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 31, 2018
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 every Interactive Data File required to be submitted 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 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 de Chile | |
| 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 | |
| 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 |
| 4 |
| 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 | Comision de Proteccion 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. | |
| 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 | |
| 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 |
| 5 |
| 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 Insurance Fund | |
| FX | Foreign exchange | |
| GAAP | Generally Accepted Accounting Principles | |
| GDP | Gross Domestic Product | |
| IASB | International Accounting Standards Board | |
| 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 of Internal Auditors | |
| 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 | |
| IOL | Internal Overdue Loans | |
| IPO | Initial Public Offering | |
| IPPF | International Professional Practices Framework 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 | |
| LoB | Lines of Business | |
| 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, Mexico and Peru | |
| MMD | Middle-Market Division |
| 6 |
| 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 | |
| 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 | |
| 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 | |
| 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 |
| 7 |
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, each of which means either Credicorp Ltd. 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).
The balances of financial instruments at December 31, 2018 have been prepared in accordance with IFRS 9; the balances of the previous period have been prepared in accordance with ISA 39, see Note 3(a)(i) of the Credicorp Consolidated Financial Statements.
We operate primarily through our four lines of business (LoB): Universal Banking, Microfinance, Insurance & Pensions and Investment Banking and Wealth Management. For information about these LoBs, see “Item 4. Information on the Company – 4.B Business Overview”.
Our seven main operating subsidiaries are: (i) Banco de Credito del Peru (BCP Stand-alone); (ii) Banco de Credito de Bolivia (BCP Bolivia), which we hold through Inversiones Credicorp Bolivia S.A. (ICBSA); (iii) Mibanco Banco de la Microempresa S.A. (Mibanco); (iv) Pacifico Cia de Seguros y Reaseguros (which together with its consolidated subsidiaries, is referred to as Grupo Pacifico); (v) Prima AFP; (vi) Credicorp Capital Ltd. (which, together with its subsidiaries, is referred to as Credicorp Capital) and (vii) Atlantic Security Bank, which we hold through Atlantic Security Holding Corporation (which are referred to as ASB and ASHC, respectively). As of and for the year ended December 31, 2018, BCP Stand-alone represented 75.0% of our total assets, 71.8% of our net profit and 63.2% of our equity attributable to Credicorp’s equity holders (that is, its shareholders). Unless otherwise specified, the financial information for BCP Stand-alone, BCP Bolivia, Mibanco, 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, BCP Bolivia, Mibanco, Grupo Pacifico, Prima AFP, Credicorp Capital and ASB as our main operating 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, 2014, 2015, 2016, 2017 and 2018.
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” or “U.S. Dollars” are to United States Dollars.
Some of our subsidiaries, namely ASB and two subsidiaries of Credicorp Capital, Credicorp Capital Securities Inc. (CCSI) and Credicorp Capital Asset Management, 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/3.373 = US$1.00, which is the December 31, 2018 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.
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”.
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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 “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “goal”, “seek”, “project”, “strategy”, “future”, “likely”, “should”, “will”, “would”, “may”, or other similar expressions referring to future periods.
Forward-looking statements are based only 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, the following factors:
| • | General economic conditions, including in particular economic conditions in Peru; |
| • | The occurrence of disasters or political or social instability in Peru; |
| • | The adequency of the dividends that our subsidiaries are able to pay to us, which may affect our ability to pay dividends to shareholders; |
| • | Performance of, and volalitity in, financial markets, including Latin-American and other emerging markets; |
| • | The frequency and severity of insured loss events; |
| • | Fluctuations in interest rate levels; |
| • | Currency exchange rates, including the Sol/U.S. Dollar exchange rate; |
| • | Deterioration in the quality of our loan portfolio; |
| • | Increasing levels of competition in Peru and other emerging markets; |
| • | Developments and changes in laws and regulation and adoption of new international guidelines; |
| • | 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, including in the Peruvian banking industry; |
| • | Effectiveness of our risk management policies and of our operational and security systems; and |
| • | Losses associated with counterparty exposures. |
See “Item 3. Key Information - 3.D Risk Factors” and “Item 5. Operating and Financial Review and Prospects”.
Any forward-looking statement made by us in this Annual Report is based only on information currently available to us and is made only as of the date on which it is made. 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.
| 9 |
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 year ended, December 31, 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 and 2018 were 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, 2017 and 2018 and for the years ended December 31, 2016, 2017 and 2018 appears elsewhere in this Annual Report.
| 10 |
SELECTED FINANCIAL DATA
| Year ended December 31, | ||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
| (Soles in thousands, except percentages, ratios, and per common share data) | U.S.
Dollars in thousands (1) | |||||||||||||||||||||||
| INCOME STATEMENT DATA: | ||||||||||||||||||||||||
| IFRS: | ||||||||||||||||||||||||
| Interest and similar income | 8,578,664 | 9,784,089 | 10,773,055 | 11,030,683 | 11,522,634 | 3,501,966 | ||||||||||||||||||
| Interest and similar expenses | (2,191,062 | ) | (2,527,133 | ) | (2,914,714 | ) | (2,959,196 | ) | (3,033,529 | ) | (921,952 | ) | ||||||||||||
| Net Interest, similar income and expenses | 6,387,602 | 7,256,956 | 7,858,341 | 8,071,487 | 8,489,105 | 2,580,014 | ||||||||||||||||||
| Provision for credit losses on loan portfolio (2) | (1,914,143 | ) | (2,052,177 | ) | (2,063,209 | ) | (2,057,478 | ) | (1,814,898 | ) | (551,585 | ) | ||||||||||||
| Recoveries of written-off loans | 198,333 | 171,279 | 277,714 | 268,313 | 283,190 | 86,067 | ||||||||||||||||||
| Provision for credit losses on loan portfolio, net of recoveries | (1,715,809 | ) | (1,880,898 | ) | (1,785,495 | ) | (1,789,165 | ) | (1,531,708 | ) | (465,518 | ) | ||||||||||||
| Net interest, similar income and expenses, after provision for credit losses on loan portfolio | 4,671,793 | 5,376,058 | 6,072,846 | 6,282,322 | 6,957,397 | 2,114,496 | ||||||||||||||||||
| Commissions and fees | 2,521,829 | 2,644,191 | 2,771,561 | 2,911,408 | 3,126,857 | 950,316 | ||||||||||||||||||
| Net gain on foreign exchange transactions | 453,405 | 773,798 | 698,159 | 650,228 | 737,954 | 224,279 | ||||||||||||||||||
| Net gain on securities | 212,943 | 215,106 | 339,930 | 760,772 | 242,829 | 73,801 | ||||||||||||||||||
| Net gain on derivatives held for trading | 22,202 | 207,938 | 44,500 | 103,580 | 13,262 | 4,031 | ||||||||||||||||||
| Net gain from exchange differences | 172,095 | 46,563 | - | 17,394 | 16,022 | 4,869 | ||||||||||||||||||
| Net gain on financial assets designated at fair value through profit or loss | - | - | 51,667 | 67,633 | - | - | ||||||||||||||||||
| Others income | 639,572 | 315,482 | 326,830 | 376,926 | 395,557 | 120,218 | ||||||||||||||||||
| Total other income | 4,022,046 | 4,203,078 | 4,232,647 | 4,887,941 | 4,532,481 | 1,377,514 | ||||||||||||||||||
| Net premiums earned | 2,189,666 | 1,733,978 | 1,799,115 | 1,808,340 | 2,100,788 | 638,473 | ||||||||||||||||||
| Net claims incurred for life, general and health insurance contracts | (1,426,733 | ) | (1,031,659 | ) | (1,098,905 | ) | (1,118,304 | ) | (1,239,635 | ) | (376,751 | ) | ||||||||||||
| Total other expenses (3) | (6,067,302 | ) | (5,920,863 | ) | (6,114,275 | ) | (6,285,365 | ) | (6,758,817 | ) | (2,054,143 | ) | ||||||||||||
| Profit before income tax | 3,389,470 | 4,360,592 | 4,891,428 | 5,574,934 | 5,592,214 | 1,699,589 | ||||||||||||||||||
| Income tax | (968,224 | ) | (1,197,207 | ) | (1,281,448 | ) | (1,393,286 | ) | (1,520,909 | ) | (462,236 | ) | ||||||||||||
| Net profit | 2,421,246 | 3,163,385 | 3,609,980 | 4,181,648 | 4,071,305 | 1,237,353 | ||||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||
| Credicorp’s equity holders | 2,387,852 | 3,092,303 | 3,514,582 | 4,091,753 | 3,983,865 | 1,210,779 | ||||||||||||||||||
| Non-controlling interest | 33,394 | 71,082 | 95,398 | 89,895 | 87,440 | 26,575 | ||||||||||||||||||
| Number of shares as adjusted to reflect changes in capital (4) | 79,487,653 | 79,478,484 | 79,466,780 | 79,480,309 | 79,499,043 | - | ||||||||||||||||||
| Net basic earnings per common share attributable to Credicorp’s equity holders (5) | 30.04 | 38.91 | 44.23 | 51.49 | 50.13 | 15.24 | ||||||||||||||||||
| Net dilutive earnings per common share attributable to Credicorp’s equity holders (5) | 29.97 | 38.84 | 44.15 | 51.35 | 49.99 | 15.19 | ||||||||||||||||||
| Cash dividends declared per common share Soles (6) | 6.7700 | 8.1910 | 12.2865 | 14.1726 | 20.0000 | - | ||||||||||||||||||
| Additional cash dividends declared per common share Soles (6) | - | - | 15.7000 | - | - | - | ||||||||||||||||||
| As of December 31, | ||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
| (Soles in thousands, except percentages, ratios, and per common share data) | U.S.
Dollars in thousands (1) | |||||||||||||||||||||||
| STATEMENT OF FINANCIAL POSITION DATA: | ||||||||||||||||||||||||
| IFRS: | ||||||||||||||||||||||||
| Total assets | 134,834,372 | 155,480,217 | 156,435,222 | 170,472,283 | 177,263,201 | 52,553,573 | ||||||||||||||||||
| Total loans (7) | 79,509,360 | 90,328,499 | 94,768,901 | 100,477,775 | 110,759,390 | 32,837,056 | ||||||||||||||||||
| Allowance for loan losses (2) | (3,102,096 | ) | (4,032,219 | ) | (4,416,692 | ) | (4,943,008 | ) | (5,314,531 | ) | (1,575,610 | ) | ||||||||||||
| Total deposits (8) | 76,783,964 | 88,307,962 | 85,583,120 | 96,717,674 | 103,984,124 | 30,828,379 | ||||||||||||||||||
| Equity attributable to Credicorp’s equity holders | 13,979,455 | 16,128,016 | 19,656,135 | 21,756,567 | 23,839,243 | 7,067,668 | ||||||||||||||||||
| Non-controlling interest | 646,570 | 599,554 | 460,376 | 497,136 | 426,833 | 126,544 | ||||||||||||||||||
| Total equity | 14,626,025 | 16,727,570 | 20,116,511 | 22,253,703 | 24,266,076 | 7,194,212 | ||||||||||||||||||
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| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||
| SELECTED RATIOS | ||||||||||||||||||||
| IFRS: | ||||||||||||||||||||
| Net interest margin – NIM (9) | 5.65 | % | 5.45 | % | 5.46 | % | 5.33 | % | 5.30 | % | ||||||||||
| Return on average total assets - ROAA(10) | 1.92 | % | 2.13 | % | 2.25 | % | 2.50 | % | 2.29 | % | ||||||||||
| Return on average equity -ROAE (11) | 18.50 | % | 20.54 | % | 19.64 | % | 19.76 | % | 17.47 | % | ||||||||||
| Operating efficiency (12) | 45.17 | % | 42.77 | % | 43.18 | % | 43.42 | % | 43.95 | % | ||||||||||
| Operating expenses as a percentage of average assets (13) | 4.32 | % | 3.76 | % | 3.64 | % | 3.62 | % | 3.66 | % | ||||||||||
| Equity attributable to Credicorp’s equity holders as a percentage of period end total assets | 10.37 | % | 10.37 | % | 12.57 | % | 12.76 | % | 13.45 | % | ||||||||||
| Regulatory capital as a percentage of risk weighted assets – BIS ratio (14) | 14.99 | % | 15.95 | % | 16.33 | % | 15.92 | % | 16.22 | % | ||||||||||
| Total internal overdue loan amounts as a percentage of total loans (15) | 2.53 | % | 2.56 | % | 2.77 | % | 3.01 | % | 2.82 | % | ||||||||||
| Allowance for direct loan losses as a percentage of total loans | 3.76 | % | 4.25 | % | 4.44 | % | 4.48 | % | 4.47 | % | ||||||||||
| Allowance for loan losses as a percentage of total loans and other off-balance-sheet items (16) | 3.20 | % | 3.69 | % | 3.85 | % | 4.12 | % | 4.04 | % | ||||||||||
| Allowance for direct loan losses as a percentage of total internal overdue loans (17) | 148.65 | % | 166.16 | % | 160.55 | % | 148.98 | % | 158.75 | % | ||||||||||
| Allowance for direct loan losses as a percentage of impaired loans (18) | 99.22 | % | 105.35 | % | 99.90 | % | 98.36 | % | 94.56 | % | ||||||||||
Note: Total internal overdue includes internal overdue loans and under legal collection loans.
