470 | |||||||||
| Total AuC - Credicorp Capital (2) | 38,885 | 56,337 | 53,796 | |||||||||
| (1) | Includes AuM for which there is a service agreement between ASB and Credicorp Capital for the latter to perform functions as Portfolio Manager (ASB funds in millions of Soles are: S/.4,776, S/.4,553 and S/.4,380 in 2015, 2016 and 2017, respectively). |
| (2) | Assets under custody. |
| · | The Sales & Trading business also faced a difficult year due to political issues in the region and weather issues like El Niño. However, the Fixed Income and Equities teams maintained leadership positions in intermediation in their respective markets and the business was also supported by the good results obtained in operations of Equity Capital Markets (ECM) and Debt Capital Markets (DCM), especially in Peru. |
Finally, in line with the business strategy of working jointly with ASB, the transfer to this vehicle of the International Fixed Income Portfolio was successfully carried out, generating capital and funding efficiencies for Credicorp.
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| Traded volume | 2015 | 2016 | 2017 | |||||||||
| Soles in millions | ||||||||||||
| Equity securities – Credicorp Capital Peru 1 | 3,412 | 6,974 | 15,760 | |||||||||
| Fixed income – Credicorp Capital Peru 1 | 2,478 | 6,473 | 11,478 | |||||||||
| Equity securities - Credicorp Capital Colombia 2 | 16,436 | 17,551 | 18,892 | |||||||||
| Fixed income - Credicorp Capital Colombia 2 | 235,029 | 248,338 | 299,423 | |||||||||
| Equity securities – Credicorp Capital Chile 3 | 18,066 | 22,181 | 24,175 | |||||||||
| Fixed income – Credicorp Capital Chile 3 | 111,443 | 74,216 | 98,381 | |||||||||
| (1) | Peru: Lima Stock Exchange information. Fixed Income also includes information from Datatec platform. Does not include repo operations. |
| (2) | Colombia: Colombia Stock Exchange information. Fixed Income also includes Banco de la Republica’s information. Does not consider repo operations. |
| (3) | Chile: Santiago Stock Exchange information. It does not consider repo operations. Fixed Income includes financial intermediation operations. Equity includes operations with investment fund shares and foreign stock. |
(6) Competition
6.1 Banking
6.1.1 Overview
In recent years, several foreign companies have showed interest in entering the Peruvian market while financial companies already in Peru have taken steps to expand operations and develop new businesses.
Throughout 2017, the most relevant events in terms of new entrants or financial institutions that have been granted new licensees are:
| · | In April 2016, the SBS authorized JP Morgan to operate as an investment bank in Peru, commencing operations in March 2017. Over the last 20 years, JP Morgan has had a representative office in Peru and has given counseling to local businesses about the issue of shares in the United States. Now, as an investment bank, it can expand its business in Peru by getting involved in sales and trading of BCRP and Government instruments, as well as foreign exchange trading. |
| · | In June 2017, the SBS authorized the merger by absorption between Los Andes (a rural savings bank from the Peruvian financial system) and Edpyme Solidaridad, merging the latter into the former. This reduces the number of entities in the Peruvian financial system. Additionally, in November 2017, Los Andes bought part of the portfolio from its peer, “La Santa”, increasing its market share even more. |
| · | In August 2017, the SBS authorized the voluntary dissolution and subsequent initiation of the liquidation process of Leasing Peru. In October 2017, Leasing Peru, at the time a member of the Bancolombia Group, approved the distribution of its capital stock and final Income Statement after all of their fixed assets, making the operations closure official. |
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While new entries into the Peruvian banking system over the last three years have not been as pronounced as in previous years, there is evidence that additional foreign-owned banks are taking steps to begin operations in the Peruvian market. For example, Itau Unibanco, Bladex, Morgan Stanley, Bank of Tokyo Mitsubishi and Sumitomo Mitsui Banking opened representative offices in Peru.
6.1.2 Peruvian financial system
On December 31, 2017, the Peruvian financial system consisted of the following principal participants: the Peruvian Central Bank, the SBS, 55 financial institutions and four state-owned banks (not including the Peruvian Central Bank): Banco de la Nacion, COFIDE, Agrobanco and Fondo MiVivienda.
| 2017 | ||||||||||||||||
| Number of entities | Assets | Deposits (Soles in 000) | Loans | |||||||||||||
| Multiple banking | 16 | 371,302,881 | 229,357,835 | 245,551,558 | ||||||||||||
| Financial firms | 11 | 13,327,728 | 6,640,184 | 11,259,514 | ||||||||||||
| Municipal savings banks | 12 | 24,127,028 | 18,872,736 | 19,693,092 | ||||||||||||
| Rural savings banks | 6 | 1,786,580 | 1,095,349 | 1,453,036 | ||||||||||||
| Edpymes | 9 | 2,284,702 | - | 1,993,326 | ||||||||||||
| Leasing companies | 1 | 247,266 | - | 190,607 | ||||||||||||
| Total | 55 | 413,076,185 | 255,966,104 | 280,141,133 | ||||||||||||
| (i) | Multiple banking |
| Major Peruvian Banks | As % of Peruvian Financial System | As % of Multiple Banking | ||||||||||||||||||||||
| as of December 31, 2017 | Assets | Deposits | Loans | Assets | Deposits | Loans | ||||||||||||||||||
| BCP Stand-alone | 31.4 | % | 29.9 | % | 29.5 | % | 34.9 | % | 33.4 | % | 33.6 | % | ||||||||||||
| BBVA Banco Continental | 18.5 | % | 19.0 | % | 18.5 | % | 20.6 | % | 21.2 | % | 21.1 | % | ||||||||||||
| Scotiabank Peru | 14.0 | % | 13.0 | % | 14.7 | % | 15.6 | % | 14.6 | % | 16.8 | % | ||||||||||||
| Interbank | 11.0 | % | 11.8 | % | 10.0 | % | 12.3 | % | 13.1 | % | 11.4 | % | ||||||||||||
| Banco Interamericano de Finanzas | 3.2 | % | 3.5 | % | 3.3 | % | 3.5 | % | 3.9 | % | 3.8 | % | ||||||||||||
| Mibanco | 2.9 | % | 2.9 | % | 3.3 | % | 3.3 | % | 3.2 | % | 3.8 | % | ||||||||||||
As of December 31, 2017, BCP Stand-alone ranked first among all Peruvian banks in terms of assets, deposits and loans.
In 2017, the Peruvian banking system reported a balance of loans of S/164,708 million in local currency and US$24,944 million in foreign currency. These figures represented an annual expansion of loan balances of 2.7% and 11.7%, respectively (5.5% and 2.2%, respectively, from December 31, 2015 to December 31, 2016). As a result, the dollarization of loans reached 32.9% at the end of 2017 (compared to 31.8% in 2016 and 32.9% in 2015). As of December 31, 2017, the total amount of multiple banking deposits was S/229,358 million, which represented a dollarization rate of 42.9% (compared to 47.6% in 2016 and 52.9% in 2015).
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As part of its plan to decrease the dollarization of loans, BRCP established a de-dollarization program that is explained in the “Item 4. Information on the company – 4.B Business overview – (9) Supervision and Regulation – 9.2 BCP and Mibanco - 9.2.7 The Peruvian Central bank monetary and macro prudential policy.”
Peru’s capital ratio (regulatory capital/risk-weighted assets) reached 15.18% as of December 31, 2017, which was above the 10% legal minimum that became effective in July 2011. This represented an increase of 17 basis points from the capital ratio reported at the end of December 2016 (15.01%). In 2016, the ratio increased 84 basis points from the ratio of 14.17% as of December 31, 2015.
Peru’s loan portfolio quality indicators deteriorated in 2017. As of December 31, 2017, internal overdue ratio reached 3.04%, 24 basis points more than the ratio reported as of December 31, 2016 (2.8%). At the end of 2016, the ratio had increased 7 basis points compared to December 31, 2015 (2.54%). Also, the internal overdue, refinanced and re-structured loans over total loans ratio was 4.39% as of December 31, 2017, 37 basis points higher than the figure reported at year-end 2016, 4.02% (3.6% in 2015). Similarly, the coverage ratio of Peru’s internal overdue loan portfolio was 152.6% as of December 31, 2017 (compared to 160.6% as of December 31, 2016 and 166.6% as of December 31, 2015).
Finally, the liquidity of the banking system remained at high and comfortable levels. The local currency liquidity ratio and foreign currency liquidity ratio closed 2017 at 34.3% and 44.9%, respectively (27.4% and 43.9% in 2016; and 26.5% and 46.6% in 2015, respectively). These ratio levels were well above the minimums required by SBS regulations (8% in local currency and 20% in foreign currency).
(ii) Other financial institutions
BCP faced strong competition from credit providers, primarily with respect to consumer loans and SME-Pyme loans. SME-Pyme loan providers lent S/14.9 billion in 2017, compared to the S/12.9 billion in 2016 and S/11.4 billion in 2015. In 2017, overall SME-Pyme loans to customers of other financial institutions represented 21.3% of the total in the financial system (compared to 19% in 2016 and 17.3% in 2015).
Consumer loan providers lent S/10.5 billion in 2017, compared to the S/8.9 billion and S/7.6 billion in 2016 and 2015, respectively. In 2017, overall loans to consumers of other financial institutions represented 19.3% of total loans in the financial system (compared to 17.5% in 2016 and 16.3% in 2015).
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6.2 Investment banking
Credicorp Capital is organized around its three main business units: Asset Management, Sales & Trading and Corporate Finance. In addition, the company has organized a regional business support team, has structured an integrated regional sales force and has a centrally managed Treasury Department.
In the Asset Management business, Credicorp Capital continued to strengthen its proprietary funds with an increasing participation by institutional and retail clients (supported by the development of Wealth Management teams in Colombia and Chile and an already strong team in Peru). As an example of its position, Credicorp Capital maintains its leadership in Mutual Funds Peru with a market share of 40.8% of total market AuMs. Also, the company keeps developing alternative funds in Real Estate, Infrastructure and Private Debt at a regional level, and offers third-party funds from global asset managers to its clients.
In the Sales & Trading business, the brokerage house in Peru reaffirmed its leadership, reaching market shares of 38% and 16%, in equities (1st place) and fixed income (2nd place), respectively (Source: Lima Stock Exchange). In the same way, the brokerage company in Colombia reached the first place among brokers in equities and fixed income with 26% and 23% (Source: Colombia Stock Exchange), respectively. Finally, in Chile, Credicorp Capital reached the 4th place in equities with 9% and a 2nd place in fixed income with a 12% share in proprietary volumes (Source: Santiago Stock Exchange).
In the Corporate Finance business, we maintained a strong position and our teams are recognized in Peru and Chile. Some of the main highlights are the business of Capital Markets and Lending in Peru and M&A and Capital Markets in Chile. Colombia’s team is less known, but there is a growing opportunity to build its reputation as financial advisors for infrastructure projects.
Finally, Credicorp Capital also offers Trust Services to its clients in Peru and Colombia. In Peru, we have a very strong leadership position in fiduciary and custody services to retail and institutional clients, but growth is limited by market size. On the other hand, we still have a very low market share in fiduciary services in Colombia, but it has become a high-growing business.
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6.3 Insurance
The Peruvian insurance market is highly concentrated. As of December 31, 2017, four companies accounted for 84.6% of the market share by premiums, and the leading two had a combined market share of 61.7%. Together, Pacifico Seguros and Pacifico EPS constituted the second largest insurance company in Peru, with a 28.7% market share. Peruvian insurance companies compete principally on the basis of price, as well as on the basis of brand recognition, customer service and product features. Grupo Pacifico’s insurance businesses believe that their competitive pricing, strong and positive image, and quality of customer service are significant aspects of their overall competitiveness. While increased foreign entry into the Peruvian insurance market may put additional pressure on premium rates, particularly for commercial coverage, Grupo Pacifico believes that foreign competition will in the long-term increase the quality and strength of the industry. Grupo Pacifico believes that its size and its extensive experience in the Peruvian insurance market provide it with a competitive advantage over foreign competitors.
However, competition in the Peruvian insurance industry has increased substantially since the industry was deregulated in 1991, with particularly strong competition in the area of large commercial policies, for which rates and coverage typically are negotiated individually. A loss by Grupo Pacifico to competitors of even a small number of major customers or brokers could have a material impact on Grupo Pacifico’s premium levels and market share.
(7) Peruvian government and economy
While we are incorporated in Bermuda, most of BCP and Grupo Pacifico’s operations and customers are located in Peru. On the other hand, although ASHC is based outside of Peru, a substantial number of its customers are also located in Peru. Therefore, the results of our operations and our financial health could be affected by changes in economic or other policies of the Peruvian government. We are also exposed to other types of changes in Peruvian economic conditions, such as the depreciation of the Sol relative to the U.S. Dollar or social unrest related to extractive industries such as mining. The level of economic activity in Peru is also very important for our financial results and the normal conduct of our business.
7.1 Peruvian government
During the past several decades, Peru has had a history of political instability that has included several military coups and multiple government changes. On many occasions, changes in Peru’s government have altered the nation’s economy, financial system, and agricultural sector, among other components of its infrastructure. In 1987, President Alan Garcia attempted to nationalize the banking system, including BCP. At that time, the majority shareholders of BCP sold a controlling interest in BCP to its employees, which prevented the government from assuming control of BCP.
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Beginning in 1990, President Alberto Fujimori implemented a series of market-oriented reforms; since that time, these reforms have largely remained in place. After President Fujimori resigned in November 2000 following a series of corruption cases, a transitional government was arranged and elections were called in April 2001. Alejandro Toledo won the elections and took office that year, maintaining most of the economic policies of the prior decade. In 2006, former president Alan Garcia was elected again and, unlike his first term in the 1980s, maintained the same market-oriented economic policies of prior governments.
In 2011, Ollanta Humala was elected president. While his initial proposals as a candidate were designed to change radically the existing market-oriented policies and move toward a more state-run economy, his first cabinet changed their approach upon taking office, especially after President Humala chose Luis Castilla, who had worked in the previous administration as Deputy Finance Minister, to serve as Minister of Finance. President Humala also decided to ratify the appointment of the Central Bank’s president, Julio Velarde, which was perceived as an attempt to gain confidence from business leaders and financial markets. Both appointments contributed to a recovery in Peru’s investment climate, which had deteriorated during the presidential campaign. Economic growth in 2011 and 2012 reached 6.5% and 6.0%, respectively, and both rates were seen as being in line with the country’s potential output. In 2013, however, the economy’s growth rate decelerated to 5.8% amid concerns about metal prices (especially gold, which fell 28.3% that year), monetary policy in the United States and Chinese growth, which also affected the performance of other emerging markets. In 2014, supply-side shocks in the mining and fishing industries led to a 2.3% contraction in the primary sector, its worst performance since 1992. This added to the pressures of a difficult international environment and as a result the economy grew 2.4%. In 2015, GDP grew 3.3%, as economic activity was boosted by primary sector growth (6.9%). The partial reversal of the supply-side shocks experienced during 2014 and the increase of production capacity in the copper industry due to the result of operations of the mines in Toromocho and Constancia, and the ramp-up of Cerro Verde’s expansion, contributed to the GDP growth in 2015.
In 2016, new presidential elections were held, with a first round on April 10, 2016. A second round between candidates Ms. Keiko Fujimori and Mr. Pedro Pablo Kuczynski was necessary as none of the candidates obtained more than 50% of the valid votes. The second round was held on June 5, 2016, and Pedro Pablo Kuczynski was elected president for the 2016-2021 period with 50.12% of the vote. President Kuczynski, a former Wall Street veteran and World Bank official, was expected to maintain the current economic model. This model includes: (i) maintaining the Constitution and respect for the already signed trade agreements, (ii) bolstering private investment, and (iii) decreasing the extent of the informal economy. Moreover, one of President Kuczynski’s main objectives was for Peru to enter the OECD by 2021. However, President Kuczynski faced a minority in Congress (17 of 130 seats) and political negotiation is a key factor to carry out his political agenda. To compound the difficulties that President Kuczynski faced, in October 2016 Congress granted, for a period of 90 days, legislative powers to the Executive Branch relating to (i) economic recovery and formalization, (ii) administrative simplification, (iii) water and sanitation, (iv) combatting corruption, and (v) citizen security. The Executive Branch enacted a total of 112 legislative decrees under this authority. Moreover, amid the Lava-jato case investigations that started in early 2017, two Presidential Vacancy motions were proposed by Congress. Amid high political turmoil, Pedro Pablo Kuczynski resigned as President and his first vice-president, Martin Vizcarra, took office in March 2018
See “Item 3. Key Information — 3.D Risk Factors — (1) Our geographic location exposes us to risk related to Peruvian political, social and economic conditions.”
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7.2 Peruvian economy
The adoption of market-oriented macroeconomic policies since the early 1990s and a positive outlook for Peru’s economy among international investors has allowed Peru to grow at an average rate of 4.9% since 2000. Peru’s economy even experienced a positive, albeit small, growth rate during the global financial crisis in 2009 (1.0%). In subsequent years, and as international financial conditions improved, growth resumed in most economies, and Peru continued to outperform the global economy, growing 6.0% in 2012 and 5.8% in 2013. In 2014, the economy decelerated and grew 2.4% because of lower international prices for metals, supply-side shocks in the mining, fishing and coffee industries and a contraction of public investment at the subnational level. In 2015, the economy grew 3.3%, at a faster pace compared to 2014 due to the growth in the primary sector (6.9%). In 2016, the economy grew 3.9%, above growth rates for 2015 and 2014, mainly due to the expansion of the mining sector (21.2%) as operations from Las Bambas and Cerro Verde’s expansion reached peak capacity and copper production grew 40.1%. In 2017, GDP grew 2.5% due to the adverse effects of El Niño, the Lava-Jato case and the context of high political noise.
Peruvian economic policy is based on three pillars: trade policy, fiscal policy and monetary policy.
Peru’s has maintained an open trade policy for more than two decades. In 2007, Peru signed a Free Trade Agreement (FTA) with the United States, which went into effect in 2009, and made permanent the special access to the U.S. market previously enjoyed under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). Exports from Peru to the United States were US$6.9 billion in 2017 (15.3% of Peru’s total exports). With the available information, the FTA with United States has not been affected after the U.S. Presidential Election. In terms of bilateral trade, Peru remains as a net importer from the U.S. At the end of 2017, the amount of net imports reached US$824 million and did not represent major competition for the U.S. industrial sector. Another trade agreement was signed with China in 2009 and went into effect in 2011. Exports from Peru to China reached US$11.6 billion in 2017 (25.8% of total exports). In addition, Peru has also signed trade agreements with the European Union, Japan, South Korea, Singapore and Thailand, among others. Within Latin America, Peru has trade agreements with Chile, Colombia and Mexico and is a founding member, along with these countries, of the Alliance of the Pacific. Furthermore, the country is part of the Trans-Pacific Partnership (TPP), a trade agreement involving twelve Pacific Rim countries. However, because the President of the United States has indicated that United States would not ratify the agreement, the state of the TPP remains uncertain.
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In 2017, exports increased 21.3% compared to 2016, to US$44.9 billion. Imports amounted to US$38.7 billion, and grew 10.0% compared to 2016. As a result, the 2017 trade surplus was US$6.3 billion, the highest it has been since 2012. As a result, the current account deficit represented 1.3% of GDP, the lowest in 9 years.
Peruvian policymakers have also maintained an orthodox approach with regards to fiscal policy and government spending. The debt-to-GDP ratio has fallen from 51.1% in 1999 to 24.8% in 2017 as the government cut its spending and privatized some state-run enterprises. The fiscal position has also benefited from the accumulation of surpluses over the major part of the last decade. In 1999, Congress approved the Law of Fiscal Responsibility and Transparency, which includes the following rules: (i) the fiscal deficit cannot exceed 1% of GDP; (ii) spending corresponding to government consumption cannot grow above 4% in real terms; and (iii) in years in which general elections take place, government spending in the first seven months of the year shall not exceed 60% of the budget for such year. In 2013, these measures were further refined, following the best international practices, with the approval of the Law Strengthening Fiscal Responsibility and Transparency, which introduced a structural-guidance approach based on the evolution of structural commodity prices and potential GDP and established that the structural fiscal deficit cannot exceed 1% of GDP. While the 1999 framework helped the country to reduce its debt, the changes introduced in 2013 allow for the implementation of counter-cyclical policy (when a negative output gap of more than 2% of potential GDP exists, the spending limit can be adjusted by, at most, 0.5% of GDP, and corrective measures should be employed once the output gap falls below 2%) and delineates the responsibilities of national, regional and local governments (the latter two can only borrow for investment projects and debt cannot exceed the four-year moving average of annual revenues). In March 2016, Congress approved the bill that establishes the gradual convergence of the structural deficit for 2017 (1.5%, previously 2.5%) and 2018 (1.0%, previously 2.0%). These rules, together with low debt levels and fiscal savings of about 15% of GDP have allowed Peru to not only retain its investment grade status but also to improve its credit rating, standing at BBB+ for S&P as well as Fitch Ratings and A3 for Moody’s.
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The new government introduced changes to the fiscal rules amid the legislative powers granted by Congress to the Executive Branch. The following changes are among the most notable: (i) the migration from a structural framework to a conventional deficit rule, with an expected trajectory of 2.5% of GDP in 2017, 2.3% in 2018, 2.0% in 2019, 1.5% in 2020 and 1.0% in 2021; (ii) the legal limit to public debt of the non-financial public sector is kept at 30% of GDP, but, exceptionally, a deviation of up to 4 bps in cases of financial volatility (and if other fiscal rules are fulfilled) is allowed; (iii) a limit is established for the real growth of non-financial public spending from the General Government. The limit is the upper bound of a 20-year average GDP growth +/- 1bps (the 20-year average includes: the 15 previous years, the estimate for the current year, and forecast for the 4 years ahead); (iv) a limit to the real growth of current spending from the General Government, excluding maintenance expenditure, which is the lower bound of the range referred to in item (iii); and (v) simplification of fiscal rules of subnational governments. After El Niño in 2017, the conventional deficit rule referred to in item (i), was modified in order to comply with the Reconstruction spending assumed by the Government. The new trajectory for the conventional fiscal deficit was set to 3.0% of the GDP in 2017, 3.5% in 2018, 2.9% in 2019, 2.0% in 2020 and 1.0% in 2021.
In 2017, the non-financial public sector reported a deficit equivalent to 3.2% of GDP. Fiscal revenues represented 18.0% of GDP and stood at its minimum level in 14 years. It should be noted, however, that in the fourth quarter of 2017, fiscal revenues of the General Government increased 8.4% YoY in real terms, the highest expansion in 19 quarters due to the improvement in terms of trade. In contrast, after a 10.1% YoY contraction in the first semester of 2017, in the fourth quarter of 2017, public investment of the General Government grew 12.2% YoY in real terms. Hence, in 2017 it registered a 3.3% expansion compared to the -3.1% achieved on 2016. Peru ended 2017 as the only MILA country with an investment grade that holds a stable outlook from the three main Credit Rating Agencies.
In 2016, relying upon legislative powers granted by Congress, the Executive branch established changes on tax measures. Some of the most important decrees in tax measures were: (i) the VAT will be cut from 18% to 17% from July 2017 onwards, provided that government revenues from VAT excluding tax refunds reach 7.2% of GDP by May 2017; (ii) the corporate income tax was increased from 28% to 29.5%, the dividend tax was cut from 6.8% to 5% (this reverted the changes established by the previous administration in which the corporate income tax would be cut gradually and reach 26% by 2019), while additional deductions to the individual income tax were established in Health, Housing Spending, and others; and (iii) tax amnesty was implemented to achieve capital repatriation of non-declared income, with a 10% rate for income that is declared and 7% for capital that is repatriated and invested, among other measures. Regarding item (i), the condition was not met, and the VAT tax rate remains at 18%. Moreover, the tax amnesty of item (iii) enabled fiscal revenues for a total of S/ 1,007 million during 2017.
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The BCRP, which is officially autonomous and presides over a system of reserve banking, is responsible for monetary policy. In 2002, BCRP set an inflation target of 2.5% (+/-1 %), which it later reduced to 2.0% (+/-1%) in 2007. The mid-point of the target range of 2.0% is the lowest in Latin America and reflects the Central Bank’s commitment to price stability. BCRP also has considerable foreign reserves, equivalent to approximately 30% of GDP as of year-end 2017, and other mechanisms to provide liquidity to Peru’s domestic financial system. The Central Bank also sets regulations for the financial system, including pension funds, in coordination with the SBS. Finally, the currency regime in Peru does not have currency controls or barriers to capital inflows but has the Central Bank as an important player in the market, selling or buying foreign currency in order to soften volatility.