| (1) | Translated for convenience only from Sol amounts to U.S. Dollar amounts using exchange rates of S/3.373 = US$1.00, which is the December 31, 2018 exchange rate set by the SBS, for statement of financial position data and of S/3.290333 = US$1.00, which is the average exchange rate on a monthly basis in 2018, for income statement data (for consistency with the annual amounts being translated). |
| (2) | Provision for credit losses on loan portfolio and allowance for loan losses include provisions and reserves with respect to direct loans losses and indirect loans losses or off-balance sheet items such as guarantees and standby letters, performance bonds, and import and export letters of credit. |
| (3) | Total other expenses includes net loss from exchange differences (S/60.6 million in 2016) and net loss on financial assets designated at fair value through profit or loss (S/4.1 million in 2014, S/33.5 million in 2015 and S/53.9 million in 2018). |
| (4) | The number of shares consists of capital stock (see Note 17(a) to the Consolidated Financial Statements) less treasury stock (see Note 17 (b) to the Consolidated Financial Statements). |
| (5) | Basic earnings per share is calculated by dividing the net profit for the year attributable to Credicorp’s equity holders by the weighted average number of ordinary shares outstanding during the year, excluding the average number of ordinary shares purchased and held as treasury stock (see Note 29 to the Consolidated Financial Statements). |
| (6) | Dividends based on net profit attained for the financial years 2014 and 2015 were declared in Soles and paid in U.S. Dollars after converting the Soles amount using the weighted exchange rate of PEN/US$ as published by the SBS for transactions at the close of business on the declaration date. Dividends based on net profit attained for the financial years 2016 and 2017 were declared in Soles and 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 9, 2018 respectively. In October 2017, the Credicorp Board of Directors agreed to pay an additional dividend from the reserves, which was declared in Soles and 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. |
Dividends based on net profit attained for the financial year 2018 were declared in Soles and will be paid in U.S. Dollar on May 10, 2019 using the weighted exchange rate registered by the SBS for the transactions at the close of business on May 8, 2019.
| (7) | “Total loans” refers to “loans, net of unearned income” as disclosed in our Consolidated Financial Statements, which equals 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) above, that amounted to S/17,319.5 million, S/19,004.7 million, S/19,832.0 million, S/19,369.6 million and S/20,774.3 million, as of December 31, 2014, 2015, 2016, 2017 and 2018, respectively. See Note 20 to the Consolidated Financial Statements. |
| (8) | “Total deposits” excludes Interest payable. See Note 13 to the Consolidated Financial Statements. |
| (9) | Net interest similar income and expenses as a percentage of average interest-earning assets, computed as the average of period-beginning and period-ending balances. |
| (10) | Net profit attributable to Credicorp’s equity holders as a percentage of average total assets, computed as the average of period-beginning and period-ending balances. |
| (11) | Net profit 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. |
| (12) | Sum of salaries and employee benefits, administrative expenses, depreciation and amortization, acquisition cost and Association in participation, all as percentage of the sum of net interest income, commissions and fees, net gain from exchange differences, net gain in associates, net premiums earned, net gain on foreign exchange transactions, net loss (gains) on financial assets designated at fair value through profit or loss and net gain on derivatives held for trading. Acquisition cost includes net fees, underwriting expenses and underwriting income. |
| (13) | Sum of salaries and employee benefits, administrative expenses, depreciation and amortization and acquisition cost, all as percentage of average total assets. |
| (14) | Regulatory capital calculated in accordance with guidelines established by the Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (Basel Committee 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.” |
| (15) | Depending on the type of loan, BCP Stand-alone and Mibanco consider corporate, large business and medium business loans to be internal overdue loans for after 15 days; and overdrafts, small and micro business to be internal overdue loans after 30 days. For consumer, mortgage and leasing loans the past-due installments are considered internal overdue after 30 to 90 days and 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 30 days. BCP Bolivia considers loans as internal overdue after 30 days. |
| (16) | Other off-balance-sheet items primarily consist of guarantees and stand-by letters, performance bonds, and import and export letters of credit. See Note 20 to the Consolidated Financial Statements. |
| (17) | Allowance for direct loan losses, as a percentage of all internal overdue loans without accounting for collateral securing such loans. |
| (18) | Allowance for direct loan losses as a percentage of direct loans classified as impaired debt. 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.” |
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| 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 risks related to Peruvian political, social and economic conditions.
Most operations of BCP Stand-alone, Grupo Pacifico, Prima AFP, Mibanco 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 businesses. These 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.
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 in 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.
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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 (the diference was of 41,438 votes). 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, in response to concerns regarding Peru’s public infrastructure contracting process raised by Lava -Jato case investigations in Brazil and various other countries, on-going infrastructure projects in Peru that started during the last two governments were put on hold1. Furthermore, during 2017 Peru experienced the negative effects of El Nino Phenomenom, which was the worst El Nino Phenomenon since 1998 due to heavy flooding and infrastructure damage (bridges, road, etc.) in the north of the country (that represents approximately 20% of the Peruvian gross domestic product (GDP)). 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 the 87 votes required to approve the vacancy were obtained. In March 2018, a second Presidential Vacancy motion was presented by Congress. On March 21, 2018 Pedro Pablo Kuczynski presented his resignation as President to the Congress amid high political turmoil. His resignation was accepted on March 22, and on March 23, Martin Vizcarra (Kuczynski’s former first vice-president) took office as President for a term to end July 28, 2021, in a democratic process and as provided in the Constitution of Peru. 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. Despite the Lava Jato case, El Nino Phenomenom and the Presidential Vacancy motion of December 2017, the Peruvian real GDP grew 2.5% in 2017. This result was above the growth rates of Chile (1.5%), Colombia (1.8%), Mexico (2.1%) and Brazil (1.1%).
President Vizcarra held a Referendum on December 9, 2018 to address the following issues: (i) re-election of members of congress, (ii) reforms regarding financing for political parties, (iii) a reform of the judiciary system, and (iv) the return to the bicameral parliamentary system. All the reforms were approved, except for the return to the bicameral parliamentary system. The referendum had no material impact on the business environment.
Notwithstanding, during the past 18 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 5.0% for real GDP and 5.4% for domestic demand (2001-2018); four consecutive democratic transitions; a relatively consistent free-market approach to economic policy; and growth in GDP per capita, which reached US$7,118 in 2018 (equivalent to S/ 24,010 at an exchange rate of S/ 3.373 per US$1.00), 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 (with a two percent points difference with Kuczynski) amid promises to hinder mining projects with vast regulation and renegotiate gas export contracts. Hence, there is a sizeable portion of the population still asking for an economy that is more reliant on govenment spending. Therefore, a risk of significant political and economic change remains.
1 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 been investigating former and current local authorities in Peru for alleged payments from Odebrecht.
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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. 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 (Amazon rainforest). 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. Moreover, in 2018 another three members from Shining Path were released.
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 2018, mining represented approximately 9% of Peru’s GDP and approximately 59% of the country’s exports, while oil and gas represented 1% of Peru’s GDP and 8% of 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, hurting agricultural and other traditional economic activities, as well as complaining of not receiving the benefits in terms of growth and wealth generated by the mining proyects. In late 2011 and throughout 2012, social and political tension peaked around Conga, a gold mining project in Cajamarca in northern Peru. The launch of Conga, which involved investments of approximately US$4.5 billion, failed because of the protests.
Delays or cancellations of mining projects could reduce Peruvian 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).
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(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.
(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 Stand-alone, BCP Bolivia, Mibanco, 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 Stand-alone, BCP Bolivia, Mibanco, 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”.
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(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. As a consequence, the fluctuation of our functional currency against other currencies, or any exchange controls implemented in the countries in which we operate, could have an adverse impact on our financial condition and results of operations. BCP Stand-alone, BCP Bolivia, ASB, Credicorp Capital Colombia and Credicorp Capital Chile are particularly exposed to foreign exchange fluctuations.
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 information, 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 information, 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 Stand-alone. To address this risk, BCP Stand-alone 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. For further information, 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 Organica 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 BCRP supervise and regulate BCP Stand-alone 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 BCRP have general administrative responsibilities over BCP Stand-alone and Mibanco, including defining capital and reserve requirements. In past years, the BCRP 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 BCRP. Such changes in the supervision and regulation of BCP Stand-alone and Mibanco 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 Stand-alone 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 certain of our subsidiaries such as BCP, Credicorp Capital Sociedad Agente de Bolsa (Credicorp Capital Bolsa), Credicorp Capital Sociedad Administradora de Fondos (Credicorp Capital Fondos), Credicorp Capital Peru S.A.A. and Credicorp Capital Titulizadora.
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 Chilean Financial Market Commission (CMF - Comision para el Mercado Financiero). See “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.6 Credicorp Capital”.
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. On January 1, 2019, the OECD´s Common Reporting Standard (CRS) will take effect in Peru, which will increase current client due diligence efforts for BCP Stand-alone and other Credicorp financial subsidiaries in Peru.
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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 (CCSI), which is 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 Fiscalizacion 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 a discussion of Peruvian Regulationtax 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).
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 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 December 31, 2018. This transitory rule would be in effect until December 31, 2021.
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 was 33% for fiscal year 2018 and a temporary income surtax of 4% was introduced (34% and a surtax of 6% for 2017). This surtax applied only from a tax base equal to or greater than 800,000,000 Colombian pesos, approximately US$268,096.
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For 2019, Colombian corporate income tax rate is, in general, 33% and will decrease to 32% in 2020, 31% in 2021 and 30% as from 2022. However, a temporary surtax will be applied only to financial institutions whose taxable income equals to or exceeds US$ 1.3 million approximately. (CC Fiduciaria, our Colombia trustee company, is eligible for this surtax). In 2019 the surtax rate is 4%, in 2020, 3%; and 3% in 2021.
Without prejudice of the provisions established in tax treaties, distribution of dividends to non-residents is subject to a 7.5% withholding tax, as from 2019. When the corresponding profits were not taxed at the level of the distributing company, the corporate income tax rate would be applied over the dividends (the percentage will depend on the year of distribution), and after that, the 7.5% tax.
Foreign portfolio investment is also subject to the 7.5% withholding tax. However, in case of previously untaxed corporate profits, instead of applying the general income tax rate, a withholding tax of 25% will be assessed.
Corporate profits earned up to December 31, 2016, are not subject to the 7.5% withholding tax on dividends, even though the distribution occurs from and after January 1, 2017.
Finally, as from 2019, profits distributed to Colombian companies are also subject to the 7.5% tax, under similar conditions of non-resident investors, even though some exceptions apply. In any case, the tax paid by the Colombian company over the dividends can be transferred to its foreign investors. Therefore, they are entitled to use it as a tax credit against its own tax when they receive dividends.
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. (Pacifico Seguros), 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.
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.
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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.
Pension fund
In 2012, the Peruvian Government passed a law to reform the Private Pension System (SPP by its Spanish initials), which attempted to expand coverage for affiliates, encourage market competition, and decrease administration fees in the SPP.
In 2016, the Congress approved a reform that allows pensioners to withdraw up to 95.5% of their pension funds. This initiative may motivate affiliates that haven’t reached the age of retirement to apply to an early retirement regime by altering their employment situation. See “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.5 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. For further detail on concentration of loan portfolio see item 4.b 10.3.3 Concentrations of loan portfolio and lending limits. 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 2018, due to: (i) a high political polarization, (ii) weak global demand, 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 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 October 2019. Political instability ahead of the 2019 elections could lead to a reduction in 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 2018, Bolivia’s macroeconomic indicators recovered. GDP growth in 2018 is expected to be reported at 4.5%, 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 4.7%. Also, in 2018 the trends indicate that for a fourth consecutive year, Bolivia experienced both fiscal and current account deficits due to lower gas exports and increased government spending. Inflation in 2018 was the lowest since 2009, at 1.51%, which was below the BCB’s original and adjusted targets of 4.5% and 3.5%, respectively. On the other hand, as of December 2018, international reserves represented 22% of GDP (US$8.946 billion), a decrease of 12.8% in comparison to 2017.
Colombia
The Colombian economy expanded by 2.7% in 2018, meaning an acceleration when compared to the 1.8% growth rate posted in 2017. Thus, Colombian economic activity started to recover following three years of slowdown after the strong fall in oil prices in 2014. The election of Mr. Ivan Duque as President in June 2018 improved economic sentiment, allowing for a gradual recovery of private investment after the high political uncertainty in previous years had led firms and households to postpone investment decisions. In addition, consumers are facing a better backdrop amid lower inflation and interest rates. Overall, improvements in the economy have continued to be in an orderly manner, particularly considering that the imbalances on both fiscal and external accounts have continued to be reduced. In fact, the fiscal deficit reached 3.1% of GDP in 2018, down from 3.6% in 2017 and 4.0% in 2016, while the current account deficit stabilized near 3% of GDP, well below 6.3% in 2015. Within four months of Mr. Duque taking office, the Colombian Congress passed tax reform aimed no only at raising income to meet the 2019 fiscal target (2.4% of GDP) but also to improve the conditions of firms through a strong reduction of corporate taxes (the statutory tax rate will fall to 30% by 2022, down from 40% in 2017 and 33% in 2019). At the same time, fiscal accounts remain the main long-term challenge of the Colombian economy, as the fiscal law for the upcoming years is still demanding and the enacted reduction of corporate taxes will pose new pressures on fiscal income from 2020 onwards, entailing the need of additional reforms in the next years. In any case, the Colombian government has affirmed that compliance with the fiscal rule remains a priority and so, it will take the necessary actions. Under this context, both S&P and Fitch recently reaffirmed their rating on Colombia at BBB- and BBB, respectively, with a stable outlook.
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Chile
The Chilean economy grew by 4% in 2018, the highest pace in five years amid a solid investment performance, which expanded 6% after four consecutive years of contractions. The change in government played a key role, which has been particularly reflected in sentiment. According to firms, the strong reduction of regulatory risks under the Pinera administration has led to a rise in confidence and unlocked investment projects that remained on hold during the previous government. Specifically, several firms have decided to invest in the replacement of depleted assets as well as in technology to gain in efficiency and productivity. Also, higher copper prices compared to previous years led to the announcement of large-scale mining projects, with Quebrada Blanca and Los Pelambres becoming the most relevant with a planned joint total investment of around US$ 6 billion, over several years. Overall, the imbalances of the Chilean economy remain bounded with a current account deficit that stands near 2% of GDP, more than funded by FDI inflows, and a fiscal deficit that reached 1.7% of GDP in 2018, well below the 2.8% observed in 2017. That sentiment decreased somewhat in the last part of 2018 with the inability of the government to approve a proposed tax reform (aimed to reintegrate the tax system) and difficult discussions around pension reform, both being critical factors especially as President Pinera does not have a legislative majority in either house in Congress. Accordingly, politics and the approval of key reforms remain as core challenges for Chile amid the need of maintaining a fiscal consolidation process in the upcoming years while increasing spending needs, especially on social programs.
(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.
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As risk is inherent in the Group’s trading activities, we have implemented a risk management process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process 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 Nino Phenomenon, which provokes floods and mudslides in the north and central Andean regions. Due to its very strong intensity, the 1997-1998 El Nino Phenomenon destroyed crops and infrastructure equivalent to 2.2% of GDP. Heavy rains caused by El Nino Phenomenon 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.
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 of loss; 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, may put pressure on our margins and reduce our profitability.
BCP Stand-alone 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 Stand-alone’s corporate customers through securities issuances. |
Larger Peruvian companies have gained access to new sources of capital through the local and international capital markets, and BCP Stand-alone’s existing and new competitors have increasingly made inroads into the higher margin, middle market and retail banking sectors. Such increased competition has affected BCP Stand-alone’s loan growth as well as reduced the average interest rates that BCP Stand-alone can charge to 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 Stand-alone’s products and services. Such competition would adversely affect the acceptance of BCP Stand-alone’s products and/or lead to adverse changes in the spending and saving habits of BCP Stand-alone’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 Stand-alone, BCP Stand-alone’s products and services may be unable to compete successfully. BCP Stand-alone 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 its 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 Stand-alone because of their greater financial resources, higher sales and marketing capacity or other similar factors.
As a result of Peru’s better economic growth, 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 also will eventually put downward pressure on interest rates. Any negative impact on BCP Stand-alone as a result of increased competition could have a material adverse effect on our results of operations and financial condition. For further detail about the competitive market in our Lines of business 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 peaking at 14% in 2007 and represented 5% of total tax revenues in 2018. In addition, gold and copper exports represented 47% of all shipments in 2018 (49% 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, 2018 registered a US$7.0 billion trade surplus (2017: US$ 6.6 billion), the highest since 2011, due to a US$6.8 billion increase in copper exports and US$1.6 billion increase in gold exports since 2015 (the exported volume of copper increased 50.4% and the average export prices of gold increased 9.4% in the same period). In 2018 the average price of copper stood at US$2.96 per pound, its highest price in the last four years. Meanwhile, terms of trade remained stable in 2018 (in 2017 they increased 7.1%, the first increase in the last 6 years).
In addition to changes in prices, Peru is also vulnerable to fluctuations in foreign demand, especially from China and the United States. A 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. A reduction of 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), a free trade agreement (FTA), after a long period of negotiations between the Trade ministers of the 12 Asia-Pacific countries, a final agreement was signed on February 4, 2016. However, on November 22, 2016 the President elect of the United States announced the United States withdrawal from TPP while the other 11 countries reached an arrangement to continue with the agreement without the United Staates. On March 8, 2018, these 11 countries signed a modified FTA called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP or TPP11). Since then, United States officials, including President Donald Trump have suggested that the United States mayrejoin the TPP.
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Throughout 2018, there were some trade tensions between United States and China. Early in 2018, the President of the United States issued a memorandum directing his administration to take several actions, including to: file a World Trade Organization case against China for discriminatory licensing practices, restrict investment in key technology sectors, and impose tariffs on Chinese products (such as aerospace, information communication technology and machinery). On July 6, 2018, the United States put in place the first China-specific tariffs (25% on 818 imported Chinese products valued at US$34 billion, referred to as List 1). China took retaliatory measures by imposing a 25% tariff on 545 goods imported from the US, worth US$34 billion. On August 7, 2018, the US released a revised version of the 25% tariffs on a List 2 of goods imported from China worth US$16 billion; China announced on the same day a reciprocal 25% additional tariff on US imported goods valued at US$16 billion. Both of these second-round tariffs were implemented on August 23, 2018. On September 24, 2018, the US implemented a third round of tariffs to Chinese imported goods worth US$200 billion with an initial carry rate of 10% (set to increase up to 25% by January 1, 2019); China reacted with tariffs on US imported goods worth US$60 billion with a rate varying between 5% - 10%. After resuming negotiations in late November 2018 and during the G20 Summit in Buenos Aires in December 2018, US and China agreed to a temporary truce in which both countries would refrain from increasing tariffs or imposing new tariffs for 90 days (until March 1, 2019) as they work towards a large and complete trade deal. To date, no comprehensive trade deal has been struck. The development of the trade tensions between the US and China is relevant to Peru’s economy and businesses because the US and China are Peru’s main trading partners and are relevant drivers of global demand.
Furthermore, financial conditions in global markets also affect the Peruvian economy, affecting interest rates for local corporate bonds and influencing the exchange rate. Monetary policy tightening in developed economies, particularly on the Federal Reserve System in the United States, could affect economic activity in Peru since it strengthens the US dollar and increases interest rates, thereby reducing access to funding for some local businesses. Also, since the Peruvian economy still has some level of loans denominated in U.S. Dollars (28.2% of loans and 37.3% of deposits as of December 2018), which we sometimes refer to as dollarization, potential statement of financial position effects should be taken into account since a higher exchange rate could increase debt burdens for individuals and businesses that have taken loans in dollars but earn their income in local currency.
However, the BCRP has taken steps to foster de-dollarization and thus reduce this vulnerability by implementing in January 2015 the so-called “De-dollarization Program” that implies additional U.S. dollar reserve requirements on financial institutions if:
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| • | The balance of total loans in dollars (excluding loans for foreign trade operations and loans with a term greater than 3 years and over US$ 10 million since January 1, 2015) as of December 2015 was 90% above the balance recorded in September 2013. In December 2016, the target was updated to 80% of the balance recorded as of September 2013. This target continued to apply for December 2017. For December 2018 the target considered total loans in dollars and required additional U.S. dollar reserve requirements on financial institutions if the balance is either: (i) above 80% of the balance of September 2013, (ii) above the balance of loans in dollars of December 2017 plus 40% of the additional flows in domestic currency compared to Decemeber 2017 (the flows in domestic currency are converted to U.S. dollars using the pubished exchange rate by the SBS, and exclude mortgage, consumer and foreign trade loans) or (iii) above 1.04 times the balance of loans in dollars of December 2017. As of February 2019, the BCRP has made no further rulings on this topic. |
| • | The 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 2018 was updated to 60% of the balance recorded in February 2013; and thereafter the target would be lowered by 10 percentage points each year. As of March 2019, the target for December 2019 is 50% of the balance recorded in February 2013. |
| • | In the case of U.S. dollar total loans, the reduction target is calculated based on period-end balances as of September 2013. The reduction target for the joint portfolio of mortgage and car loans was calculated with period-end balances as of February 2013. However, compliance levels for both targets are calculated using average daily balances. |
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 discussed 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 Stand-alone and Mibanco – 9.2.7 The BCRP’s 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 U.S. dollars through a Repo - Expansion. However, under no circumstance, can the median reserve requirements decrease below 25%; |
| · | Providing local currency to financial institutions at spot foreign exchange (FX) prices in order to finance the re-denomination of their loans in U.S. dollars 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.
Like most significant financial companies, we are susceptible to, among other risks, 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 constantly strive to provide more, and better, functionality to our customers; expanding our mobile and internet-based products and services, at the same time this increased our footprint and visibility, and thus our susceptibility.
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While we believe that we maintain an internal control system designed to monitor and control operational risk, we cannot assure that our system of internal controls will be entirely effective. Although we have a strong information technology (IT) infrastructure and highly-skilled professionals managing our IT operations, our risk exposure could be significant. We are still vulnerable to a failure of our operational systems and to cybersecurity threats. Losses from the failure of our internal control system to discover and rectify such matters could have a material adverse effect on our business, financial condition and results.
To address these risks, we have defined and implemented governance with specific roles for risk management & control assessment, monitoring & awareness programs, security initiatives, business objectives, corporate alignment and regulatory compliance with requirements for banking, insurance and pension fund industries in Peru, Bolivia, Chile, Colombia, Panama, the Cayman Islands and the United States.
In 2017, we engaged The Boston Consulting Group (BCG) to review and determine the best cybersecurity governance model for our organization. As a result, during 2018, we increased our investment levels to address the evolving threat environment and implemented a structure of three lines of defense. The first line remains in the IT Division and includes the IT Security and the Security Architecture functions. For the second line of defense, we created the Cyber Security Area, in charge of our Chief Information Security Officer (CISO), who reports directly to the Chief Risk Officer (CRO); this unit defines our cybersecurity strategy and policies, based on the most advanced international standards. Our Internal Audit Division is the third line of defense, reviewing the soundness of the control environment. Furthermore, in 2018, we adopted the National Institute of Standards and Technology (NIST) Cybersecurity Framework, while keeping the ISO 27001 framework that we have been using to control our information security management system. Further, we formed an alliance with a specialized provider to have 2nd generation Security Operations Center (SOC) services and have improved our capabilities with initiatives in security awareness, data protection, privilege access management, among others.
While Credicorp has not yet experienced any material losses related to cyber-attacks or operational instability, 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. We remain subject to substantial cybersecurity risks, and any failure in, or breach of, our operational or cybersecurity systems could temporarily interrupt our businesses, 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.
(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.
As financial institutions, our subsidiaries are subject to significant anti-money laundering and anti-terrorist financing laws and regulations. We work diligently to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations, and have developed various policies and procedures under a comprehensive risk-based approach as provided by the laws of each country in which Credicorp operates and the Financial Action Task Force (FATF) recommendations and international practices. In this regard our processes contemplate internal controls and "know your client" 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. We must indicate that our processes are reviewed annually by internal and external audit and by the regulator itself. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could be affected, 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 operations. To mitigate the risk mentioned above, 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. For further detail please see Note 11.b) to the Audited Financial Statements: Intangible Assets and Goodwill.
(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.
While Credicorp’s internal 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, a failure by one or more of our counter-party reinsurance companies to honor their contractual obligations could have a material adverse effect on our financial condition and results of operations.
(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, internal and external fraud, computer crime, professional liability for services we provide, directors and officers liability and general liability against general claims involving bodily injuries and property damage. 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.
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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.
(17) Bermuda’s continued presence on a list of non-cooperative jurisdictions published by the European Union could adversely affect our financial condition or results of operations.
During 2017, the European Union Economic and Financial Affairs Council (ECOFIN) released a list of “non-cooperative jurisdictions” for tax purposes. Although not at that time considered “non-cooperative jurisdictions,” certain countries, including Bermuda, were listed as having “tax regimes that facilitate offshore structures which attract profits without real economic activity.” Despite enacting legislation in 2018 designed to satisfy the commitment made by Bermuda to address ECOFIN’s concerns relating to economic substance, on March 12, 2019, Bermuda was placed on the EU’s list of non-cooperative tax jurisdictions. The effect of this listing is not yet clear, but Member States of the EU may choose to apply a range of countermeasures to Bermuda and entities registered in Bermuda (such as Credicorp). The Bermuda Government has stated that it believes the relevant Bermuda legislation complies with EU requirements and is committed to reversing Bermuda’s inclusion on the list of non-cooperative tax jurisdictions at the earliest opportunity, but we cannot assure you that the Bermuda Government will be successful in these efforts. If Bermuda is not removed from the list, we cannot assure you that any sanctions or other countermeasures that may be applied by European Member States to Bermuda and to entities registered in Bermuda (such as Credicorp) or the EU’s prohibition of funds being channeled or transited through Bermuda, as well as any measures that Bermuda may adopt in response to such countermeasures and prohibition, will not adversely affect our financial condition or results of operations.