During 2017, the Central Bank (BCRP) lowered its reference rate from 4.25% on December 2016 to 3.25% on December 2017, which entails a 100 bps reduction in a year. The stimulus from the monetary authority was in line with annual inflation, which lowered from 4.00% on March 2017 (mainly affected by El Niño’s effect on food prices) to 1.4% on December 2017 (as the supply-side shock reversed). Moreover, economic activity grew consistently below its potential during 2017, which gave space to the BCRP to apply monetary stimulus. In January 2018, the Central Bank made another 25 bps rate cut which took the reference rate to 3.00%, in order to maintain the level of monetary stimulus.
During 2016 the Central Bank increased the minimum percentage for current account deposits in local currency subject to reserve requirements, from 0.75% at the close of 2015 to 1.00% by March 2016, and in 2017 made no changes to this ruling. Moreover, in 2017 the BCRP lowered its reserve requirements in local currency (from 6.5% on December 2016 to 5.0% on April 2017) and in foreign currency (from 70% on December 2016 to 40% on December 2017). The BCRP continued to lower the marginal reserve requirements to 39% on January 2018, 38% on February 2018 and 37% on March 2018.
Inflation in 2017 was 1.4%, below the 3.2% print of 2016 and below the mid-point of the target range (1-3%) of the Central Bank for the first time in 8 years. Similar to 2016, Peru recorded an inflation rate lower than that observed in other countries in the region (Mexico: 6.8%, Colombia: 4.1%, Brazil: 3.0%, Chile: 2.3%). Also, at the end of 2017, the exchange rate was at S/ 3.241 per U.S. Dollar, which represents an annual appreciation of 3.5%. This represented the second consecutive year of appreciation for the Sol in a context were the price of copper increased 32% and the trade balance surplus reached a maximum level since 2012. Moreover, the Central Bank made net purchases for US$ 5.2 billion, the highest amount since 2012, in order to reduce appreciation pressures on the Sol.
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Also, in 2016, the Central Bank lowered its outstanding FX swaps (sales) from a maximum of S/34.4 billion in February 2016 to S/0.5 billion at the close of 2016. By January 2017, the outstanding FX swaps (sales) was null.
(8) The Peruvian financial system
As our activities are conducted primarily through banking and insurance subsidiaries operating in Peru, a summary of the Peruvian financial system is set forth below.
8.1 General
Peruvian Law No. 26702 (“Peruvian Banking Law” or “Law No. 26702”) regulates Peruvian financial and insurance companies. In general, it provides for loan loss reserve standards, brings asset risk weighting in line with Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (or the Basel Accord) guidelines, broadens supervision of financial institutions by the SBS to include holding companies, and includes specific treatment of a series of recently developed products in the capital markets and derivatives areas.
8.2 The Peruvian Central Bank
The Peruvian Central Bank was established in 1922. Pursuant to the Peruvian Constitution, its primary role is to ensure the stability of the Peruvian monetary system. The Peruvian Central Bank regulates Peru’s money supply, administers international reserves, issues currency, determines Peru’s balance of payments and other monetary accounts, and furnishes information regarding the country’s financial situation. It also represents the government of Peru at the IMF and the Latin American Reserve Fund (a financial institution whose purpose is to provide balance of payments assistance to its member countries by granting credits or guaranteeing loans to third parties).
The highest decision-making authority within the Peruvian Central Bank is its seven-member board of directors. Each director serves a five-year term. Of the seven directors, four are selected by the executive branch and three are selected by the Congress. The Chairman of the Peruvian Central Bank is one of the executive branch nominees but must be approved by Peru’s Congress.
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The Peruvian Central Bank’s board of directors develops and oversees monetary policy, establishes reserve requirements for entities within the financial system, and approves guidelines for the management of international reserves. All entities within the financial system are required to comply with the decisions of the Peruvian Central Bank.
8.3 The Superintendency of banks, insurance and pension funds (SBS)
The SBS, whose authority and activities are discussed in “—(9) Supervision and Regulation” is the regulatory authority in charge of implementing and enforcing Law No. 26702 and, more generally, supervising and regulating all financial, insurance and pension fund institutions in Peru.
In June 2008, Legislative Decree 1028 and 1052 were approved modifying Law No. 26702 with the following objectives: (i) to strengthen and to increase competitiveness, (ii) to implement Basel II and (iii) to adapt Peru’s existing regulatory framework to the FTA signed between Peru and the United States.
The main amendments defined in Law No. 1028 were designed to promote the development of Peruvian capital markets by extending the range of financial services that could be offered by microfinance institutions (i.e., non-banks) without requiring SBS authorization. Law No. 1028 also modified the framework in which the Peruvian financial system is to be harmonized with the international standards established by the Basel II Accord (which aims to minimize the issues regarding regulatory arbitrage). Since July 2009, Peruvian financial institutions generally have applied a standardized method to calculate their capital requirement related to credit, market and operational risk. As an alternative to the standardized method, financial institutions may request authorization from the SBS to use different models for calculating the reserve amount associated with any of these three risks. In July 2009, the SBS started receiving applications to use alternative models, referred to as Internal Models Methods. If the amount of an institution’s reserve requirements would be higher using the standard model than it would be using the approved Internal Models Method, then the institution will have to maintain between 80% and 95% of the standard amount during a phase-in period. Even after the phase-in period, institutions using an Internal Models Method will be subject to regulatory capital floors.
Law No. 1052 aims to include and synchronize Law No. 26702 and the FTA’s framework, particularly regarding insurance services. The amendments allow companies to offer cross-border services and have simplified the process for international institutions to enter into the Peruvian market by establishing subsidiaries.
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8.4 Financial system institutions
Under Peruvian law, financial institutions are classified as banks, financing companies, other non-banking institutions, specialized companies and investment banks. BCP is classified as a bank.
8.4.1 Banks
A bank is defined by Law No. 26702 as an enterprise whose principal business consists of (i) receiving money from the public, whether by deposits or by any other form of contract, and (ii) using such money (together with the bank’s own capital and funds obtained from other sources) to grant loans or discount documents, or in operations that are subject to market risks.
Banks are permitted to carry out various types of financial operations, including the following:
| (i) | receiving demand deposits, time deposits, savings deposits and deposits in trust; |
| (ii) | granting direct loans; |
| (iii) | discounting or advancing funds against bills of exchange, promissory notes and other credit instruments; |
| (iv) | granting mortgage loans and accepting bills of exchange in connection with the mortgage loans; |
| (v) | granting conditional and unconditional guaranties; |
| (vi) | issuing, confirming, receiving and discounting letters of credit; |
| (vii) | acquiring and discounting certificates of deposit, warehouse receipts, bills of exchange and invoices of commercial transactions; |
| (viii) | performing credit operations with local and foreign banks, as well as making deposits in those institutions; |
| (ix) | issuing and placing local currency and foreign currency bonds, as well as promissory notes and negotiable certificates of deposits; |
| (x) | issuing certificates in foreign currency and entering into foreign exchange transactions; |
| (xi) | purchasing banks and non-Peruvian institutions which conduct financial intermediation or securities exchange transactions in order to maintain an international presence; |
| (xii) | purchasing, holding and selling gold and silver as well as stocks and bonds listed on one of the Peruvian stock exchanges and issued by companies incorporated in Peru; |
| (xiii) | acting as financial agent for investments in Peru for external parties; |
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| (xiv) | purchasing, holding and selling instruments evidencing public debt, whether internal or external, as well as obligations of the Peruvian Central Bank; |
| (xv) | making collections, payments and transfers of funds; |
| (xvi) | receiving securities and other assets in trust and leasing safety deposit boxes; and |
| (xvii) | issuing and administering credit cards and accepting and performing trust functions. |
In addition, banks may carry out financial leasing operations by forming separate departments or subsidiaries. Banks may also promote and direct operations in foreign commerce, underwrite initial public offerings, and provide financial advisory services apart from the administration of their clients’ investment portfolios. By forming a separate department within the bank, a bank may also act as a trustee for trust agreements.
Law No. 26702 authorizes banks to operate, through their subsidiaries, warehouse companies and securities brokerage companies. Banks may also establish and administer mutual funds.
Peruvian branches of foreign banks enjoy the same rights and are subject to the same obligations as Peruvian banks. Multinational banks, with operations in various countries, may perform the same activities as Peruvian banks, although their foreign activities are not subject to Peruvian regulations. To carry out banking operations in local Peruvian markets, multinational banks must maintain a certain portion of their capital in Peru, in at least the minimum amount that is required for Peruvian banks.
8.4.2 Finance companies
Under Law No. 26702, finance companies are authorized to carry out the same operations as banks, with the exception of (i) issuing loans as overdrafts in checking accounts and (ii) participating in derivative operations. These operations can be carried out by finance companies only if they fulfill the requirements stated by the SBS.
8.4.3 Other financial institutions
The Peruvian financial system has a number of less significant entities which may provide credit, accept deposits or otherwise act as financial intermediaries on a limited basis. Leasing companies specialize in financial leasing operations where goods are leased over the term of the contract and in which one party has the option of purchasing the goods at a predetermined price. Savings and loans associations or cooperatives may accept certain types of savings deposits and provide other similar financial services.
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Peru also has numerous mutual housing associations, municipal savings and credit associations, savings and credit cooperatives and municipal credit bureaus. Over the past five years the entry of new participants, including foreign banks and non-bank financial institutions, has increased the level of competition in Peru.
8.4.4 Insurance companies
Since the Peruvian insurance industry was deregulated in 1991, insurance companies have been authorized to conduct all types of operations and to enter into all forms of agreements that are needed to offer risk coverage to customers. Insurance companies may also invest in financial and non-financial assets, although they are subject to the regulations on investments and reserves established in Law No. 26702 and the regulations issued by the SBS.
Law No. 26702 is the principal law governing insurance companies in Peru. The SBS is charged with the supervision and regulation of all insurance companies. The formation of an insurance company requires prior authorization of the SBS. The insurance industry was comprised of 21 companies as of December 31, 2017.
(9) Supervision and regulation
9.1 Credicorp
Currently, there are no applicable regulations under Bermuda Law that are likely to materially impact our operations as they are currently structured. Under Bermuda law, there is no regulation applicable to us as a holding company that would require that we separate the operations of our subsidiaries incorporated and existing outside Bermuda. Because our activities are conducted primarily through our subsidiaries in Peru, the Cayman Islands, Bolivia, Chile, Colombia and Panama, a summary of the main regulations governing our businesses is set forth below.
Our common shares are listed on the New York Stock Exchange (NYSE). We are therefore subject to regulation by the NYSE and the SEC as a “foreign private issuer”. We also must comply with the Sarbanes-Oxley Act of 2002.
We are, along with BCP, subject to certain requirements set forth by Law 26702 as well as certain banking statutes issued by the Peruvian banking regulator, SBS, including SBS Resolution No. 11823-2010, enacted in September 2010 and which approved the “Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates”. Resolution N° 11823-2010 was partially amended by Resolution N° 2945-2013 enacted in May 2013. These regulations affect BCP and us primarily in the areas of reporting, risk control guidelines, limitations, ratios and capital requirements.
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Since our common shares are listed on the Lima Stock Exchange in addition to the New York Stock Exchange, we are subject to certain reporting requirements to Superintendencia del Mercado de Valores, the Peruvian securities market regulator, and the Lima Stock Exchange. See “Item 9. The Offer and Listing — 9.C Markets — (1) The Lima Stock Exchange – 1.2 Market Regulation”.
9.2 BCP and Mibanco
9.2.1 Overview
BCP and Mibanco’s operations are regulated by Peruvian law. The regulations governing operations in the Peruvian financial sector are stated in Law 26702. The SBS periodically issues resolutions under Law 26702. See “Item 4. Information on the Company – 4.B Business Overview – (8) The Peruvian Financial System”. The SBS supervises and regulates entities that Law 26702 classifies as financial institutions. These entities include commercial banks, finance companies, small business finance companies, savings and loan corporations, financial services companies such as trust companies and investment banks, and insurance companies. Financial institutions must obtain the SBS’s authorization before beginning operations.
BCP and Mibanco’s operations are supervised and regulated by the SBS and the Peruvian Central Bank. Those who violate Law 26702 and its underlying regulations are subject to administrative sanctions and criminal penalties. Additionally, the SBS and the Peruvian Central Bank have the authority to issue fines to financial institutions and their directors and officers if they violate the laws or regulations of Peru, or their own institutions’ Bye-laws.