We are undertaking a comprehensive analysis of the regulations to assess their impact on Credicorp and our subsidiaries with operations outside of Peru. It is important to note that approximately 91% of Credicorp’s income is generated by subsidiaries constituted and operating in Peru, for further information please refer to Notes on the Consolidated Financial Statement (See Note 30 OPERATING SEGMENTS – (ii)).
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 for, and to coordinate the policy and administration of our subsidiaries, which include BCP Stand-alone, BCP Bolivia, Mibanco, Grupo Pacifico, Prima AFP, Credicorp Capital and ASB. We currently hold, directly and indirectly, 97.70% of BCP, 100.00% of BCP Bolivia, 97.74% of Mibanco, 98.80% of Grupo Pacifico, 100.00% of Prima AFP, 100.00% of Credicorp Capital and 100.00% of ASHC (and 100.00% of ASB through ASHC). 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 & pension funds and Investment Banking and Wealth Management 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, and the address of our Internet website is www.credicorpnet.com. 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 its phone number is +51-1-313-2000.
The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our electronic filings with the SEC are available to the public from the SEC’s Internet website at http://www.sec.gov.
As of December 31, 2018, our total assets were S/ 177.3 billion and our equity attributable to Credicorp’s equity holders was S/ 23.8 billion. Our net profit attributable to Credicorp’s equity holders in 2016, 2017 and 2018 was S/ 3,514.6 million, S/ 4,091.8 million and S/3,983.9 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 Stand-alone. Assets transferred included Credicorp Capital Bolsa, Credicorp Capital Titulizadora, Credicorp Capital Fondos and BCP Stand-alone’s investment banking activities. The equity block split had no effect on Credicorp’s consolidated financial statements; no gains or losses arose from it.
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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.
In 2015, Grupo Pacifico signed an agreement with Banmedica to participate as equal partners in the health insurance and medical services business. This association includes the private health insurance business managed by Pacifico Seguros, the corporate health insurance for employees sold by Pacifico corporate health insurance business, and medical subsidiaries that provide medical services. As a result, Grupo Pacifico transferred the majority control of Pacifico corporate health insurance business to Banmedica. Therefore, Pacifico corporate health insurance business and the medical subsidiaries no longer consolidate with Pacifico Seguros for accounting purposes and are reported as an investment in associates.
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 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 May 12, 2016, BCP Stand-alone sold its shares of 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. A total of 43,237 shares were sold at a price of Bs. 25,811 per share, representing sales proceeds of Bs. 1.1 billion, equivalent to US$162.7 million. To finance the acquisition by ICBSA, Grupo Credito S.A. (which is a shareholder of ICBSA and a subsidiary of Credicorp Ltd.) made a capital contribution in Bolivianos to ICBSA of approximately US$163 million.
On September 30, 2016, Credicorp Capital, through its holding subsidiaries, concluded the acquisition of the non-controlling interests 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 approximately US$120.1 million to Credicorp Capital, which, in addition to other available resources, allowed these acquisitions to proceed.
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In January 2017, Credicorp’s Board of Directors approved the transfer of 9% of BCP Stand-alone’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 holding structure of BCP Stand-alone. The total amount paid for all the shares was S/3,505,916,484.50. Upon the completion of this transaction, Credicorp directly held 3.7% of BCP Stand-alone’s total shares and, in conjunction with its subsidiary Grupo Credito, continued to control 97.7% of BCP Stand-alone’s shares. This modified organizational structure did not affect the way Credicorp and BCP Stand-alone 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, after the Superintendent of Banking, Insurance and AFP issued the corresponding Merger authorization. As a result of the merger, PPS's shares were excluded from the Public Securities Market Registry and delisted from the Lima Stock Exchange (BVL, by the initials for its Spanish name, Bolsa de Valores de Lima), without the obligation to make a public offering by exclusion, and Pacifico Vida acquired all of the rights and obligations of Pacifico Seguros Generales. The resulting company is named Pacifico Compania de Seguros y Reaseguros (Pacifico Seguros). We expect the merger to permit Credicorp to realize synergies in its decision-making process and to integrate all its insurance business lines, which would also allow Grupo Pacifico to provide more integrated insurance solutions to its customers. No gains or losses were recognized in our statement of comprehensive income as a result of this merger.
In December 2017, UnitedHealth Group Inc (UnitedHealth) and Banmedica announced that Banmedica and a wholly owned subsidiary of UnitedHealth had signed a definitive purchase agreement and that the subsidiary intended to launch a tender offer for Banmedica, in a transaction that would value Banmedica’s equity at approximately US$2.8 billion. Upon the closing of the tender offer transaction, UnitedHealth owned 96.8% of Banmedica.
Also, 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. These change took effect on April 1, 2018.
On April 18, 2018, Credicorp Ltd., through its subsidiaries Grupo Credito S.A. and BCP Stand-alone acquired 3.23% and 0.06%, respectively, of the share capital of Mibanco from minority shareholders for approximately S/129.0 million and S/2.4 million, respectively. Additionally, on May 22 and 23, 2018, BCP Stand-alone acquired 1.22% and 0.05%, respectively, of the share capital of Mibanco from minority shareholders for approximately S/47.3 million and S/1.9 million, respectively. These acquisitions of non-controlling interest were recorded as equity transactions. Through these acquisitions, Credicorp Ltd. increased its interest in the share capital of Mibanco from 93.18% to 97.74%.
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On May 7, 2018, Credicorp Ltd. sold to its subsidiary Grupo Credito S.A. 220,113,636 shares of BCP Stand-alone owned by Credicorp Ltd., which represented 2.77% of BCP Stand-alone's share capital. The amount paid per share was S/6.61. Following this sale, Credicorp, in conjunction with its subsidiary Grupo Credito, continued to own 97.7% of the shares of BCP Stand-alone.
Subsequent Events
On February 12, 2019, Credicorp Ltd., through its subsidiary Credicorp Capital Holding Colombia, reached an agreement with the shareholders of Ultraserfinco S.A. Comisionista de Bolsa, a financial services company in Colombia, to acquire the 100% stake in that entity for approximately US$43.0 million. Closing of this transaction is subject to approval from the authorities in Colombia, upon receipt of which the transaction will be completed.
On March 27th, Credicorp Ltd. announced to its shareholders and the market that Krealo, a subsidiary of Credicorp, has agreed to pay approximately US$ 19 million to acquire 100% stake of Multicaja’s digital business unit. The payment will be made in two installments, 50% in 2019 and the remaining in 2020. The transaction is subject to compliance with certain conditions precedent and approvals. Multicaja is a Chilean payment-acquiring company founded in 2007 with a wide presence in Chile through more than 17,000 affiliated merchants and 700,000 online users. The digital business unit of Multicaja comprises: support services to cross-border payments, online top-ups, online utility payments, and pre-paid accounts. The prepaid account business requires a regulatory approval from SBIF (the Chilean Banking Supervisor).
| 4. B | Business Overview |
| (1) | Lines of Business (LoBs) |
We are the largest financial services holding company in Peru. For management purposes, Credicorp is organized into four LoBs 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 LoBs as follows: Universal Banking, Microfinance, Insurance & Pensions and Investment Banking and Wealth Management.
| 1.1 | Universal 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 Stand-alone’s Wholesale Banking Group (WBG); (ii) retail banking activities, including our SME-Business, SME-Pyme, mortgage, consumer financing, credit card segments, which are carried out by BCP Stand-alone’s Retail Banking Group (RBG); (iii) treasury activities, including money market trades, foreign exchange trading, derivatives and proprietary trading; and (v) wholesale and retail banking activities in Bolivia.
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The majority of our banking business is carried out through BCP Stand-alone. We conduct banking activities in Bolivia through BCP Bolivia, a full service commercial bank.
We apply uniform credit policies and approval and review procedures, which are based on conservative criteria adopted by BCP Stand-alone and BCP Bolivia. Our Chief Executive Officer (CEO) 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, and the guidelines set forth by our Board of Directors. For further details, see “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation”.
Our deposit-taking operations are principally managed by BCP Stand-alone’s RBG group. See “Item 4. Information on the Company – 4.B Business Overview – (10) Selected Statistical Information – 10.4 Deposits”.
1.1.1 BCP Stand-alone
| (1) | Overview |
BCP Stand-alone has two branches in Miami and Panama. See “Item 4. Information on the Company – 4.C Organizational Structure – (2) BCP.” BCP Stand-alone’s operations are supervised and regulated by the SBS and the BCRP. As of and for the year ended December 31, 2018, BCP Stand-alone represented 75.0% of our total assets, 71.8% of our net profit and 63.2% of our equity attributable to Credicorp’s equity holders.
The following table shows the client segmentation of BCP Stand-alone. This segmentation was a result of an analysis, which addressed multiple factors such as the size and volume of activity for each client, the clients’ affiliation with other companies or groups and their credit ratings.
| Client Segmentation | ||||
| Business | Group | Client Income/Sales/Total debt | ||
| Wholesale Banking Group (WBG)(1) |
Corporate | Annual sales higher than $100 million | ||
| (equivalent to S/337 million) | ||||
| Middle-Market | Annual sales from $10 million to $100 million | |||
| (equivalent to S/34 million to S/337 million) | ||||
|
Retail Banking Group (RBG) |
Enalta | Individual monthly income at least S/20,000; or more than US$ 200,000 in AuM (not including severance indemnity deposits) | ||
| Affluent | Individual monthly income from S/5,000 to S/20,000 | |||
| Consumer | Focus on medium- and low-income individuals (less than S/5,000 of individual monthly income) | |||
| 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 | |||
| (1) | Converted into Soles at the exchange rate of S/ 3.373 per U.S. Dollar, December 31, 2018 - SBS. |
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| (2) | Business segments |
| (2.1) | Wholesale Banking Group (WBG) |
WBG competes with local and foreign banks. WBG’s loan book amounted to S/44,780 million in 2018 (a 9.4% YoY increase), compared to average daily balances of S/40,964 million in 2017 (a -2.0% YoY decrease) and S/41,793 million in 2016 (a 7.1% YoY increase). It also maintained its leadership in the Peruvian Wholesale Banking market with a 39.0% market share in loans, according to the SBS and ASBANC. It has also established longstanding client relationships with virtually all of the major industrial and commercial groups in Peru. The 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 divisions and support areas:
Corporate and International Division (CID)
The CID provides financing for capital expenditures and investments, sales, international trade, and inventories. It offers medium- and long-term financing, financial leases, and project financing and includes the following subdivisions:
| • | Corporate banking subdivision, which provides loans and other credit and financial services, focuses on serving large-sized companies in Peru that have annual sales 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 & leasing subdivision manages relationships with financial institutions (locally and abroad), and provides 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. |
BCP Stand-alone assists its corporate clients with financial services, cash management solutions and short- and medium-term financing through the CID. BCP Stand-alone’s corporate banking loans, measured in average daily balances, decreased from S/28,162 million in 2016 to S/26,807 million in 2017, but grew to S/28,083 million in 2018.
Regardless the intense competition from foreign banks, which finance their operations at lower costs due to the fact that our monetary authority has high U.S. dollar reserve requirements for local banks, BCP Stand-alone has a leading position in the Peruvian banking system with 40.3% of the market share for corporate banking loans, according to the SBS and ASBANC.
Middle-Market Banking Division (MMD)
| • | The MMD serves mid-sized companies, organizations and institutions. In identifying potential clients, MMD considers a mix of different characteristics, such as annual revenues, financial leverage, overall debt and product penetration and complexity. The MMD clients’ annual revenues generally range between US$10 million to US$100 million and are serviced nationwide by 12 BCP Stand-alone regional managers and multiple industry-focused service teams. |
| • | MMD focuses principally on serving profit and non-profit organizations, state-owned companies and other major institutions. |
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| • | Furthermore, Institutional Banking Unit, which operates within the MMD, serves 1,345 clients throughout Peru. In Lima, a specialized MMD team serves governmental entities, educational institutions, religious organizations, international bodies, non-governmental organizations, civil associations, and regulated entities, such as microfinance institutions, insurance companies, pension funds, and private funds. In other provinces, a specialized remote team partners with RBG to serve clients. |
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. |
The MMD loan portfolio was S/13,631 million as of December 31, 2016, S/14,157 million as of December 31, 2017, and S/16,697 million as of December 31, 2018. As of December 31, 2018, BCP Stand-alone had a market share of 37.1% in the Peruvian middle-market segment, according to the SBS and ASBANC.
Support areas
International Banking Unit
BCP Stand-alone’s International Banking Unit focuses on obtaining and providing short-term funding for international trade, as well as medium-term lines of credit funded by international commercial banks and other countries’ governmental institutions. In addition, this unit earns fees by confirming letters of credit and guarantees issued by international banks and otherwise by providing international payment and trade finance services. BCP Stand-alone’s 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.
Cash Management & Transactional Services Unit
BCP Stand-alone’s Cash Management and Transactional Services Unit provides transactional services and products to WBG’s clients for their day-to-day operations such as payments, collections, factoring, automated payments, electronic office banking, electronic lending solutions, among the most important.
2.2) Retail Banking Group (RBG)
As of December 31, 2018, retail banking-related loans represented 46.2% of BCP Stand-alone’s total loans, while retail banking-related deposits represented 59.8% of BCP Stand-alone’s total deposits.
The business segments within RBG are:
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Enalta
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 12 exclusive branches, 11 in Lima and 1 in Arequipa, and the benefit of personalized advice from investment, insurance and loan experts, as well as exclusive, by-invitation-only products. Enalta has approximately 38,000 clients.
Affluent / BEX
Customers in BCP Stand-alone’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 through our call center, and preferential interest rates on loans. Aproximately 60% of these 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. This year we redeployed 50% of these account managers into a remote and digital model, no longer located in the physical branches, which has allowed us to offer clients longer service hours, remote processes, and more personalized service through digital channels, among other things. BCP Stand-alone has approximately 387,000 mass affluent customers.
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 8 million medium-to-low-income individuals. Consumer Banking focuses on customers who receive their payroll through BCP Stand-alone (which represent slightly more than 1.5 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 may include non-banking benefits (such as access to discounts on non-banking products) and access to payroll advances.
SME-Business and SME-Pyme
BCP Stand-alone’s SME-Business and SME-Pyme Banking segments serve approximately 626,560 clients. We segment customers in these categories into two groups with different business models, services levels, and product access. SME-Business serves approximately 13,376 clients and SME-Pyme serves approximately 613,184 small and micro-business clients.
Mortgage
According to the SBS and ASBANC, as of December 31, 2018, BCP Stand-alone was the largest mortgage lender in Peru, with a market share of 31.68%, representing a growth of 1.31 percentage points since December 31, 2017. This increase was mainly attributable to an expansion in BCP Stand-alone’s average loan size.
As of December 31, 2018, mortgage loans accounted for 17.1% of Credicorp’s total loan portfolio, with an average loan-to-value ratio (LTV) of 54%. All of our mortgage-financing programs are available to customers with a minimum monthly income of S/1,500. The mortgage loans offered by BCP Stand-alone have a maximum maturity of 25 years.
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One of the product lines responsible for recent growth in the middle-income segment is MiVivienda. The MiVivienda program provides government-funded loans with down payment aid to purchasers of properties valued up to S/419,600. Under the program, BCP Stand-alone extended mortgages with LTV up to 90%, based on appraised value of a property (in local currency), and monthly mortgage payments of up to 50% of the client’s stable net profit. Mortgage loans to this sector represent approximately 16.4% of Credicorp’s total mortgage loans and 2.9% 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.
Credit card & Consumer loans
BCP Stand-alone’s outstanding credit card balances increased S/850 million in 2018, from S/4,229 million as of December 31, 2017 to S/5,079 million as of December 31, 2018 (a 20% increase), which allowed us to gain 120 basis points in market share in Peru, closing 2018 with a 22.7% market share, according to the SBS. In 2018, credit card use grew 18%, as we positioned our cards as customers’ main form of payment. These increases in outstanding balances and customer transactions allows us to increase interest and non-interest income.
In its credit card business, BCP Stand-alone continued to apply segmented strategies. BCP Stand-alone offers value to low-income customers by giving them access to credit and to its medium- and high-income customers through loyalty programs such as through a partnership with LATAM airlines.
In 2018, BCP Stand-alone launched a platform for the digital issuance of credit cards that is expected to be one of the main distribution channels in the future, which will reduce acquisition costs and allow us to target new customer segments. Additionally, we developed new servicing functionalities through chatbots and our remote banking platform.
Consumer loans without collaterals, measured in outstanding balances, grew from S/3,892 million as of December 31, 2017 to S/4,378 million as of December 31, 2018. The growth can be explained by our higher penetration in low income segments and the offering of more appealing credit terms to low-risk customers. Our current market penetration strategy for low income segments started in 2017, with the diversification of the value proposition and product portfolio, selling loans with limited amounts and short maturities. In 2018, BCP Stand-alone maintained this strategy, which allowed to attend this new segment in a profitable way and creating medium-term growth opportunities in the future. In 2018, we managed to consolidate the digital sales channel, which represented 35% of the total number of loans granted in 2018.
In 2018, BCP Stand-alone continued developing its prospecting tools, income estimators and customer scoring models. This allowed that 80% of loan sales come from pre-approved and approved loans, which facilitates the proactive sales in cost-efficient distribution channels. Also, we have led layout improvements and commercial initiatives in our distribution channels, which resulted in better productivity ratios of the commercial team.
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(2.3) Treasury
BCP Stand-alone’s Treasury function is managed through three primary units: Assets & Liabilities Management (ALM) Group, the Trading Unit (comprising the FX, Derivatives, and Proprietary Trading Units), and the FX and Derivatives Distribution Unit.
ALM Group
The ALM Group is responsible for managing BCP Stand-alone’s statement of financial position and for taking reasonable interest rate and liquidity risks under the oversight of our Asset and Liabilities Committee (ALCO). The ALM Group is also responsible for maintaining our liquidity asset portfolio and Liquidity Coverage Ratio (LCR) and Common Equity Tier 1 (CET1) ratio compliance under the third Basel Committee Accord (Basel III) standards. In addition, the ALM Group is a participant in money and debt capital markets, oversees reserve requirements, manage BCP Stand-alone’s liquidity and the bank’s statement of financial position. The ALM Group has been active in auctions held by the BCRP 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.
Trading Unit
BCP Stand-alone’s Trading Unit manages both FX and Interest Rate Risk exposure for proprietary trading purposes. The market risk exposures and limits are independently defined by the Market Risk Unit and closely monitored by the Treasury Risk Unit. BCP Trading Unit is divided into three desks; as follows:
BCP Stand-alone’s FX Trading Desk offers liquidity for FX Spot operations for its clients in USDPEN, other Latin-American, and G-10 currencies; and actively participates in FX transactions related to the different instruments designed by the BCRP in the local currency market.
BCP Stand-alone’s Derivatives Desk offers Cross Currency and Interest Rate Swaps, as well as tailor-made derivatives for our customers in Peru and Latin America. A team of highly trained market professionals, with years of experience in various markets, allows BCP to provide sound and cost-effective financial solutions to its customer base.
BCP Stand-alone’s Fixed Income Trading Desk consists of short-term investments in securities both corporate and governmental from Latam countries and the US. The BCP Stand-alone’s Fixed Income desk is one of the main liquidity providers in the local government bond market in Peru, where it is part of the Market Maker Program of the Ministry of Economy of Peru
FX and Derivatives Distribution Unit
BCP Stand-alone’s FX and Derivatives Distribution Unit helps both individuals and companies with their FX needs (spot and hedging) through all BCP Stand-alone’s channels (sales desk, branch network, agents, and electronic channels). The broad portfolio of FX products provided to its client base has allowed the FX and Derivatives Distribution Unit to position itself as the largest participant by trading volume in the FX business in the Peruvian market.
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(2.4) Transformation
The Digital Transformation of BCP Stand-alone represents one of the most important strategic initiatives the largest subsidiary of Credicorp is embarked on. This initiative has a wide scope and as such has required the involvement of all units across the organization. It is important to briefly highlight the process that Senior Management at BCP-Stand-alone have followed in the last years.
2014 - 2015
Towards the end of 2014 and for the full year 2015, BCP Stand-alone initiated a comprehensive analysis to understand how digital technology could change the business and operational model of a Bank, and as such how it should be incorporated in the organization. The process allowed Senior Mangement to recognize that “digitalization” was beyond a traditional upgrade of IT and systems, and more than just the creation of digital products and channels.
BCP Stand-alone decided to launch its InnovaCXion Center in 2015.
2016
The InnovaCXion Center (“Center”) was created to improve the customer experience using digital technology. Towards the end of 2016 the Digital Transformation Unit incorporated IT, Customer Experience, Data and Strategic Information Analysis & Governance. In the first year of operations, the Digital Transformation Unit created some minimum-viable-products (MVP) such as:
| i) | An onboarding self-service platform to open savings accounts at a branch; |
| ii) | a peer-to-peer payment application called "Yape", which uses the cell phone number as the customer account; |
| iii) | A web-based self-service platform to offer personal loans to our clients that reduced distribution cost per unit and thus, the minimum ticket and tenure for a personal loan. This has allowed us reach low-income segments profitably. |
2017
BCP Stand-alone continued fine-tuning and enlarging the scope of its Digital Transformation Unit. The most important strategic decisions made in 2017 were:
| i) | To merge its Digital Transformation initiative and its Cultural Transformation initiative, both of which were developing on their own track. The objective was to manage a single Transformation initiative. |
| ii) | To incorporate new workstreams: Digital Risk, Digital Operations, Distribution Channels, and Governance. |
| iii) | To accelerate the execution of the Digital Transformation Strategy. |
Furthermore, in terms of value creation to improve customer experience, we launched the first digital product for Wholesale Banking, which is “Carta Fianza Digital” (digital performance bond) that was delivered to a base of 253 companies, posted a 90% satisfaction rate, and reduced issuance-time from two days to a few hours.
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2018
In 2018, BCP Stand-alone has defined a strategy with the vision to become the first bank in customer experience in Peru, and the most efficient bank in the Latin-American region. To those ends, our transformation initiative has been organized to focus on ten workstreams:
(i) Customer experience
We believe that customer experience is influenced by four drivers: trust, service, product and value. In 2018, we focused our efforts on the service driver. We have a structured methodology to review our key customer journeys and have implemented changes that have increased our customer satisfaction with the journeys affected by those changes.
(ii) Digital journeys
We are improving our customer experience through digital innovations such as those mentioned as part of the products, services and channels created in previous years. we released our web-based investment prospecting tool for affluent customers, which includes a digital self-assessment. In 2018, we launched a web-based self-service platform for our customers to apply for credit cards, a service that had been offered only at our branches.
(iii) Digital risk
We are improving the risk practice within BCP Stand-alone to be more prepared for a digital world. This includes developing the technological capabilities and tools to enable digital sales and extend our reach to new markets, as well as risk policies and statistical models that generated more pre-approved credits and for higher amounts. They also allowed us to reach more customers with two new products (micro-credits and one-installment credits) while reducing the costs when compared to our traditional personal loans.
(iv) Information Technology (IT)
We consider our IT platform to be one of our main competitive strengths and continue to invest in this area to maintain a competitive position in the banking sector. Since 2012, we have outsourced the administration and operation of the IT infrastructure, application development, and maintenance of some of our applications to IBM, Tata Consulting Services and Everis. We also are working on the implementation of a new digital architecture and have started a series of structural projects for integrating channels with product systems more securely, efficiently, and flexibly.
Our IT annual investments, to support both our day-to-day operations and our transformation initiatives, totaled S/227.0 million in 2016, S/260.5 million in 2017, and S/331.2 in 2018. BCP Stand-alone’s IT expenses totaled S/702.0 million in 2016, S/705.2 million in 2017, and S/718.5 in 2018. Although BCP Stand-alone has continued to invest in its digital transformation, continuous control and optimization efforts have allowed us to maintain expense levels that grow at a compound annual growth rate of only 1.2% from 2016 to 2018. Finally, because of our new operating model, our ratio of IT expenses to revenues decreased from 9.4% in 2011, to 8.1% in 2016, and to 7.8% in 2018.
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(v) Data & Analytics
We are striving to enable a data-driven organization and are working on a new data architecture, infrastructure, and governance model. We already use data to enable more sales and efficiency through a new CRM engine and advanced analytics models and are acquiring non-traditional data through mobile and web-based platforms. In 2018, we increased our profits in our FX business using an analytical tool that helps traders define the exchange rate to offer to our customers and are working on extending these capabilities to other businesses.
(vi) Distribution model
We are redefining BCP Stand-alone’s distribution model to align it with customers’ needs through four major initiatives: 1) developing a new value proposition to serve customers with basic financial needs; 2) transforming our physical footprint, including consolidation of branches, implementation of new formats for branches, migration of transactions to other channels, and redefinition of branch roles; 3) developing digital sales and servicing capabilities and digital education initiatives; and 4) a laboratory to test and learn new approaches to improve customer experience inside branches.
(vii) Digital operations
We are improving front- and back-office processes with automation tools to deliver faster, less risky, and more efficient processes for increased customer satisfaction and cost reduction.
(viii) Culture & leadership
We are adjusting our practices to manage human resources and developing new capabilities to attract the human talent that is needed as part of the Transformation initiative.
(ix) Governance
We are building a model to enable budget and performance management for the digital bank that should be gradually deployed to the organization.
(x) Agile @scale
We continue to work on the implementation of agile methodologies across all units to transform ourselves into an agile organization, and have created the Agile Center of Excellence to exchange knowledge, promote innovation and predict new opportunities and challenges. We currently have a team of coaches who provide daily training to the 80 agile teams, to improve our practices and move toward the agile mindset. We already have many BCP Stand-alone projects applying agile methodologies, and we will continue developing this process. We are also working on a new organizational structure focused on multidisciplinary teams for our units involved in delivering new products and services.
| (3) | Lending policies and procedures |
BCP Stand-alone 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 is managed and monitored by the Risk Management Unit within the BCP Stand-alone’s Central Risk Management Group. The adoption of a risk appetite framework reflects the BCP Stand-alone’s commitment to aligning its forward-looking business strategy with its corporate risk vision.
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BCP Stand-alone’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. For further information, see “Item 4. Information on the Company – 4.B Business Overview - (9) Supervision and Regulation – 9.2 BCP Stand-alone and Mibanco”.