The SMV is the Peruvian government institution in charge of: (i) promoting the securities market, (ii) making sure fair competition takes place in the securities markets, (iii) supervising the management of businesses that trade in the securities markets, and (iv) regulating their activities and accounting practices. BCP and Mibanco must inform SMV of significant events that affect its business and is required to provide financial statements to it and the Lima Stock Exchange each quarter. Both institutions are also regulated by SMV when it conducts operations in the local Peruvian securities market.
Under Peruvian law, banks may conduct brokerage operations and administer mutual funds but must do so through subsidiaries. However, bank employees may market the financial products of the bank’s brokerage and mutual fund subsidiaries. Banks are prohibited from issuing insurance policies, but are not prohibited from distributing insurance policies issued by insurance companies.
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9.2.2 Authority of the SBS
Peru’s Constitution and Law 26702 (which contains the statutory charter of the SBS) grant the SBS the authority to oversee and control banks and financial institutions (with the exception of brokerage firms, which are regulated by SMV), insurance and reinsurance companies, companies that receive deposits from the general public, AFPs and other similar entities as defined by Law 26702. The SBS is also responsible for supervising the Peruvian Central Bank to ensure that it abides by its statutory charter and Bye-laws.
The SBS has administrative, financial and operating autonomy. Its objectives include protecting the public interest, ensuring the financial stability of the institutions over which it has authority and punishing violators of its regulations. Its responsibilities include: (i) reviewing and approving, with the assistance of the Peruvian Central Bank, the establishment and organization of subsidiaries of the institutions it regulates; (ii) overseeing mergers, dissolutions and reorganization of banks, financial institutions and insurance companies; (iii) supervising financial, insurance and related companies from which information on an individual or consolidated basis is required, through changes in ownership and management control (this supervision also applies to non-bank holding companies, such as us); (iv) reviewing the Bye-laws and amendments of Bye-laws of these companies; (v) issuing criteria governing the transfer of bank shares, when permitted by law, for valuation of assets and liabilities and for minimum capital requirements; and (vi) controlling the Bank’s Risk Assessment Center, to which all banks are legally required to provide information regarding all businesses and individuals with whom they deal without regard to the amount of credit risk (the information provided is made available to all banks to allow them to monitor individual borrowers’ overall exposure to Peru’s banks). The SBS is also responsible for setting criteria for the establishment of financial or mixed conglomerates in Peru and for supervising these entities. As a result, in addition to its supervision of BCP and Mibanco, the SBS also supervises Credicorp Ltd. because Credicorp Ltd. is a financial conglomerate conducting the majority of its operations in Peru.
9.2.3 Management of operational risk
SBS Resolution No. 37-2008, which sets forth the guidelines for enterprise risk management (ERM), and 2116-2009 collectively established guidelines for operational risk management. Under these resolutions, operational risk management is defined broadly to include those risk resulting from the possibility of suffering financial losses due to inadequate or failed internal processes, people and systems, or from adverse external events. The resolutions also establish responsibilities for developing policies and procedures to identify, measure, control and report such risks. Banks are required to manage risks involved in the performance and continuity of their operations and services adequately in order to minimize possible financial losses and reputation damage due to inadequate or non-existent policies or procedures. Banks also are required to develop an information security model to guarantee physical and logical information integrity, confidentiality and availability. On April 1, 2018, SBS Resolution N° 37-2008 has been replaced by SBS Resolution N° 272-2017.
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Credicorp, following these SBS requirements, as well as the guidelines issued by the Basel Committee on Banking Supervision, and the advice of international consultants, has appointed a specialized team responsible for operational risk management across our organization. This team reports regularly to our risk committee, top managers and the Board of Directors.
In evaluating operational risks and potential consequences, we mainly assess risks related to critical processes, critical suppliers, critical information assets, technological components, new products and significant changes to our services, and channels. To support the operational risk management process, we have developed a Business Continuity Management (BCM) discipline, which involves the implementation of continuity plans for critical business processes, incident management, and training and testing. In addition, our methodology and data processing team has developed procedures to register, collect, analyze and report operational risk losses, using advanced models for operational risk capital allocation. Lastly, we have monitoring and reporting procedures, designed to monitor Key Risk Indicators (KRI) and other performance metrics.
We intend to be guided by the risk control standards of international financial institutions that are noted for their leadership in this field. Our overall objective is to implement an efficient and permanent monitoring system to control operational risks, while training our operational units to mitigate risks directly.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to make certain certifications regarding our internal controls over financial reporting as of December 31, 2017. We have developed internal methods to identify and evaluate risk and controls over our critical processes to determinate how effective internal controls are over financial reporting using the COSO 2013 Internal Control Framework.
9.2.4 Capital adequacy requirements for BCP and Mibanco
Capital adequacy requirements applicable to us are set forth in the Law No. 26702 through Legislative Decree 1028. Legislative Decree 1028 was aimed at adapting Law No. 26702 to the capital guidelines and standards established by the second Basel Accord (Basel II). Capital adequacy requirements are also included in Peruvian GAAP accounting guidelines. Pursuant to the Basel II guidelines, financial institutions are required to hold regulatory capital that is greater than or equal to the sum of (i) 10% of credit risk-weighted assets, and (ii) 10 times the amount required to cover market and operational risks.
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On July 20, 2011, the SBS issued SBS Resolution 8425-2011, establishing the methodologies and the implementation schedule of additional capital requirements consistent with certain aspects of Basel III, which is a comprehensive set of reform measures, developed by the SBS, to strength the regulation, supervision and risk management of the banking sector. The new capital requirements include requirements to cover concentration, interest rate and systemic risk. Additionally, pro-cyclical capital requirements were established. These additional requirements were fully implemented in July 2016.
Article 184 of Law No. 26702, as amended by Legislative Decree 1028, provides that regulatory capital may be used to cover credit risk, market risk and operational risk. Regulatory capital is comprised of the sum of basic capital and supplementary capital, and is calculated as follows:
| • | Basic Capital: Basic Capital or Tier 1 capital is comprised of: |
| (i) | paid-in-capital (which includes common stock and perpetual non-cumulative preferred stock), legal reserves, supplementary capital premiums, voluntary reserves distributable only with prior SBS approval, and retained earnings with capitalization agreements (earnings that the shareholders or our Board of Directors, as the case may be, have committed to capitalize as common stock); |
| (ii) | other elements that have characteristics of permanence and loss absorption that are in compliance with regulations enacted by the SBS, such as hybrid securities; and |
| (iii) | unrealized gains and retained earnings in Subsidiaries. |
Items deducted from Tier 1 capital include:
| (a) | current and past years’ unrealized losses; |
| (b) | deficits of loan loss provisions; |
| (c) | goodwill resulting from corporate reorganizations or acquisitions; and |
| (d) | half of the amount referred to in “Deductions” below. Absent any Tier 2 capital, 100% of the amount referred to in “Deductions” below must be deducted from Tier 1 capital. |
The elements referred to in item (ii) above should not exceed 17.65% of the amount resulting from adding components (i) and (iii) of Tier 1 capital net of the deductions in (a), (b) and (c) in this paragraph.
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| • | Supplementary Capital: Supplementary capital is comprised of the sum of Tier 2 and Tier 3 capital. Tier 2 capital elements include: |
| (i) | voluntary reserves that may be reduced without prior consent from the SBS; |
| (ii) | the eligible portion of redeemable subordinated debt and of any other components that have characteristics of debt and equity as provided by the SBS; |
| (iii) | for banks using the Standardized Approach Method (SAM), the generic loan loss provision up to 1.25% of credit risk-weighted assets; or, alternatively, for banks using the IRB Method, the generic loan loss provision up to 0.6% of total credit risk-weighted assets (pursuant to article 189 of the Law); and |
| (iv) | half of the amount referred to in “Deductions” below. Tier 3 capital is comprised of redeemable subordinated debt that is incurred with the exclusive purpose of covering market risk, as referred to in Article 233 of the Law. |
| • | Deductions: The following elements are deducted from Tier 1 and Tier 2 capital: |
| (i) | all investments in shares and subordinated debt issued by other local or foreign financial institutions and insurance companies; |
| (ii) | all investments in shares and subordinated debt issued by an affiliate with which the bank consolidates its financial statements, including its holding company and such subsidiaries referred to in Articles 34 and 224 of the Law; |
| (iii) | the amount in which an investment in shares issued by a company with which the bank does not consolidate its financial statements and which is not part of the bank’s negotiable portfolio exceeds 15% of the bank’s regulatory capital; |
| (iv) | the aggregate amount of all investments in shares issued by companies with which the bank does not consolidate its financial statements and which are not part of the bank’s negotiable portfolio exceeds 60% of the regulatory capital; |
| (v) | when applicable, the amount resulting from the formula prescribed in Article 189 of the Law. |
| (vi) | unrealized gains and retained earnings in Subsidiaries. |
For the purposes herein, “regulatory capital” excludes the amounts referred to in (iii), (iv) and (v) of this paragraph.
Article 185 of Law No. 26702 also provides that the following limits apply when calculating regulatory capital:
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| (i) | the aggregate amount of supplementary capital must not exceed the aggregate amount of basic capital; |
| (ii) | the amount of redeemable Tier 2 subordinated instruments must be limited to 50% of the amount resulting from the sum of Tier 1 elements net of the deductions in (a), (b), and (c) in “Basic Capital” above; |
| (iii) | the amount of Tier 3 capital must be limited to 250% of the amount resulting from the sum of Tier 1 elements net of the deductions (a), (b), and (c) in “Basic Capital” above in the amounts assigned to cover market risk. |
SBS Resolution 8548-2012, adopted in 2012, modified the regulatory capital requirements for credit risk weighted assets in SBS Resolution 14354-2009 and established a schedule for implementing the modifications.
As of December 31, 2017, BCP’s regulatory capital was 15.05% of its unconsolidated risk-weighted assets. As of December 31, 2016 and December 31, 2015, BCP’s regulatory capital was 15.35% and 14.34% of its unconsolidated risk-weighted assets, respectively.
In November 2013, BCP’s board of directors decided to track a Basel III ratio known as Common Equity Tier 1. Common Equity Tier 1 is comprised of:
| (i) | paid-in-capital (which includes common stock and perpetual non-cumulative preferred stock), |
| (ii) | legal and other capital reserves, |
| (iii) | accumulated earnings, |
| (iv) | unrealized profits (losses), |
| (v) | deficits of loan loss provisions, |
| (vi) | intangibles, |
| (vii) | net deferred taxes that rely on future profitability, |
| (viii) | goodwill resulting from corporate reorganizations or acquisitions; and |
| (ix) | 100% of the amount referred to in “Deductions” above. |
As of December 31, 2017, BCP’s Common Equity Tier 1 Ratio was 11.83% of its unconsolidated risk-weighted assets, well above the 10.50% limit that BCP set for itself. This limit was approved in March 2017 by the BCP’s Risk Committee and is part of the Risk Appetite framework. BCP’s Basel III Common Equity Tier 1 Ratio is estimated based on BCP’s understanding, expectations and interpretation of the proposed Basel III requirements in Peru.
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Capital management
On February 24, 2016, SBS issued Resolution 975 -2016 - “Subordinated Debt Regulation”, which aims to improve the quality of the total regulatory capital and align Peruvian regulation towards Basel III, by modifying:
| · | The characteristics that subordinated debt must meet to be considered in the calculation of total regulatory capital: and |
| · | The calculation of risk-weighted assets |
The new regulation considers that subordinated debt issued prior to the new regulation and that does not meet the new requirements, may be recognized as total regulatory capital, according to the following:
| · | Tier 1 subordinated debt: as of January 2017, and for ten (10) years that follow, Tier 1 subordinated debt is subject to a 10% discount. However, the amount not computable as Tier 1 regulatory capital may be computed as a Tier 2 instrument, if it has a residual maturity equal to or greater than fifteen (15) years. |
As of December 2017, BCP’s Tier 1 subordinated debt (issued in 2009) totals S/. 729 million, and matures in 2069. Thus, as of January 2018, the amount to be discounted from Tier 1 regulatory capital is now eligible in Tier 2 regulatory capital.
| · | Tier 2 subordinated debt: during the five (5) years prior to maturity, the principal balance will be discounted by 20%. In the year prior to its maturity the tier 2 subordinated debt will not be considered in the calculation of Tier 2. This treatment is similar to that stipulated in the current regulation. As a result, there will be no impact in Tier 2 subordinated debt computed in December 2017. |
In addition, the SBS Resolution also includes changes to the calculation of risk-weighted assets (RWAs) of the following accounting items:
| · | Intangible (excluding Goodwill); |
| · | Deferred Tax Assets (DTAs) that are originated by operating losses. Deferred Tax Assets are to be net of Deferred Income Tax Liabilities (DTLs); and |
| · | Deferred Tax Assets (DTAs) that are associated with temporary differences and that exceed the threshold of 10% of the “adjusted total capital”. Deferred Tax Assets are to be net of Deferred Tax Liabilities (DTLs). |
These assets will experience a gradual increase in their risk weights (until they reach a maximum of 1000% in 2026) to replicate the deductions established by Basel III. It is important to highlight that these increases in risk weights are not associated with a higher level of risk in these assets. These RWAs will be used exclusively for calculating the BIS ratio.
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Furthermore, the new regulation requires the calculation of a new solvency ratio: Adjusted total capital on adjusted total risk weight assets. This methodology is similar to that which is used to calculate the Common Equity Tier 1 ("CET1") ratio under Basel III. As a result, the accounting items mentioned above are deducted from the numerator of the new solvency ratio, and the calculation of RWAs (the denominator) does not consider these deductions. As of December 2017, the CET1 ratio was 11.83%. This ratio will not change because it is already calculating using adjusted total risk weight.
Finally, for transparency purposes and to demonstrate the calculation of the CET1 ratio, Credicorp will periodically publish the Adjusted Total RWAs.
Regulatory capital information for BCP and Mibanco as of December 31, 2015, 2016 and 2017
| BCP Stand-alone- Regulatory Capital and Capital Adequacy Ratios | ||||||||||||
| Soles in thousands | 2015 | 2016 | 2017 | |||||||||
| Capital stock | 5,854,051 | 7,066,346 | 7,933,342 | |||||||||
| Legal and other capital reserves | 3,157,906 | 3,582,218 | 3,885,494 | |||||||||
| Accumulated earnings with capitalization agreement | 600,000 | - | - | |||||||||
| Loan loss reserves (1) | 1,146,571 | 1,181,200 | 1,234,999 | |||||||||
| Perpetual subordinated debt | 852,750 | 839,000 | 729,225 | |||||||||
| Subordinated debt | 4,588,342 | 4,520,406 | 3,978,406 | |||||||||
| Unrealized profit (loss) | - | - | - | |||||||||
| Investment in subsidiaries and others | (1,922,061 | ) | (1,513,593 | ) | (1,587,715 | ) | ||||||
| Unrealized profit and net income in subsidiaries | 334,132 | 305,624 | 346,656 | |||||||||
| Goodwill | (122,083 | ) | (122,083 | ) | (122,083 | ) | ||||||
| Total Regulatory Capital | 14,489,608 | 15,859,118 | 16,398,324 | |||||||||
| Tier 1 (2) | 9,715,725 | 10,761,497 | 11,805,448 | |||||||||
| Tier 2 (3) + Tier 3 (4) | 4,773,882 | 5,097,621 | 4,592,875 | |||||||||
| Total risk-weighted assets | 101,068,772 | 103,350,373 | 108,950,141 | |||||||||
| Market risk-weighted assets (5) | 2,047,887 | 745,539 | 1,391,099 | |||||||||
| Credit risk-weighted assets | 91,725,676 | 94,495,998 | 98,799,888 | |||||||||
| Operational risk-weighted assets | 7,295,209 | 8,108,836 | 8,759,154 | |||||||||
| Capital ratios | ||||||||||||
| Tier 1 ratio (6) | 9.61 | % | 10.41 | % | 10.84 | % | ||||||
| Common Equity Tier 1 ratio (7) | 9.34 | % | 11.08 | % | 11.83 | % | ||||||
| BIS ratio (8) | 14.34 | % | 15.35 | % | 15.05 | % | ||||||
| Risk-weighted assets / Regulatory Capital (9) | 6.98 | 6.52 | 6.64 | |||||||||
(1) Up to 1.25% of total risk-weighted assets.
(2) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + 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 Investment in subsidiaries).
(4) Tier 3 = Subordinated debt covering market risk only.
(5) It includes capital requirement to cover price and rate risk.
(6) Tier 1 / Risk-weighted assets
(7) Common Equity Tier I = Capital + Reserves + retained earnings + unrealized gains – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability).
(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 * 1.0 (since July 2014).
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| Mibanco - Regulatory Capital and Capital Adequacy Ratios | ||||||||||||
| Soles in thousands | 2015 | 2016 | 2017 | |||||||||
| Total Regulatory capital | 1,314,456 | 1,461,472 | 1,453,361 | |||||||||
| Tier 1 (1) | 992,812 | 1,054,084 | 1,085,350 | |||||||||
| Tier 2 (3) | 321,644 | 407,388 | 368,011 | |||||||||
| Total risk-weighted assets | 8,582,380 | 9,403,959 | 9,516,019 | |||||||||
| Market risk-weighted assets (3) | 8,157,047 | 8,895,164 | 8,933,974 | |||||||||
| Credit risk-weighted assets | 82,024 | 98,437 | 59,904 | |||||||||
| Operational risk-weighted assets | 343,309 | 410,358 | 522,141 | |||||||||
| Capital ratios | ||||||||||||
| Tier 1 ratio (4) | 11.57 | % | 11.21 | % | 11.41 | % | ||||||
| Common Equity Tier 1 ratio (5) | 12.08 | % | 14.46 | % | 14.92 | % | ||||||
| BIS ratio (6) | 15.32 | % | 15.54 | % | 15.27 | % | ||||||
| Risk-weighted assets/Regulatory Capital(7) | 6.53 | 6.43 | 6.55 | |||||||||
(1) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + 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).
(2) Tier 2 = Subordinated debt + Loan loss reserves - (0.5 x Investment in subsidiaries).
(3) It includes capital requirement to cover price and rate risk.
(4) Tier 1 / Risk-weighted assets
(5) Common Equity Tier I = Capital + Reserves + retained earnings + unrealized gains – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability).
(6) Regulatory Capital / Risk-weighted assets (legal minimum = 10% since July 2011)
(7) 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 * 1.0 (since July 2014).
9.2.5 Legal reserve requirements
In accordance with Peruvian regulation -article 67 of Law No. 26702- a reserve of up to at least 35% of paid-in capital of the Group’s subsidiaries operating in Peru is required to be established through annual transfers of at least 10% of their net income. In accordance with Bolivian regulation, a reserve of up to at least 50% of paid-in capital of the Group’s subsidiaries operating in Bolivia is required to be established through annual transfers of at least 10% of their net income. As of December 31, 2017, 2016, and 2015, these reserves amounted to approximately S/4,480.3 million, S/3,987.5 million and S/2,996.7 million, respectively.
9.2.6 Provisions for loan losses
Credicorp’s allowance model is an IFRS compliant loss estimation model that comprises a number of methodologies which estimate losses for Wholesale Banking and Retail Banking in line with IAS39. Depending on the portfolio analyzed, each methodology takes into consideration collateral recovery projections, outstanding debt, and qualitative aspects that reinforce the estimate. Some examples of qualitative aspects are the complexity of the recovery processes, sector trends, and officers’ judgment of the estimated recovery values.
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The methodology includes three estimation scenarios: base, upper threshold and lower threshold. These scenarios are generated by modifying some assumptions, such as collateral recovery values and adverse effects due to changes in the political and economic environments. The process to select the best estimate within the range is based on management’s best judgment, complemented by historical loss experience. See “Item 4. Information on the Company - 4.B Business Overview - (10) Selected Statistical Information - 10.3 Loan Portfolio - 10.3.12 Allocation of Loan Loss Reserves”.
9.2.7 The Peruvian central bank monetary and macroprudential policy
The reference interest rate is periodically revised by the Peruvian Central Bank in accordance with its monetary policy objectives. Once a month the board of directors of the Peruvian Central Bank approves and announces the monetary program through a press release. The following chart summarizes the reference interest rate changes in 2015, 2016 and 2017:
| Changes in BCRP's reference interest rate | ||||
| Month | Rate | |||
| July 2014 | 3.75 | % | ||
| September 2014 | 3.50 | % | ||
| January 2015 | 3.25 | % | ||
| September 2015 | 3.50 | % | ||
| December 2015 | 3.75 | % | ||
| January 2016 | 4.00 | % | ||
| February 2016 | 4.25 | % | ||
| May 2017 | 4.00 | % | ||
| July 2017 | 3.75 | % | ||
| September 2017 | 3.50 | % | ||
| November 2017 | 3.25 | % | ||
The tightening of the Peruvian Central Bank’s monetary policy up to February 2016 intended to anchor inflation expectations within the target range, which ranges from 1% to 3%, in a context where inflation closed at 4.40% in 2015. Thereafter, the Central Bank’s monetary policy rate remained at 4.25% amid the expectation that inflation would lower towards the target range.
Inflation accelerated from 3.2% by December 2016 to 4.0% in March 2017 due to El Niño’s effect on food prices. However, as the supply-side shock reversed, inflation closed 2017 at 1.4% and economic activity grew below its potential during 2017. In such context, the BCRP lowered its reference rate to prove monetary stimulus for economic activity.
Under Law No. 26702, banks and financial institutions are required to maintain legal reserve requirements for certain obligations. The Peruvian Central Bank requires financial institutions to maintain marginal reserve requirements for foreign currency obligations and sets the exact level and method of calculation of such requirement. The reserve requirements in Peru apply to obligations such as demand and time deposits, savings accounts, securities, certain bonds and funds administered by banks. Additionally, the Peruvian Central Bank requires reserves on amounts due to foreign banks and other foreign financial institutions. Furthermore, as of January 2011, obligations of foreign subsidiaries and affiliates are also subject to the reserve requirement.
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For 2015, the Peruvian Central Bank set the minimum level of reserves for banks at 6.5% for local currency and 9.0% for foreign currency. However, the Peruvian Central Bank also establishes a marginal reserve requirement of 70.0% in foreign currency for funds that exceed a certain level set by the Central Bank. Foreign currency cannot be used to comply with reserve requirements for liabilities in domestic currency, and vice versa. The Peruvian Central Bank oversees compliance with the reserve requirements.
During 2017, the Peruvian Central Bank lowered the local currency reserve requirement rate (from 6.5% on December 2016 to 5.0% on April 2017) and lowered the foreign currency marginal reserve requirement rate (from 70% on December 2016 to 40% on December 2017). The BCRP continued to lower the marginal reserve requirements to 39% in January 2018, 38% in February 2018 and 37% in March 2018. According to the Peruvian Central Bank, this reduction in rates aims to maintain flexible credit conditions considering decreasing demands for loans and increasing external rates. By December 2017, the commercial banks average reserve requirement ratio for foreign currency was 36.6%.
In addition to overall changes in reserve requirements, in 2016 the Central Bank increased the minimum for current account deposits in local currency subject to reserve requirements, from 0.75% at the close of 2015 to 1.00% by March 2016. No further changes were made to this ruling in 2017.
In order to offset the excessive pressure of the derivatives market on the domestic currency, the Central Bank adjusted additional reserve requirements in Soles according to the level of bank’s forwards contracts involving foreign currencies. Moreover, the Central Bank established a program aimed at contributing to the de-dollarization of credit to reduce the risks to economic agents associated with borrowing in foreign currency in light of the depreciation observed in 2014 (6.8%) and 2015 (14.6%). Thus, additional reserve requirements of 30% were established for loans in foreign currency to increase their cost. Particularly, the program seeks that banks reduce their balances of loans in Dollars: (i) the balance of a bank’s total loans (excluding loans for foreign trade and loans issued for more than 3 years for amounts that exceed US$ 10 million) at December 2016 was required to be equal to 80% of the balance recorded in September 2013 (90% of the same balance at December 2015) and (ii) the balance of a bank’s car and mortgage loans at December 2016 was required to be equal to 70% of the balance in February 2013 (85% of the same balance at December 2015). Thereafter, the reduction for car and mortgage loans will increase by 10% at the end of each year. No further changes were made to this ruling in 2017. In the case of FC total loans, the reduction target is calculated based on period-end balances (in Peru GAAP) as of September 2013. The reduction target for the joint portfolio of mortgage and car loans was calculated with period-end balances (in Peru GAAP) as of February 2013. However, compliance levels for both targets are calculated using average daily balances.
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In such context, in 2017 BCP achieved the total loans in foreign currency target, but came short of the car and mortgage loans target:
| (i) | By December 2017, the total loans in dollars (excluding loans for foreign trade operations) were 77.9% of the balance of September 2013, below the 80% target established by the BCRP; |
| (ii) | By December 2017, car and mortgage loans in dollars were 60.8% of the balance of February 2013, above the 60% target of the BCRP. |
No monetary penalties were derived from not achieving the car and mortgage loans target. We built US$21 million in foreign currency as foreign currency reserve requirements after applying the rule states.