BCP Stand-alone’s credit approval process is based primarily on an evaluation of each borrower’s repayment capacity and commercial and banking references. BCP Stand-alone 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 Stand-alone 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 Stand-alone’s credit officers analyze the corporate client’s ability to repay obligations, estimate the probability of default of the client using an internal risk rating model, and define the maximum credit exposure that BCP Stand-alone wants to hold with the client.
BCP Stand-alone evaluates individual and small business borrowers 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. About 88% of BCP Stand-alone’s credit card and consumer loan application decisions, and about 40% of its SME loan application decisions, are made through automatic means. Loan application decisions in BCP Stand-alone’s mortgage segment and the remaining portions of its small business and consumer segments are made by credit officers who use credit scores and profitability models as inputs for their evaluations and report to a centralized unit.
Our performance in the small business and personal lending areas depends largely on BCP Stand-alone’s ability to obtain reliable credit and client information about prospective borrowers. BCP Stand-alone has a vast transactional information that is heavily used in credit risk models. Also, 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.
BCP Stand-alone 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 Stand-alone’s credit approval process, the lending authority for WBG is centralized into a specialized credit risk analysis division; and there exists another specialized credit risk analysis division for RBG. 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 risk management divisions and internal auditors regularly review credit approvals to ensure compliance with lending policies.
In accordance with international standards, BCP Stand-alone has established lending authority limits 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 Credits Committee, Executive Committee or, if the amount requested is sufficiently large, by the Board of Directors. In addition, BCP Stand-alone has approved concentration limits by industry, based on its target market share and loan portfolio participation.
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BCP Stand-alone 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 Stand-alone requires loan officers to have degrees in economics, accounting, business administration or related fields from competitive local or foreign universities. In addition, training for new loan officers begins with a three-month program that covers all aspects of banking and finance. Subsequently, loan officers receive training in specific matters throughout their careers at BCP Stand-alone. Laterally-hired officers generally are required to have prior experience as loan officers.
BCP Stand-alone operates in substantial part as a secured lender. As of December 31, 2018, approximately S/43.5 billion of our loan portfolio and off-balance-sheet exposure was secured by collateral, which represents 39.3% of its total loan portfolio based upon our unconsolidated figures (excluding BCP Panama and BCP Miami, branch offices located overseas), as compared to 44.9% in 2017 and 48.6% in 2016.
Liquid collateral is a small portion of BCP Stand-alone’s total collateral. In general, when BCP Stand-alone 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.
BCP Stand-alone’s internal audit division conducts selected revisions and analyses on borrowers’ financial statements, consistent with the local banking regulations of the jurisdictions in which it operates.
1.1.2 BCP Bolivia
BCP Bolivia’s activities include wholesale banking and retail banking. As of December 31, 2018, BCP Bolivia has total assets of S/9,956.9 million, total net loans of S/7,013.0 million, deposits of S/8,862.4 million, and equity of S/691.1 million, with a 2018 ROAE of 11.8% (compared to 12.0% in 2017).
As of December 31,2018, BCP Bolivia’s loans represented approximately 9.4% of total loans in the Bolivian financial system, and its deposits represented approximately 9.7% of total deposits in the Bolivian financial system, according to the Bolivian Financial System Supervisory Authority (ASFI by its Spanish initials).
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 (by income, sales, and/or debt) and volume of activity for each client, the clients’ affiliation with other companies or groups, and their credit ratings.
| Client Segmentation | ||||
| Business | Group | Income/Sales/Total Debt | ||
| Wholesale Banking | Large companies (1) | Annual sales higher than approximately S/49 million | ||
| Medium companies (2) | Annual sales from approximately S/6 million to S/49 million | |||
| Retail Banking (3) | Small business (4) | Annual sales from approximately S/0.1 million to S/6 million | ||
| Micro business (4) | Annual sales of at least approximately S/0.1 million | |||
| Consumer (5) | Payroll workers and self-employed workers | |||
| Mortgage Banking (6) | Payroll workers, independent professionals and business owners | |||
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| (1) | Loans to large companies account for 33% of BCP Bolivia’s total loans. This segment accounts for approximately 690 customers. |
| (2) | Loans to medium companies account for 11% of BCP Bolivia‘s total loans. This segment accounts for approximately 1,550 customers. |
| (3) | Retail banking loans account for 56% of BCP Bolivia’s total loans, while retail banking deposits account for 27% of BCP Bolivia's total deposits. |
| (4) | Small and micro-business banking accounts for 14% of BCP Bolivia’s total loans, BCP Bolivia serves approximately 9,700 small business banking clients and approximately 11,300 micro-business clients. |
| (5) | Consumer banking accounts for 10% of BCP Bolivia’s total loans. BCP Bolivia serves approximately 40,900 payroll and self-employed workers. |
| (6) | BCP Bolivia serves approximately 9,900 mortage banking customers, representing 32% of BCP Bolivia’s total loans. BCP Bolivia’s mortgage loans have an average LTV at origination of 80%. |
| 1.2 | Microfinance |
The Microfinance line of business consists of a group of subsidiaries offering commercial banking activities and specialized financial services to support small and micro business clients in Peru through Mibanco and in Colombia through Edyficar S.A.S., which commercial name is Encumbra, incorporated in 2013. As of December 31, 2018, Mibanco represented around 98.8% of the total loans of the Microfinance line of business, 7.5% of Credicorp’s total assets, 11.3% of Credicorp’s net profit, and 8.0% of equity attributable to Credicorp’s shareholders'.
Mibanco’s credit policies are set within the guidelines established by the laws and regulations of the markets in which we operate and by the guidelines set forth by the Board of Directors. For further details regarding applicable legal and regulatory guidelines, see “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation”.
| 1.2.1 | Mibanco |
The following table shows how Mibanco segments its clients. This segmentation is based on an analysis that considered multiple factors such as the size (by income, sales, and/or total debt) and volume of activity for each client, the client’s affiliation with other companies or groups and their credit ratings.
| Client Segmentation | ||
| Group | Income/Sales/Total debt | |
| SME – medium (2) | Annual sales up to S/20 million. | |
| Total debt higher than S/0.3 million, without issued debt in the capital markets. | ||
| SME – small (3) | Total debt from S/0.02 million to S/0.3 million. | |
| Micro-business (4) | Total debt up to S/0.02 million. | |
| Consumer (5) | Focus on debt unrelated to business. | |
| Mortgage (6) | Focus on individuals for acquisition, construction of homeownership and granted with mortgages. | |
| (1) | As of December 31, 2018, Mibanco had 950,532 registered clients. All portfolio percentages and customer counts in this table and the associated notes are as of December 31, 2018, unless otherwise disclosed. |
| (2) | Mibanco’s SME – medium segment focuses on financing production, trade, or service activities for companies that (1) have total debt in the last 6 months higher than S/300,000, (2) annual sales up to S/20 million in the last 2 consecutive years, and (3) have not participated in the capital markets. This segment represents 2% of Mibanco’ total loans and 1,878 of its clients. |
| (3) | Mibanco’s SME – small segment focuses on financing production, trade, or service activities for companies that have total debt between S/20,000 and S/300,000 in the last 6 months (without including mortgage loans). This segment represents 59% of Mibanco’s total loans and 164,967 of its clients. |
| (4) | Mibanco’s micro-business segment focuses on financing production, trade, or service activities for companies that have total debt up to S/20,000 in the last 6 months (without including mortgage loans). Micro-business loans represent 28% of Mibanco’s total loans and 613,575 of its clients. |
| (5) | Mibanco’s consumer segment focuses on financing individuals to cover payments of goods and services or expenses unrelated to business. Consumer loans represent 6% of Mibanco’s total loans and 166,998 of its clients. |
| (6) | Mibanco’s mortgage segment focuses on financing individuals’ acquisition, construction, renovation, remodeling, expansion, improvement, and subdivision of homes. Mortgage loans represent 5% of Mibanco’s total loans and 6,324 of its clients. Mibanco’s mortgage segment has a policy limiting LTV to up to 90%. |
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| 1.3 | Insurance & Pensions |
| 1.3.1 | Grupo Pacifico |
We conduct our insurance business exclusively through Grupo Pacifico, which operates in Peru and Bolivia and is the second-largest Peruvian insurance company by written premiums in 2018, according to the SBS and the Superintendencia Nacional de Salud (Susalud). Grupo Pacifico provides a broad range of insurance products focusing on three business areas: property and casualty (P&C), life insurance business, and corporate health insurance and medical services. Grupo Pacifico, like other major Peruvian insurance companies, sells its products both directly (through its own sales force) and through independent brokers, bancassurance, and sponsors.
For further information see “Item 4. Information on the Company – 4.A History and development of the company”.
| 1.3.2 | Prima AFP |
Credicorp conducts its pension fund operations through its private pension fund manager Prima AFP, which operates through individual capitalization accounts and provides its affiliates with retirement, disability, survival, and burial benefits. For this purpose, Prima AFP collects affiliates’ mandatory and voluntary contributions, and invests the funds in local and foreign financial markets. The funds that Prima AFP holds in custody for its affiliates are non-attachable and autonomous assets, and are not affected by Prima AFP’s financial results. Prima AFP offers four types of funds, which differ by risk profile and the asset classes in which they invest. The investment and risk management policies are defined by internal committees, and supervised by the SBS and the SMV.
For further information see “Item 4. Information on the Company – 4.B Business Overview – (6) Competition – 6.3 Insurance & Pensions – 6.3.2 Prima AFP” and “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and regulation – 9.5 Prima AFP”.
| 1.4 | Investment Banking & Wealth Management |
Credicorp Capital carries out its operations in the Latin-American region through Credicorp Capital Peru, Credicorp Capital Colombia, and Credicorp Capital Chile which hold a considerable market share in the Peruvian, Colombian and Chilean markets, respectively. In 2018, the creation of the LoB Investment Banking & Wealth Management meant to add BCP Stand-alone’s Wealth Management Division and ASB to Credicorp Capital. The main objective of this new way to operate the business in this LoB is to serve as a single regional wealth management model within one business unit, instead of three different models under different business units. This new structure facilitates sharing of best practices and delivery of a regional value proposition, with ASB supporting all wealth management business units and clients (instead of focusing on Peru-based wealth management customers).
Our Investment Banking and Wealth Management LoB’s four main business units are asset management, capital markets, corporate finance and wealth management.
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Asset management
Through the regional platform provided by MILA, our asset management business unit offers 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.
Capital markets
Our capital markets business unit has an active role in secondary markets, particularly equity and fixed-income products, as well as exchange rate products and derivatives. Our participation in the placement of equity and debt instruments, vis-à-vis our corporate finance team, is also relevant, especially for corporate issuances in local markets. We also have proprietary investments, with trading books managed in Peru, Colombia, and Chile.
Corporate finance
Our corporate finance business unit 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.
Wealth management
We run a financial and investment advisory model addressed to high-net-worth and ultra-high-net-worth individuals in which a single relationship manager coordinates various financial services for their clients, including investment advisory, investment management, long-term financial planning, banking services, and credit solutions.
(2) Corporate compliance
Our corporate compliance programs cover Credicorp and all its subsidiaries and have been developed under a comprehensive approach based on international best practices and our principles and ethical values.
Corporate compliance is responsible for managing the following corporate programs:
| • | Anti-money laundering |
| • | International sanctions and restricted lists |
| • | Fiscal transparency |
| • | Regulatory compliance |
| • | Ethics and conduct |
| • | Anti-corruption |
| • | Market abuse prevention |
| • | Personal information protection |
| • | Occupational health and safety |
| • | Consumer protection |
Our corporate compliance division is managed by compliance officers in each subsidiary of Credicorp, 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 his or her functions and duties independently.
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Our corporate compliance division establishes policies, guidelines and controls that regulate our compliance programs to provide reasonable assurance of compliance with local and international standards, the mitigation of conduct risks and facilitating ethical behavior and values, all with the aim of protecting the reputation and business of Credicorp.
In 2018, our corporate compliance division focused on developing an advanced management model that integrates compliance processes in the ongoing business, applying agile methodologies and strengthening the culture of the organization. In this regard, we apply the benefits of big data and analysis to identify financial crimes and reduce non-financial risk in a timely manner.
Fiscal Transparency
Fiscal Transparency oversees the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), which are regulations for exchanging tax information that apply to all Credicorp financial institutions. Understanding FATCA and CRS requirements and having a comprehensive FATCA and CRS compliance program are essential for foreign financial institutions (FFIs), in the case of FATCA, and financial institutions (FIs, for purposes of this subsection), in the case of CRS, to limit non-compliance risk and meet the obligations set out by applicable relevant intergovernmental agreements (IGAs), the U.S. Internal Revenue Service (IRS) and the Organization for Economic Co-operation and Development (OECD).
FATCA implementation at Credicorp: Credicorp has FFIs located in countries under IGA Model I (Bahamas, Luxembourg, Colombia, the Cayman Islands and Panama), IGA Model II (Bermuda and Chile), and General Regulation (Bolivia). Obligations of FFIs in those locations include complying with Client Due Diligence, Client Annual Reporting and Financial Counterparties Exchange of Status Information.
Peru still holds the status for FATCA purposes of “Country with an agreement in substance” while the Peruvian government and the U.S. Department of Treasury continue with the negotiations to sign an IGA. However, the jurisdiction is treated as having an In-Effect agreement for FATCA purposes and all Peruvian FFIs must comply with FATCA obligations. In 2018, the Ministry of Economy and Finance of Peru (MEF) announced that the Client Annual Reporting obligation will be put on hold, while negotiations continue. However, all of the FFIs’ other obligations, including client due diligence, must be carried on as if the IGA is already in force.