As a result of these measures, the loan dollarization ratio stood at 29.1% by December 2017 compared to 29.2% in December 2016 and 30.5% in December 2015. Additionally, in order to reduce the pressures on the Dollar, at the end of August 2015, the Central Bank established a new instrument called special Repo, which consists of the simultaneous sale of a resettable certificate of deposit (CDR) by the Central Bank and a securities Repo operation in which financial institutions use the CDR as collateral to lend Soles to the BCRP. Consequently, the instrument does not provide additional liquidity to financial institutions. As a result of this operation, private banking receives domestic currency generating a liability and maintains an asset equivalent to the CDR that is left as collateral at the Central Bank.
In 2017, amid the measures adopted by the Peruvian Central Bank and despite a year of subdued economic growth, loans to the private sector (considering a constant exchange rate of S/ 3.24 per U.S. dollar) expanded 6.7%, slightly above 2016 (5.6%) but below the observed in 2015 (8.0%). By denomination, in 2017 loans in local currency grew 5.6%, compared to 7.2% in 2016 and 28.0% in 2015. Finally, loans in foreign currency expanded 8.0%, compared to 2.1% in 2016 and a contraction of 20.7% in 2015.
9.2.8 Lending activities
Law No. 26702 sets the maximum amount of credit that a financial institution may extend to a single borrower, which can be an individual or an economic group. Resolution SBS No. 5780-2015 establishes that an “economic group” is one that has a single or common risk exposure and includes a person, such person’s close relatives and the companies in which such person or his or her close relatives have significant share ownership or decision-making capability. Significant decision-making capability is deemed to be present when, among other factors, a person or group can exercise material and continuous influence over the decisions of a company, when a person or company holds seats on the board of directors or has principal officers in another company, or when it can be assumed that one company or person is the beneficiary of credit facilities granted to another company.
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The limit on credit that may be extended to one borrower varies according to the type of borrower and the collateral received. The credit limit to credit for any Peruvian borrower is 10% of the bank’s regulatory capital, applied to both unconsolidated and consolidated records, which may be increased to up to 30% if the loan is collateralized in a manner acceptable under Law No. 26702. If a financial institution exceeds these limits, the SBS may impose a fine on the institution. As of December 31, 2017, 2016 and 2015, the 10.0% unconsolidated credit limit per borrower of BCP for unsecured loans was S/1,639.8 million, S/1,585.9 million and S/1,449.0 million, respectively. As of December 31, 2017, 2016 and 2015 the 30.0% credit limit for secured loans was S/4,919.5 million, S/4,757.7 million and S/4,346.9 million, respectively.
Pursuant to Article 52 of the organic law of the Peruvian Central Bank, in certain circumstances, the Peruvian Central Bank has the authority to establish limits on interest rates charged by commercial banks and other financial institutions. No such limits are currently in place; however, there can be no assurance that the Peruvian Central Bank will not establish such limits on interest rates in the future.
9.2.9 Related party transactions
Law 26702 regulates transactions between financial institutions on the one hand and related parties and or affiliates on the other. SBS and SMV have also enacted regulations that define indirect ownership, related parties and economic groups, in order to limit transactions with related parties and affiliates. These regulations also provide standards for the supervision of financial and mixed conglomerates formed by financial institutions.
The total amount of loans to directors, employees or close relatives of any such persons may not exceed 7% of a bank’s regulatory capital. All loans made to any single director or employee borrower, considering his/her close relatives, may not exceed 0.35% of regulatory capital (i.e., 5% of the overall 7% limit).
Pursuant to Law 26702, as amended by Law 27102, the aggregate amount of loans to related party borrowers considered to be part of an economic group (as defined above) may not exceed 30% of a bank’s regulatory capital. For purposes of this test, related party borrowers include (i) any person holding, directly or indirectly, 4% or more of a bank’s shares, (ii) directors, (iii) certain principal executive officers of a bank or (iv) people affiliated with the administrators of the bank. Loans to individual related party borrowers are also subject to the limits on lending to a single borrower described under “—Lending Activities” above. All loans to related parties must be made on terms no more favorable than the best terms that BCP or Mibanco offers to the public.
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9.2.10 Ownership restrictions
Law 26702 establishes certain restrictions on the ownership of a bank’s shares. Banks must have a minimum of two shareholders. Among other restrictions, those convicted of drug trafficking, money laundering, terrorism and other felonies, or those who are directors, employees and advisors of public entities that regulate and supervise the activities of banks, are subject to ownership limitations. All transfers of shares in a bank must be recorded at the SBS. Transfers involving the acquisition by any individual or corporation, whether directly or indirectly, of more than 10% of a bank’s capital stock require prior authorization from the SBS. The SBS may deny authorization to such transfer of shares if the purchasers (or their shareholders, directors or employees in the case of juridical persons) are legally disabled, have engaged in illegal activity in the area of banking, finance, insurance or reinsurance, or if objections are raised on the basis of the purchaser’s moral fitness or economic solvency, among others. The decision of the SBS is final, and cannot be overturned by the courts. If a transfer is made without obtaining the prior approval of the SBS, the purchaser shall be fined with an amount equivalent to the value of the transferred shares and is obligated to sell the shares within 30 days, or the fine is doubled. In addition, the purchaser is not allowed to exercise its voting rights at the shareholders’ meetings. Foreign investors receive the same treatment as Peruvian nationals and are subject to the limitations described above.
Finally, under Peruvian law, individuals or corporations that acquire, directly or indirectly, 1% of the capital stock of a bank in a period of 12 months or acquire a 3% or more share participation, have the obligation to provide the information that the SBS may require to identify such individuals’ or corporations’ main economic activities and assets structure.
9.2.11 Risk rating
Law No. 26702 and SBS Resolutions No. 672 and 18400-2010 require that all financial companies be rated by at least two risk rating companies on a semi-annual basis, in addition to the SBS’s assessment. Criteria to be considered in the rating include risk management and control procedures, loan quality, financial strength, profitability, liquidity and financial efficiency. Five risk categories are assigned, from “A” (lowest risk) to “E” (highest risk), allowing for sub-categories within each category. As of September 2017, BCP and Mibanco were assigned the “A+” and “A” risk category, respectively, by their two rating agencies, Equilibrium Clasificadora de Riesgo and Apoyo and Associates International. As of December 2017, BCP and Mibanco maintained the risk category of “A+” and “A”, respectively.
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9.2.12 Deposit insurance fund
Law 26702 provides for mandatory deposit insurance to protect the deposits of financial institutions by establishing the Fondo de Seguro de Depositos (Deposit Insurance Fund or the Fund) for individuals, associations, not-for-profit companies, and demand deposits of non-financial companies. Financial institutions must pay an annual premium calculated on the basis of the type of deposits accepted by the entity and the risk classification of such entity, made by the SBS and at least two independent risk-rating agencies. The annual premium begins at 0.65% of total funds on deposit under the coverage of the Fund and increases to 1.45% applicable to banks in the highest risk category. BCP and Mibanco are currently classified in the lowest risk category. The maximum amount (defined on a monthly basis) that a customer is entitled to recover from the Fund is S/.97,529 as of December 31, 2017 and S/ 98,205 from the period starting on March 2018 until May 2018.
9.2.13 Intervention by the SBS
Pursuant to Law 26702, as amended by Law 27102, the SBS has the authority to seize the operations and assets of a bank. These laws provide for three levels of action by the SBS: a supervisory regime, an intervention regime and the liquidation of the bank. Any of these actions may be taken if certain events occur, including if the bank: (i) interrupts payments on its liabilities, (ii) repeatedly fails to comply with the regulations of the SBS or the Peruvian Central Bank, (iii) repeatedly violates the law or the provisions of the bank’s Bye-laws, (iv) repeatedly manages its operations in an unauthorized or unsound manner or (v) has its regulatory capital fall or be reduced by more than 50%.
During the intervention regime, rather than seizing the operations and assets of a bank, the SBS may adopt other measures, including (i) placing additional requirements on the bank, (ii) ordering it to increase its capital stock or divest certain or all of its assets, or (iii) imposing a special supervision regime during which the bank must adhere to a financial restructuring plan.
The SBS intervention regime stops a bank’s operations for up to 45 days and may be extended for an additional 45 days. During this time, the SBS may institute measures such as: (i) canceling losses by reducing reserves, capital and subordinated debt, (ii) segregating certain assets and liabilities for transfer to another financial institution and (iii) merging the intervened bank with an acquiring institution according to the program established by Urgent Decree No. 108-2000, enacted in November 2000. After the intervention, the SBS will liquidate the bank unless it is merged with an acquiring institution, as described in (iii) above.
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9.2.14 Regulation from the United States Federal Reserve and from the State of Florida Department of Banking and Finance
Banco de Credito del Peru Miami Agency (“BCP Miami Agency”) is licensed to operate as an International Agency in the State of Florida and was authorized to transact business by the Comptroller of Florida on September 3, 2002. The Office of Financial Regulation of the State of Florida shares regulatory responsibility with the Federal Reserve Bank of Atlanta.
9.2.15 Regulation from the Superintendency of Banks in Panama
BCP Panama is a branch of BCP that is registered in the Republic of Panama. It began operating in June 2002 under an International License issued by the Panamanian Superintendence of Banks, in accordance with Law Decree N° 9 of February 26, 1998, as amended. BCP Panama is subject to an inspection made by auditors and inspectors of the Panamanian Superintendence of Banks, to determine, among other things, its compliance with the Decree Law N° 2 of February 22, 2008 and N° 23 of April 27, 2015 Law on the Prevent Money Laundering, the Financing of Terrorism and the Financing of the Proliferation of Mass Destruction Weapons.
9.3 Atlantic Security Bank (ASB)
9.3.1 General
ASB, a subsidiary of ASHC, is a Cayman Islands bank with a branch in Panama. ASB is regulated and supervised by the regulatory authorities of the Cayman Islands (Cayman Island Monetary Authority) while its Panama branch is regulated by the Superintendence of Banking of Panama (SBP - Superintendencia de Bancos de Panama). In November 22, 2017, ASB acquired Correval Panama, S.A. a brokerage company based in Panama with operations in the local and international markets. This subsidiary is regulated by the Panamanian Superintendence of Security Market (SMVP - Superintendencia de Mercado de Valores de Panama).
ASB is registered as an exempt company and is licensed in the Cayman Islands pursuant to the Banks and Trust Companies Law (“Cayman Banking Law”). ASB holds an unrestricted Category B Banking and Trust License, as well as a Mutual Fund Administrator License. As a holder of a Category B License, ASB may not take deposits from any person residing in the Cayman Islands other than another licensee, an exempt company or an ordinary non-resident company which is not carrying on business in the Cayman Islands.
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ASB may not invest in any asset which represents a claim on any person residing in the Cayman Islands, except a claim resulting from: (i) a loan to an exempt or an ordinary non-resident company not carrying on business in the Cayman Islands; (ii) a loan by way of mortgage to a member of its staff or to a person possessing or being deemed to possess Caymanian status under the immigration law, for the purchase or construction of a residence in the Cayman Islands to be owner-occupied; (iii) a transaction with another licensee or (iv) the purchase of bonds or other securities issued by the government of the Cayman Islands, a body incorporated by statute, or a company in which the government is the sole or majority beneficial owner. In addition, ASB may not, without the written approval of the Cayman Islands Monetary Authority (the “Authority”), carry on any business in the Cayman Islands other than business permitted by the Category B License.
There are no ratio or liquidity requirements under the Cayman Banking Law, but the Authority expects observance of prudent banking practices. As a matter of general practice, the ratio of liabilities to capital and surplus should not exceed 40-to-1 and the ratio of risk-weighted assets to capital and surplus should not exceed 8.33-to-1 (approximately 12%). There is a statutory minimum net worth requirement of US$500,000 (approximately S/1,620,500), but the Authority generally requires a bank or trust company to maintain a higher paid-in capital appropriate to its business. The Authority requires compliance with the guidelines promulgated by the Basel Accord on Banking Regulations and Supervisory Practices although, in special circumstances, different gearing and/or capital risk asset ratios may be negotiated. Compliance with the Cayman Banking Law is monitored by the Authority.
9.3.2 Continuing requirements
Under the law of the Cayman Islands, ASB is subject to the following continuing requirements: (i) to remain in good standing under the Cayman Islands Companies Law, including the filing of annual and other returns and the payment of annual fees; (ii) to file with the Registrar of Companies any change in the information or documents required to be provided and to pay annual fees; (iii) to file certain prescribed forms with the Authority on a quarterly basis; (iv) to file with the Authority audited accounts within three months of each financial year (in the case of a locally incorporated bank which is not part of a substantial international banking group, a senior officer or board member discusses these accounts each year at a meeting with the Authority) and (v) to file an annual questionnaire.
ASB is required by the Cayman Banking Law to have at least two directors. Additionally, ASB must receive prior approval from the Authority (i) for any proposed change in the directors or senior officers, though in exceptional cases a waiver can be obtained enabling changes to be reported after the event or annually in the case of a branch of a substantial international bank; (ii) for the issue, transfer or other disposal of shares (it is rare for a waiver to be granted with respect to shares except in the case of a branch of a substantial international bank and where the shares are widely held and publicly traded); (iii) for any significant change in the business plan filed on the original license application or (iv) to open a subsidiary, branch, agency or representative office outside the Cayman Islands. Finally, ASB must obtain the prior approval of the Authority to change its name and must notify the Authority of any change in its principal office or its authorized agent in the Cayman Islands.
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Under Panamanian Law, ASB has a registered branch in Panama (ASB Panama Branch), which holds an International Banking License issued by the Superintendence of Banking of Panama. This license allows institutions to carry out banking operations with effects outside of the jurisdiction from a permanent establishment in the Republic of Panama. SBP acts as the main regulator for the Panama Branch, although supervision activities are closely coordinated with CIMA as regulator for the Head Office in the Cayman Islands.
Correval Panama S.A (Correval) is a wholly owned subsidiary of ASB, incorporated in Panama. Correval holds a Securities Broker license issued by the Superintendence of the Securities Market that enables the entity to act as securities broker, manager and custodian. Correval is required to comply with regulations pertaining to corporate governance; minimum working capital and liquidity requirements to meet obligations with customers and vendors; adequate accounting practices and recordkeeping; provision of regulatory reports; adherence to confidentiality standards, code of ethics and prevention of conflict of interest and adequate anti-money laundering and terrorism finance laundering controls, policies and programs, among others.
9.4 BCP Bolivia
Until November 2013, the Bolivian banking system operated under the Law of Banks and Financial Entities No. 1488, enacted on April 14, 1993 and later modified by Law 3076 of June 20, 2005. On August 21, 2013, the Bolivian Government enacted a new Banking Law (Law 393), which became effective on November 21, 2013. This new law envisions a more active role of government in the financial services industry and emphasizes the social objective of financial services.
Pursuant to Supreme Decree 29894, in May 2009 the ASFI was vested with the authority to regulate the Bolivian banking system. ASFI also supervises brokerage and mutual fund management activities that Credicorp Ltd. conducts through BCP Bolivia’s affiliates, Credibolsa and Credifondo. These affiliates operate under the Securities Markets Law No. 1834, enacted on March 31, 1998. Additionally, the Central Bank of Bolivia (BCB by its Spanish initials) regulates financial intermediation and deposit activities, determines monetary and foreign exchange policy, and establishes reserve requirements on deposits.
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In 2012, the Bolivian government imposed an additional income tax of 12.5% on earnings before taxes, which applied to all financial institutions with a ratio of earnings before taxes to equity in excess of 13%. Additionally, in November 2012, the government approved a new tax on sales of foreign exchange. This new tax, which levied all sales of foreign exchange with a 0.70% rate on the amount of foreign currency sold, was in effect for 36 months and thus expired in December 2015.
In December 2015, the additional income tax was elevated to 22%, applied to all financial institutions with a ratio of earnings before taxes to equity in excess of 6%. In February 2017, the government stated its intention to increase the additional income tax to 25%, as of the date of this report there is no official regulation on the proposed increase.
In 2013, Presidential Decree 1842 set interest rate caps for social housing loans ranging from 5.5% to 6.5% and established loan quotas pursuant to which, by December 31, 2018, at least 60% of the loan portfolio of all universal banks needs to be comprised of loans to productive sectors and social housing loans.
In 2014, the Bolivian government through Presidential Decree 2137 established the creation of a guarantee fund for new mortgages without down payment. This fund, which is aimed at providing guarantees of up to 20% of the amount financed, was established in 2015 through an additional obligatory 6% tax on 2014 net income.
In November 2015, Presidential Decree 2614 established the creation of a new guarantee fund aimed at guaranteeing loans to productive sectors. The fund was established in 2016 through an additional obligatory 6% tax on 2015 net income. In December 2016, Presidential Decree 3036 established an additional obligatory 6% tax on 2016 net income, half of which will be destined to replenish the guarantee fund for social housing established in 2015, while the other half will be destined for a new fund whose objective is to fund seed capital.
9.5 Credicorp Capital
9.5.1 Credicorp Capital Securities, Inc. (CCSI)
Credicorp Capital Securities, Inc. (“CCSI”) (CRD No. 122199) is a registered broker-dealer with FINRA and with the SEC. CCSI is owned by Credicorp Capital Limited which is wholly owned by Credicorp. Headquartered in Coral Gables, Florida, CCSI provides brokerage services through a clearing agreement with Pershing, LLC. There are currently five registered principals at CCSI, all of whom are Series 7 and Series 24 (our General Securities Principal) licensed. At the trading desk, all registered representatives maintain their Series 7 and Series 63 licenses. We also have one Series 27 licensed (our Financial and Operations Principal).
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9.5.2 Credicorp Capital Peru, S.A.A.
Credicorp Capital Peru falls under the supervision of the SMV, a specialized technical body attached to the Ministry of Economics and Finance, aimed to ensure the protection of investors, efficiency and transparency of the markets, as well as the diffusion of the information required for such purposes. It enjoys functional, administrative, economic, technical and budgetary autonomy. The Securities Market Law as amended, approved by Legislative Decree Nº 861, governs the public offering and trading of securities listed on the SMV and the Lima Stock Exchange. The latter institution, as the only stock exchange in Peru, also provides internal regulations which form part of the regulations and administrative rulings that govern the offering and trading of securities.
9.5.3 Credicorp Capital Colombia S.A.
Credicorp Capital Colombia falls under the supervision of the Superintendencia Financiera de Colombia, an entity whose main function is to oversee the financial and insurance sectors. Although it has an important role in monitoring and surveillance, it also has certain regulatory powers that permit it to issue laws and decrees. Additionally, the AMV supervises and regulates the conduct of securities intermediaries, as well as the certification of those who carry out such activities. AMV is a private entity, and is the product of a self-regulatory scheme established after the termination of Law 964 of 2005.
9.5.4 Credicorp Capital Chile S.A.
Credicorp Capital Chile is supervised directly by the Comision del Mercado Financiero (CMF). The CMF ensures that persons or supervised institutions, from formation until liquidation, comply with laws, regulations, statutes and other provisions governing the functioning of these markets. The SVS also authorizes companies to manage mutual funds (Mutual Fund Administrators and General Fund Management or AFM and AGF, respectively, by its Spanish initials) and oversees such companies and their respective funds to ensure compliance with laws and regulations by monitoring their legal, financial and accounting information
In Chile, there are laws, regulations and rules that govern the various sectors of the stock market. One such law is the Securities Market Law, which governs the functioning of the Chilean market and the laws relating to corporations, management of third-party funds (investment funds, mutual funds, pension funds and others) and the deposit and custody of securities.
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9.6 Grupo Pacifico
9.6.1 Overview
Grupo Pacifico’s operations are regulated by Law No. 26702 and the SBS. Peruvian insurance companies must submit regular reports to the SBS concerning their operations. In addition, the SBS conducts on-site reviews on an annual basis, primarily to evaluate a company’s compliance with solvency margin, reserve and investment requirements and rules governing the recognition of premium income. If the SBS determines that a company is unable to meet the solvency margin or technical reserve requirements, or is unable to pay claims as they become due, it may either liquidate the company or permit it to merge with another insurance company.
On May 27, 2013, a new Peruvian insurance law, Insurance Act No. 29946, became effective. The act governs all insurance contracts, except for those that are expressly governed by other regulations. It substantially changes how insurance policies are offered by insurance companies, regulates the information provided by the insured, and includes changes to termination and arbitration clauses included in insurance contracts. The Insurance Act No. 29946 also provides a list of terms and conditions that cannot be included in any insurance contract and ensures that any changes in the contract can only be made if 45 days’ notice is given to the policyholder prior to renewal of the policy. Other measures include restrictions on the duration and renewal of contracts, consumer protection rules, and regulations governing how to address non-payment of premium installments required under insurance contracts.
In September 2013, the SBS initiated reforms to the SPP, by establishing a tender process for the exclusive right to manage the SPP’s collective insurance policy for D&S and burial expenses. Tender offers for the collective insurance contract were submitted on September 13, 2013 and the winning bidder obtained the right to manage the SPP’s collective insurance policies from October 1, 2013 until December 31, 2014. The bid submitted by our subsidiary Pacifico Vida was not selected, and as a result Pacifico Vida has not issued insurance policies in the SPP for D&S and burial expenses since October 2013. However in December 2014, Pacifico Vida won the tender process and was able to issue policies for D&S and burial expenses in the SPP system, from January 2015 to December 2016. Finally, in 2017 Pacifico Vida won the third tender process, which allows the company to continue in the disability and survivorship business for 2017 and 2018.
Under Peruvian law, insurance companies may engage in certain credit risk operations, such as guarantees, bonds and trusteeships, but are prohibited from offering other banking services, operating mutual funds or offering portfolio management services. In addition, insurance companies may not conduct brokerage operations for third parties.
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Peruvian insurance companies are also prohibited from having an ownership interest in other insurance or reinsurance companies of the same class unless such risks are developed by insurance companies acting as subsidiaries and that risk is withdraw from the principal insurance company activities (Resolution SBS No. 3930-2017); or in private pension funds.
9.6.2 Establishment of insurance company
Insurance companies must be authorized by the SBS to commence operations. Peruvian law establishes certain minimum capital requirements for insurance and reinsurance companies, which must be satisfied by cash investments in the company. The statutory amounts are expressed in constant value.
9.6.3 Solvency requirements
Pursuant to Law No. 26702, the SBS regulates the solvency margin of Peruvian insurance companies. The solvency margin calculations take into account the amount of premiums written and losses incurred during a specified period prior to the date of the calculation.
Insurance companies must also maintain solvency equity, which must be the greater of (i) the solvency margin and (ii) the minimum capital requirement, as established by law. The required amount of solvency equity is recalculated at least quarterly. If an insurance company has outstanding credit risk operations, part of the solvency equity must be set aside for its coverage.
| Regulatory Ratios (%) - S/ in thousands | Dec 15 | Dec 16 | Dec 17 | |||||||||
| (A) Capital Adequacy | 1,292,452 | 1,462,807 | 1,462,936 | |||||||||
| (B) Regulatory Capital Requeriment | 946,726 | 964,462 | 913,427 | |||||||||
| (B.1) Solvency I Required capital | 699,216 | 712,247 | 676,741 | |||||||||
| (B.2) Security Fund | 244,548 | 249,118 | 236,687 | |||||||||
| (B.3) Credit risk | 0 | 0 | 0 | |||||||||
| (B.4) Other Capital Requeriment | 2,962 | 3,097 | 0 | |||||||||
| (C) Leverage | 578,205 | 495,770 | 592,397 | |||||||||
| Surplus 1 = (A) - (B) | 345,726 | 498,345 | 549,509 | |||||||||
| Ratio (A)/(B) | 1.4 | 1.5 | 1.6 | |||||||||
| Surplus 1 = (A) - (C) | 714,247 | 967,037 | 870,539 | |||||||||
| Ratio (A)/(C) | 2.2 | 3.0 | 2.5 | |||||||||
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9.6.4 Legal reserve requirements
Peruvian law also requires that all insurance companies establish a legal guarantee reserve for policyholders by setting aside 10% of income before taxes until the reserve reaches at least 35% of paid-in capital.
9.6.5 Reserve requirements
Pursuant to Law No. 26702 and regulations issued by the SBS, Peruvian insurance companies must establish technical reserves. Law No. 26702 also requires insurance companies to create a reserve for IBNR claims that are reflected as a liability, net of recoveries and reinsurance, in our Consolidated Financial Statements. Reserves for IBNR claims are estimated by using generally accepted actuarial reserving methods. I Note 3(e) to our Consolidated Financial Statements. Finally, Grupo Pacifico is required by the SBS to establish pre-event reserves for risk of catastrophes, which, in accordance with IFRS principles, are not considered in our financial statements. See Item 4. Information on the Company — (5) Review of 2016 - 5.2 Financial Performance - 5.2.4 Grupo Pacifico”.