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, the Cayman Islands and Luxembourg). In 2017, Panama and Chile initiated Client Due Diligence obligations, started with the revision of high value accounts and continued with low value accounts through 2018. Between June and July 2018, our FIs in both countries submitted their first Annual Report.
For Peru, in 2017 the MEF announced its intention to subscribe to a CRS agreement which was finally signed at the end of that year and ratified in May 2018. On November 10, 2018, the Peruvian Government issued the Supreme Decree 256-2018-EF (Decree) to instruct Peruvian FIs about the implementation of CRS Phase I. In this regard, some obligations stated in the Decree had to be implemented on or before January 1, 2019 (gather fiscal residency information at the on-boarding of new clients). All Credicorp FIs including BCP Stand-alone, Pacifico, Mibanco, Prima, Credicorp Capital Bolsa, Credicorp Capital Fondos, and Credicorp Capital Titulizadora, implemented the first set of obligations successfully by January 1, 2019. The Program Manager is currently preparing the strategy for Phase II (due diligence of high value accounts for all in-scope FIs) under the Decree. The information gathered during this phase will be used to draft the first Annual Report that will be submitted to the Peruvian Tax Authority (SUNAT) between January and May 2020.
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| (3) | Internal Audit |
In 2018, our internal audit unit focused on creating a permanent risk-based framework to evaluate the effectiveness and efficiency of Credicorp's risk management, control and governance processes. For this purpose, our internal audit unit formulates the Annual Audit Plan using a risk-based audit methodology, that is aligned with the rules of the Global Institute for Internal Auditors (IIA) and approved by the SBS. According to the concerns of the industry, topics related to data analytics and cybersecurity had special attention.
In July 2018, we obtained the International Quality Certification for the Internal Audit Activity with a "Generally Compliant" highest possible rating granted by the IIA in the External Quality Assessment, in accordance with Rule 1312 of the IIA (similar result obtained in 2013), based on compliance with the International Standards for Professional Practice, the Fundamental Principles and the IIA Code of Ethics. In 2018, the result of the internal evaluation, which began during the 2011 fiscal year, in compliance with Standard 1311 of the IIA for the eighth consecutive year, was "Generally Compliant" as a result of the Quality Assurance and Improvement Program in the Corporation (QAIP).
In 2018 our internal corporate auditor, also known as our chief audit executive (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 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.
Consistent with recommended industry practices, Credicorp recently began to apply the Cybersecurity Assessment Tool (CAT) of the U.S. Federal Financial Institutions Examination Council (FFIEC) to its operations.
In 2018, 14,718 hours of training were provided to our internal auditors with an average of 71 hours per auditor (above the 40 hours per auditor recommended by 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 operates mainly in Peru, an important emerging market economy that has been growing at a solid pace for the past few decades, with a GDP of US$ 225 billions in 2018 (according to BCRP’s figures) that has grown at a compound annual growth rate (CAGR) of 8.2% from 2005 to 2018, and which still has an under-penetrated banking system. These two characteristics represent an important opportunity for long-term growth. Credicorp has solidified its presence in the region through its operations in Peru, Bolivia, Colombia and Chile, contributing to its financial development and accompanying its clients in their growth.
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Since Credicorp was created more than 20 years ago, it has evolved into a much larger and complex company. In 2018, the management of the businesses has been organized into the four LoBs.
The LoB Universal Banking continues with its strategy to improve its clients’ experiences in all segments by upgrading and innovating digital banking, which implies, in many cases, educating and accompanying clients in the use of digital channels. This LoB aims to maintain an adequate balance between risk, growth, profitability and operating efficiency.
The LoB Microfinance continue investing in building capacities to fuel local and regional growth based on its current business model. It will do this by focusing on providing the best possible experiences to both its clients and employees. It will continue to drive efforts to capture deposits, which in addition to benefitting the funding structure, allows the organization to analyze and take advantage of information to continuously improve its business model and value proposition for its clients.
The LoB Insurance & Pension continues focused on capturing growth in the Peruvian market, which has one of the lowest penetration levels in the region. As such, the LoB will continue focusing on growing in different channels and in bancassurance to take advantage of the group’s synergies. Furthermore, Grupo Pacifico and Prima AFP will leverage the experience in the Centro de InnovaCXion at BCP to innovate in their different channels and products. Furthermore, Grupo Pacifico will focus on improving the profitability of the health insurance business, which is managed alongside the strategic partner, United Health/Banmedica.
The LoB Investment Banking & Wealth Management will continue to consolidate its position as the best financial advisory service in Peru, Chile and Colombia by strengthening the regional offering of asset management and wealth management services to provide clients with a complete vision of all of their assets while increasing the market share in Colombia and Chile.
| (5) | Operations |
The following table provides certain financial information about our LoBs as of and for the year ended December 31, 2018:
| As of and for the year ended December 31, 2018 | ||||||||||||||||||||||||||||||||
| External income (1) | Net interest, similar income and expenses | Other income, net (2) | Total assets | |||||||||||||||||||||||||||||
| (Soles in millions, except percentages) | ||||||||||||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % Total | Amount | % Total | |||||||||||||||||||||||||
| Universal Banking | ||||||||||||||||||||||||||||||||
| BCP Stand-alone | 10,757 | 59.2 | 5,616 | 66.2 | 3,275 | 60.7 | 132,880 | 75.0 | ||||||||||||||||||||||||
| BCP Bolivia | 686 | 3.8 | 309 | 3.6 | 124 | 2.3 | 9,957 | 5.6 | ||||||||||||||||||||||||
| Insurance and Pension funds | ||||||||||||||||||||||||||||||||
| Pacifico Seguros and Subsidiaries | 2,861 | 15.8 | 446 | 5.3 | 1,181 | 21.9 | 12,224 | 6.9 | ||||||||||||||||||||||||
| Prima AFP | 371 | 2.0 | - | - | 371 | 6.9 | 875 | 0.5 | ||||||||||||||||||||||||
| Microfinance | ||||||||||||||||||||||||||||||||
| Mibanco | 2,468 | 13.6 | 1,956 | 23.0 | 156 | 2.9 | 13,220 | 7.5 | ||||||||||||||||||||||||
| Edyficar S.A.S. | 44 | 0.2 | 40 | 0.5 | 1 | - | 119 | 0.1 | ||||||||||||||||||||||||
| Investment Banking and Wealth Management | 886 | 4.9 | 98 | 1.2 | 634 | 11.8 | 9,665 | 5.5 | ||||||||||||||||||||||||
| Other segments | 83 | 0.5 | 33 | 0.4 | 106 | 2.0 | 2,862 | 1.6 | ||||||||||||||||||||||||
| Eliminations | - | - | (9 | ) | (0.2 | ) | (454 | ) | (8.5 | ) | (4,539 | ) | (2.7 | ) | ||||||||||||||||||
| Total consolidated | 18,156 | 100.0 | 8,489 | 100.0 | 5,394 | 100.0 | 177,263 | 100.0 | ||||||||||||||||||||||||
| (1) | Corresponds to total interest and similar income, other income (including income and expenses on commissions) and net premiums earned from insurance activities. |
| (2) | Corresponds to income for commissions received and other income (including income and expenses on commissions) and the profits arising from the collection of premiums less claims for loss coverage from insurance activities. |
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For a description of the principal markets in which we compete, please refer to “Item 4.B. Business Overview – (1) Lines of Business,” “Item 4.B. Business overview – (6) Competition”, “Item 4.B. Business overview – (9) Supervision and Regulation” and Note 30 to Credicorp’s Consolidated Financial Statements. For a breakdown of total income and operating income by geographic market for each of the last three fiscal years, as well as other historical information about our LoBs, please refer to Note 30 to Credicorp’s Consolidated Financial Statements.
5.1 Consolidated contributions
The following table sets forth the contribution to the consolidated net profit attributable to our equity holders by each of LoBs and main subsidiaries:
| 2016 | 2017 | 2018 | ||||||||||||||||||||||
| (Soles in millions, except percentages) | ||||||||||||||||||||||||
| Amount | % Total | Amount | % Total | Amount | % Total | |||||||||||||||||||
| Universal Banking | ||||||||||||||||||||||||
| BCP Stand-alone | 2,391 | 68.0 | 2,565 | 62.7 | 2,858 | 71.8 | ||||||||||||||||||
| BCP Bolivia | 81 | 2.3 | 75 | 1.8 | 78 | 2.0 | ||||||||||||||||||
| Insurance and Pension funds | ||||||||||||||||||||||||
| Pacifico Seguros and subsidiaries (1) | 299 | 8.5 | 321 | 7.8 | 349 | 8.8 | ||||||||||||||||||
| Prima AFP | 156 | 4.4 | 140 | 3.4 | 140 | 3.5 | ||||||||||||||||||
| Microfinance | ||||||||||||||||||||||||
| Mibanco | 313 | 8.9 | 372 | 9.1 | 445 | 11.2 | ||||||||||||||||||
| Edyficar S.A.S. | (2 | ) | (0.1 | ) | (1 | ) | - | 5 | 0.1 | |||||||||||||||
| Investment Banking and Wealth Management (2) | 221 | 6.2 | 244 | 6 | 146 | 3.6 | ||||||||||||||||||
| Others segments and eliminations (3) | 56 | 1.8 | 376 | 9.1 | (37 | ) | (1.0 | ) | ||||||||||||||||
| Total | 3,515 | 100.0 | 4,092 | 100.0 | 3,984 | 100.0 | ||||||||||||||||||
| (1) | Includes Crediseguro S.A., Seguros Personales and Crediseguro S.A., Seguros Generales (incorporated in 2017). |
| (2) | Investment Banking and Wealth Management mainly includes Credicorp Capital Ltd and subsidiaries and Atlantic Security Bank. |
| (3) | 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 profit from the sale of 50% of BCI shares to a third party (profit from the sale of 50% of BCI shares to a third party in 2016), as well as the sale of the shares of ENEL. See Note 6(c)(viii) to our Consolidated Financial Statements. |
The following table shows our LoBs and main subsidiaries’ respective percentage contributions to our total revenues and equity attributable to Credicorp’s equity holders:
| Total revenue (1) | Equity
attributable to Credicorp’s equity holders | |||||||||||||||||||||||
| For the year ended December 31, | As of December 31, | |||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2016 | 2017 | 2018 | |||||||||||||||||||
| Universal Banking | ||||||||||||||||||||||||
| BCP Stand-alone | 62.9 | % | 60.6 | % | 61.4 | % | 62.1 | % | 63.0 | % | 63.2 | % | ||||||||||||
| BCP Bolivia | 3.3 | % | 3.5 | % | 3.8 | % | 3.2 | % | 2.9 | % | 2.9 | % | ||||||||||||
| Insurance and Pension funds | ||||||||||||||||||||||||
| Pacifico Seguros and subsidiaries (2) | 14.2 | % | 13.9 | % | 14.9 | % | 11.0 | % | 13.0 | % | 11.0 | % | ||||||||||||
| Prima AFP | 2.4 | % | 2.2 | % | 2.1 | % | 3.1 | % | 2.8 | % | 2.7 | % | ||||||||||||
| Microfinance | ||||||||||||||||||||||||
| Mibanco | 11.8 | % | 13.3 | % | 14.1 | % | 8.0 | % | 7.8 | % | 8.0 | % | ||||||||||||
| Edyficar SAS | 0.1 | % | 0.2 | % | 0.2 | % | 0.3 | % | 0.3 | % | 0.2 | % | ||||||||||||
| Investment Banking and Wealth Management (3) | 5.2 | % | 5.2 | % | 6.2 | % | 9.6 | % | 7.4 | % | 8.0 | % | ||||||||||||
| Others segments and eliminations (4) | 0.1 | % | 1.1 | % | (2.7 | )% | 2.7 | % | 2.8 | % | 4.0 | % | ||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
(1) Includes interest income, other income and net premiums earned.
(2) Includes Crediseguro S.A., Seguros Personales and Crediseguro S.A., Seguros Generales.
(3) Investment Banking and Wealth Management mainly includes Credicorp Capital Ltd and subsidiaries and Atlantic Security Bank.