According to a new regulation associated with the Actuarial Management, Resolution SBS N° 3863-2016, the Actuarial function must (i) ensure the use of real and adequate parameters in both pricing and technical reserves calculation and (ii) guarantee the consistency of the results obtained. Likewise, based on the sufficiency evaluation analysis, Actuarial management must propose changes in the methodologies applied in the calculation of technical or additional reserves.
9.6.6 Investment requirements
Pursuant to Law No. 26702 and regulation issued by the SBS (Resolution SBS N° 1041-2016), the total amount of an insurance company’s solvency equity and technical reserves must be permanently supported by diversified assets, which may not be pledged or otherwise encumbered. The investment regulations further state that deposits in and bonds of one financial institution together cannot exceed 7% of the total of an insurer’s solvency equity and technical reserves combined. In general, no more than 15% of an insurance company’s combined solvency equity and technical reserves may be invested in instruments (including stocks and bonds) issued by a company or group of companies. In order for an insurance company to invest in non-Peruvian securities, the securities must be rated by an internationally recognized credit rating company and the asset class must be authorized by Peruvian SBS regulations. Securities owned by insurance companies must be registered in the Public Registry of Securities of Peru or the comparable registry of their respective country.
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Additionally, according to the resolution SBS N° 1041-2016, the current account balance (cash) in one financial institution cannot exceed 5% of the total of an insurer’s solvency equity and technical reserves combined.
9.6.7 Related party transactions
Law No. 26702 generally provides that insurance companies may not extend credit to or guarantee the obligations of employees or members of the board of directors, except for certain home mortgage loans to employees.
9.6.8 Ownership restrictions
Law No. 26702 sets forth the same types of restrictions regarding the ownership and transfer of insurance company shares as it does regarding the ownership and transfer of shares in banks. See “Item 4. Information on the Company - 4.B Business overview - (9) Supervision and Regulation - 9.2 BCP and Mibanco - 9.2.1 Overview”.
9.7 Prima AFP
Prima AFP’s operations are regulated in Peru by the Unified Text of the Private System for the Administration of Funds Act, approved by Supreme Decree No. 054-97-EF. Operations are controlled and supervised by the SBS. In addition, AFPs are under the supervision of the SMV. AFPs must submit reports to the SBS, members and beneficiaries in general, with regard to the administration of pension funds and any information linked to the AFP’s operations.
Under Peruvian legislation, AFPs can only have one type of business activity: they can only offer services linked to the administration of pension funds under the category of individual capitalization accounts made up of mandatory and/or voluntary contributions.
Also, AFPs must provide payments related to retirement, disability, and death benefits, and funeral expenses. AFPs must submit audited financial information, in accordance with SBS regulations. There are certain limitations on the ownership and transfer of AFP shares.
SBS authorization is required for an AFP to begin operations. Peruvian law establishes a minimum capital requirement, paid in cash by the shareholders.
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SBS has set investment limits, which, among others, restrict investments in certain asset classes, economic groups, and issuers. In addition, some of these limits vary according to the risk profile of the fund. The general limits are:
• The total amount invested in instruments issued or guaranteed by the Peruvian State cannot exceed 30% of the fund value;
• The total amount invested in instruments issued or guaranteed by BCRP cannot exceed 30% of the fund value;
• The total amount jointly invested under the two aforementioned limits cannot exceed 40% of the fund value and;
• The total amount invested in instruments issued by the government, financial institutions, and non-financial institutions whose commercial activities are mostly abroad, cannot exceed 46% of the fund value as end of 2017. For this specific limit, the SBS sets the maximum and the Peruvian Central Bank (BCRP by its Spanish initials) administers the effective level (operating limit).
SBS requires a guaranteed minimum profitability for funds under management. Part of the guarantee is a reserve requirement, which must be funded by the AFP. The amount depends on the instruments in the portfolio, but is, on average, 1% of Funds under Management. In addition, Peruvian law establishes that companies must set up a legal reserve equivalent to 10% of net income, until the reserve is at least 20% of share capital.
Private Pension System Reform in 2012
In 2012, the Peruvian government passed the Law to Reform the Private Pension System (SPP). The relevant changes that are contemplated in the Law are as follows:
• A tender process for affiliates entering the SPP for the first time, held every 24 months, was incorporated. The AFP that offers the lowest administration fees wins the tender. As a result, new affiliates to the SPP are required to become members of the AFP that wins the tender and remain with this pension fund administrator for the next 24 months. Although the first public tender was held in December 2012, a prior short-term tender procedure with a duration of 8 months (September 2012 – May 2013) was won by Prima AFP.
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| N° | Tender Process Date | Period | Winner | |||
| - | September 2012 | October 2012 - May 2013 | Prima AFP | |||
| 1st | December 2012 | June 2013 - May 2015 | AFP Habitat | |||
| 2nd | December 2014 | June 2015 - May 2017 | AFP Habitat | |||
| 3rd | December 2016 | June 2017 - May 2019 | Prima AFP |
• A tender process for the exclusive right to manage the SPP’s collective insurance policy for disability, survivor and burial expenses was also established. The insurance is managed by the insurance company that presents the best economic proposal in the tender and applies for new and existing affiliates.
• A mixed-commission scheme was incorporated into the SPP and includes two types of administration fees: a commission charged on the affiliates’ monthly income and a commission based on the clients’ fund made up of new contributions from 2013 onwards. New affiliates enter the SPP under the mixed-commission scheme and existing affiliates had an opportunity in 2013 to choose between the new scheme and the prior monthly remuneration based scheme.
• A Zero Fund or a Capital Protection Fund was established by each AFP and began operations in April 2016. This fund focus on low-risk investments and its objective is to ensure that affiliates over the age of 65 (retirement age) have a fund that maintains a stable value.
Changes to Private Pension System in 2014
In 2014, new local and foreign investment regulations contributed to the flexibility in SPP’s registration process for new investment securities. Under the new regulations, AFPs can make non-complex investments through vehicles such as bonds, shares and mutual funds without authorization from the SBS. Additionally, AFPs can use derivative instruments without authorization from the SBS under certain restrictions, such as specific limits regarding each type of fund. These changes are expected to improve the management and risk-return profile of our portfolios while providing flexibility and additional opportunities to execute these kinds of transactions.
Changes to Private Pension System in 2015
During 2015, the Reform of the SPP in terms of investments and risk management continued, mainly with the publication of the Resolution SBS No. 3233-2015, which introduces changes to the treatment of the regulatory requirements of both local and foreign investments in order to generate greater flexibility in both direct and indirect investments. The main changes lie in the minimum requirements to be met by structured instruments, bonds for infrastructure projects, the participation fees of mutual and investment funds, as well as repurchase agreements and securities lending. Those requirements seek the efficient administration of the investments and risks associated with the process. SBS Resolution No. 5540-2015 was also published, which regulates the new Fund Type Zero, mandatory for participants from the age of 65 and up who opt for a statutory retirement pension. The Fund Type Zero may only invest in short-term instruments and debt securities, and took effect on April 1, 2016.
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Changes to Private Pension System in 2016
In December 2015, the Peruvian Congress passed a draft law that modifies some aspects of the current framework of the pension fund system. This law was observed by the President in January 2016.
On April 14, 2016, the Congress passed the law N° 30425 (further modified by law N° 30478) and it came into effect on April 21, 2016. Among the most relevant changes, the law allows affiliates to: (i) withdraw up to 95.5% of their pension funds when they reach the age of 65 (retirement age); (ii) use up to 25% of their pension funds as the initial payment or amortization of a mortgage loan used to buy their first property (any affiliate), and (iii) withdraw up to 50% of their pension funds in the case of affiliates with terminal illness. The new law also extends the Special Regime of Early Retirement (REJA by its Spanish initials) until December 31, 2018 for affiliates who have been unemployed for at least 12 months, and applies to men and women who are at least 55 and 50 years old respectively, and pensioners who chose the retirement program. During 2016, the withdrawal of funds in Prima AFP was approximately S/ 2,237 million.
Changes to Private Pension System in 2017
In 2017, BCRP raised the foreign investment limit for pension funds to encourage AFPs to diversify their investments. The limit increased from 42% to 45% on July 17, 2017 and to 46% on August 17, 2017. This ceiling has been raised gradually from 10.5% in 2006.
In July 2017, a procedure related to the affiliates’ contributions incorrectly made by regional authorities to the National Pension System instead of the SPP was approved. It requires that these authorities schedule the payment of the debts to the AFPs, for the benefit of the affiliates.
In January 2017, the Economy and Finance Ministry (MEF) established the Social Protection Committee (CPS), which, in November 2017, presented a report including proposals on pension system reforms, health financing and unemployment insurance. The proposals haven’t been discussed yet between the related parties.
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(10) Selected Statistical Information
In the following tables, we have set forth certain selected statistical information and ratios regarding our business for the periods indicated. You should read the selected statistical information in conjunction with the information included in “Item 5. Operating and Financial Review and Prospects – 5.A Operating Results” and the Consolidated Financial Statements (and the notes that accompany the financial statements). The statistical information and discussion and analysis given below for the years 2013 through 2017 reflect our consolidated financial position as well as that of our subsidiaries, as of December 31, 2013, 2014, 2015, 2016 and 2017 and our results of operations for such years.
Credicorp’s Board decided that from January 1, 2014, the Sol would be the company’s functional currency and the presentation currency of our financial statements. For this reason, the financial statements for the previous years were restated using Soles as the presentation currency and we have prepared the financial statements from 2014 onward using Soles as both the functional and presentation currency. For this restatement, we used the methodology of IFRS and specifically IAS 21 “The Effects of Changes in Foreign Exchange Rates”. The methodology applied is as follows:
Income statement
Income and expenses expressed in U.S. Dollars for the year 2013 were converted to Soles using the weighted average exchange rate, which was 2.7126855. These rates were obtained from the Superintendencia de Banca, Seguros y AFP (SBS). The accumulated result of every period corresponds to the sum of the restated figures of each month of the period. This accumulated result of the period is presented as part of the entity’s net shareholders’ equity. The difference between the restated retained earnings according to the aforementioned methodology and the restated net shareholders’ equity at the end of the period is recognized under “Reserves”.
Balance sheet
The balance of each account in the balance sheet expressed in U.S. Dollars as of December 31, 2013 was converted to Soles using the period-end exchange rate defined by the SBS, which was 2.795. For net shareholders’ equity, each account is restated using the closing exchange rate except for retained earnings which is restated using the methodology described under “Income statement” above. Likewise, foreign currency translation reserve is restated as explained in Note 3(c) of the Consolidated Financial Statements. The differences are included under “Reserves”.
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10.1 Average balance sheets and income from interest-earning assets
The tables below set forth selected statistical information based on our average balance sheets prepared on a consolidated basis. Except as otherwise indicated, we have classified average balances by currency (Soles or foreign currency, primarily U.S. Dollars) rather than by the domestic or international nature of the balance. In addition for the years 2013 and 2014, except where noted, the average balances are computed as the average of period-beginning and period-ending balances on a quarterly basis. For the years 2017, 2016 and 2015 the average balance are computed as the average of period-beginning and period-ending balances on a monthly basis. Any of these quarter-end balances that were denominated in U.S. Dollars have been converted into Soles using the applicable SBS exchange rate as of the date of such balance. Our management does not believe that the stated averages present trends materially different from those that would be presented by daily averages.
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Average Balance Sheets
Assets, interest earned and average interest rates
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||||||
| ASSETS: | Average | Interest | Nominal | Average | Interest | Nominal | Average | Interest | Nominal | |||||||||||||||||||||||||||
| Balance | Earned | Avg. Rate | Balance | Earned | Avg. Rate | Balance | Earned | Avg. Rate | ||||||||||||||||||||||||||||
| (Soles in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Deposits in BCRP | ||||||||||||||||||||||||||||||||||||
| Soles | 406,902 | 7,094 | 1.74 | % | 182,411 | 8,694 | 4.77 | % | 450,352 | 12,299 | 2.73 | % | ||||||||||||||||||||||||
| Foreign Currency | 11,990,709 | 7,992 | 0.07 | 11,460,028 | 13,964 | 0.12 | ||||||||||||||||||||||||||||||