(4) Includes Grupo Credito S.A., CCR Inc, Inversiones Credicorp Bolivia, BCP Emisiones Latam 1 S.A., Solucion EAH and others
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The following table shows BCP’s Consolidated main subsidiaries’ respective percentage contributions to its total assets, total revenues, net profit and equity attributable to BCP Consolidated for the year ended December 31, 2018:
| As of and for the year ended December 31, 2018 (1) | ||||||||||||||||
| Total assets | Total revenue (2) | Net profit/(Loss) | Equity | |||||||||||||
| BCP Stand-alone | 93.0 | % | 81.2 | % | 86.2 | % | 88.4 | % | ||||||||
| Mibanco | 7.0 | % | 18.7 | % | 13.6 | % | 11.2 | % | ||||||||
| Others (3) | - | 0.1 | % | 0.2 | % | 0.4 | % | |||||||||
| 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, 2018. |
| (2) | Includes interest income and others income. |
| (3) | Includes Solucion Empresa Administradora Hipotecaria S.A and BCP Emisiones Latam 1 S.A. |
| (6) | Competition |
| 6.1 | Universal Banking |
As of December 31, 2018, the principal participants in the Peruvian financial system were the following: the BCRP, the SBS, 55 financial institutions, and four state-owned banks (not including the BCRP): Banco de la Nacion, Corporacion Financiera de Desarrollo S.A. (COFIDE, a Peruvian government-owned development bank), Agrobanco, and Fondo MiVivienda.
| Private Financial System as of December 31, 2018 | ||||||||||||||||
| Number of entities | Assets (Soles in thousands) | Deposits (Soles in thousands) | Loans (Soles in thousands) | |||||||||||||
| Banking Sector (1) | 16 | 385,343,801 | 243,860,245 | 270,662,412 | ||||||||||||
| Financial firms (2) | 11 | 14,842,067 | 7,467,336 | 12,882,276 | ||||||||||||
| Municipal savings banks (3) | 12 | 26,727,333 | 21,254,159 | 21,367,823 | ||||||||||||
| Rural savings banks (4) | 6 | 1,920,784 | 1,331,161 | 1,564,537 | ||||||||||||
| Edpymes (5) | 9 | 2,487,842 | - | 2,229,945 | ||||||||||||
| Leasing companies (6) | 1 | 314,853 | - | 244,033 | ||||||||||||
| Total | 55 | 431,636,680 | 273,912,901 | 308,951,026 | ||||||||||||
Source: SBS
| (1) | Banca Multiple under SBS definition and terminology |
| (2) | Empresas Financieras under SBS definition and terminology |
| (3) | Cajas Municipales under SBS definition and terminology |
| (4) | Cajas Rurales under SBS definition and terminology |
| (5) | The same name under SBS definition and terminology |
| (6) | Empresas de arrendamiento financiero under SBS definition and terminology |
| (i) | Banking Sector |
Banking Sector includes universal banks, offer financial services to retail and wholesale clients, among others. The following table sets forth the percentages, by assets, deposits and loans, represented by the major Peruvian banking institutions.
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| As % of total Private Financial System | As % of Banking Sector | |||||||||||||||||||||||
| as of December 31, 2018 | Assets | Deposits | Loans | Assets | Deposits | Loans | ||||||||||||||||||
| BCP Stand-alone | 31.0 | % | 30.3 | % | 29.7 | % | 34.7 | % | 34.0 | % | 33.9 | % | ||||||||||||
| BBVA Banco Continental | 17.4 | % | 18.5 | % | 17.5 | % | 19.5 | % | 20.8 | % | 20.0 | % | ||||||||||||
| Scotiabank Peru | 14.8 | % | 12.9 | % | 14.9 | % | 16.6 | % | 14.5 | % | 17.0 | % | ||||||||||||
| Interbank | 11.0 | % | 11.2 | % | 10.5 | % | 12.3 | % | 12.6 | % | 12.0 | % | ||||||||||||
| Banco Interamericano de Finanzas | 3.3 | % | 3.6 | % | 3.3 | % | 3.6 | % | 4.1 | % | 3.7 | % | ||||||||||||
| Mibanco | 3.0 | % | 3.1 | % | 3.2 | % | 3.4 | % | 3.4 | % | 3.7 | % | ||||||||||||
Source: SBS
As of December 31, 2018, BCP Stand-alone ranked first among all Peruvian multiple banks by assets, deposits and loans, according to the SBS.
As of December 31, 2018, the principal Peruvian non-state financial institutions reported total loan balances of S/184,282 million in local currency and of US$25,609 million in foreign currency. These figures represented an annual expansion of loan balances of 11.9% and 2.7%, respectively (compared to expansion of 2.7% and 11.7%, respectively, from December 31, 2016 to December 31, 2017). As a result, the dollarization of loans reached 31.9% as of December 31, 2018 (compared to 32.9% as of December 31, 2017 and 31.8% as of December 31, 2016). As of December 31, 2018, Peru’s total amount of multiple banking deposits were S/243,860 million, and the multiple banking dollarization rate for deposits was 39.5% (compared to 42.9% as of December 31, 2017 and 47.6% as of December 31, 2016).
As part of its plan to decrease the dollarization level of loans in the Peruvian financial system, in order to reduce the risks of currency depreciation associated with borrowing in U.S. dollars, the BRCP established a de-dollarization program. For further information, see “Item 3. Key Information – 3.D Risk Factors – (11) Economic and market conditions in other countries may affect the Peruvian economy and the market price of Peruvian securities”.
Peru’s capital ratio (regulatory capital/risk-weighted assets) was 14.66% as of December 31, 2018, which was above the 10% legal minimum that became effective in July 2011 and represented a decrease of 52 basis points from the capital ratio reported as of December 31, 2017 (15.18%). In 2017, the ratio increased 17 basis points from a ratio of 15.01% as of December 31, 2016.
Peru’s loan portfolio quality indicators generally were stable in 2018. As of December 31, 2018, internal overdue ratio reached 2.95%, 9 basis points less than the ratio reported as of December 31, 2017 (3.04%). As of 2017, the ratio had increased 24 basis points compared to December 31, 2016 (2.80%). Also, the internal overdue, refinanced and re-structured loans over total loans ratio was 4.44% as of December 31, 2018, 5 basis points higher than the figure reported at year-end 2017, 4.39% (compared to 4.02% in 2016). Similarly, the coverage ratio of Peru’s internal overdue loan portfolio was 153.6% as of December 31, 2018 (compared to 152.6% as of December 31, 2017 and 160.6% as of December 31, 2016).
The liquidity of the Peruvian banking system remained at high and comfortable levels. As of December 31, 2018, the local currency liquidity ratio and the foreign currency liquidity ratio were 27.0% and 44.5%, respectively (compared to 34.3% and 44.9% in 2017 and to 27.4% and 43.9% in 2016, respectively). These liquidity ratio levels were well above the minimums required by SBS regulations (8% for local currency and 20% for foreign currency).
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(ii) Other financial institutions
BCP Stand-alone faced strong competition from credit providers, primarily with respect to consumer loans and SME-Pyme loans. SME-Pyme loan providers lent S/16.3 billion to borrowers in the SME-Pyme segment in 2018, compared to S/14.9 billion in 2017 and S/12.9 billion in 2016, according to the SBS. In 2018, overall SME-Pyme loans to customers of other financial institutions represented 22.0% of the total loans in the Peruvian financial system (compared to 21.3% in 2017 and 19.0% in 2016).
Consumer loan providers lent S/12.3 billion to consumer borrowers in 2018, compared to S/10.5 billion and S/8.9 billion in 2017 and 2016, respectively, according to the SBS. In 2018, overall loans to consumers of other financial institutions represented 19.9% of total loans in the financial system (compared to 19.3% in 2017 and 17.5% in 2016).
(iii) Recent Competitive Developments
In recent years, several foreign companies have shown interest in entering the Peruvian universal banking market while financial companies already in Peru have taken steps to expand operations and develop new businesses. In particular, the following authorizations and applications from and to the SBS may be significant to our competitive environment:
| · | In April 2016, the SBS authorized J.P. Morgan Banco de Inversion to operate as an investment bank in Peru, and its Peruvian operations commenced in March 2017. JPMorgan already had a representative office in Peru and had advised local businesses regarding U.S. equity markets. Now, with an authorized investment bank, JP Morgan can participate in sales and trading of BCRP and Government instruments, as well as FX trading. |
| · | In June 2017, the SBS authorized a merger between Caja Rural de Ahorro y Credito Los Andes S.A. (a rural Peruvian savings bank) and EDPYME Solidaridad y Desarrollo Empresarial S.A.C., with Los Andes surviving the merger. In November 2017, Los Andes also bought part of the portfolio from its peer, Caja Municipal de Ahorro y Credito del Santa S.A. |
| · | In August 2017, the SBS authorized the dissolution and liquidation of Leasing Peru, which at the time was a member of the Bancolombia Group. Leasing Peru officially closed in October 2017. |
| · | In August 2017, Bank of China Limited requested the SBS approval to establish a bank in Peru. In January 2019, the SBS authorized the organization of this bank as a multiple-operations bank and the commencement of its operations. |
| · | In May 2018, Scotiabank acquired 51% of Banco Cencosud, authorized by the regulator. This acquisition increases Scotiabank’s market share in the retail banking segment in Peru, as they will jointly manage both portfolios. Afterwards, in February 2019, the regulator approved the conversion of Banco Cencosud from a bank to a rural savings bank. |
| 6.2 | Microfinance |
Peru has the second-most conducive environment to financial inclusion among 55 selected countries, according to a 2018 report by The Economist Intelligence Unit. In addition, Peruvian microfinance institutions’ customers represent, as of September 2018, 61.8% of the debtors of the regulated Peruvian financial system, according to the SBS.
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| 6.2.1 | Peruvian microfinance system |
As of December 31, 2018, the Peruvian microfinance system consisted of 180 entities, of which 39 are supervised by the SBS (21.5%), 131 are financial cooperatives (COOPACs) regulated by the SBS but supervised by Federacion de Cooperativas de Ahorro y Credito (FENACREP) (72.4%) and 11 (6.1%) are enrolled in the self-regulation program promoted by Consorcio de Organizaciones Privadas de Promocion al Desarrollo de la Micro y Pequeña Empresa (COPEME).
| Peruvian Microfinance System in 2018 | ||||||||||||||
| Number of entities | Assets (Soles in thousands) | Deposits (Soles in thousands) | Loans (Soles in thousands) | |||||||||||
| Multiple banking | 1 | 12,940,725 | 8,392,179 | 9,949,503 | ||||||||||
| Financial firms | 11 | 14,842,067 | 7,489,881 | 12,882,276 | ||||||||||
| Municipal savings banks | 12 | 26,727,333 | 21,265,169 | 21,367,823 | ||||||||||
| Rural savings banks | 6 | 1,920,784 | 1,331,271 | 1,564,537 | ||||||||||
| Edpymes | 9 | 2,487,842 | 0 | 2,229,945 | ||||||||||
| Coopacs | 131 | 13,225,790 | 9,669,192 | 9,810,988 | ||||||||||
| Others | 11 | N/A | N/A | N/A | ||||||||||
| Total | 181 | 72,144,541 | 48,147,692 | 57,805,072 | ||||||||||
According to the SBS, as of December 31, 2018, Mibanco has the largest market share by loans in Peru’s micro and small-company segments regulated by the SBS, with shares of 26.4% and 21.2%, respectively (27.0% and 20.6%, respectively, as of December 31, 2017 and 26.9% and 20.2%, respectively, as of December 31, 2016).
| 6.2.2 | Recent competitive developments |
In October 2017, Diviso Grupo Financiero S.A. announced the purchase of 74.06% of shares of EDPYME Alternativa, consolidating a 99.67% ownership of the EDPYME. The acquisition is still subject to approval by the SBS.
The most relevant events for the development of the Peruvian microfinance sector in 2018 were:
| · | There were some Peruvian government initiatives to incentivize the granting of credits to small and micro enterprises, such as Fondo Crecer, which was created in September 2018. |
| · | On July 2018, Peruvian Law No. 30822 (COOPAC Law) was enacted to amend Law No. 26702 to assign responsibility for the regulation and some tasks related to supervision of Peru’s COOPACs to the SBS. |
| · | Peruvian Law No. 30607, which strengthens the functioning of the Cajas Municipales de Ahorro y Credito (CMACs, which are microfinance institutions) by establishing guidelines for the confirmation of their boards of directors, the authorized services and operations that CMACs can provide, their reinvestment policy, and other topics, were approved. |
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| 6.3 | Insurance & Pensions |
| 6.3.1 | Grupo Pacifico |
The Peruvian insurance market, which includes P&C, life and corporate health insurance market, is relatively highly concentrated, comprising only 20 active companies. According to the SBS and Susalud, as of December 31, 2018, four companies (Rimac, Grupo Pacifco, Mapfre and La Positiva) represent a combined 84.2% market share in terms of written premiums, and the leading two companies had a combined market share of 61.2%.
In 2018, Grupo Pacifico was the second-largest insurance company in Peru in terms of written premiums, with a consolidated market share of 29.1% (compared to 28.9% in 2017), according to the SBS and Susalud, and its 13.9% written premium growth from 2017 to 2018, exceeded the Peruvian average growth rate in the same period (12.8%, according to the SBS and Susalud). Grupo Pacifico is also the second-largest insurer in each sector of the Peruvian insurance industry, with the exception of life and health.
Grupo Pacifico has a relatively well-diversified product portfolio, with composition comparable to that of the overall Peruvian insurance industry. In contrast to the Latin-American region, Peru maintains a low insurance penetration level (as of December 31, 2018, region: 3.1%; Peru: 1.7%), and a larger gap compared to other developed countries. With growth of 12.8% in total written premiums from 2017 to 2018, after two preceding years of decrease, the Peruvian insurance industry’s total written premiums were S/15,122 million in 2018.
| Market Share by Annual Written Premiums (1) | 2016 | 2017 | 2018 | |||||||||
| 1. Rimac | 33.2 | % | 33.1 | % | 32.1 | % | ||||||
| 2. Grupo Pacifico | 27.4 | % | 28.9 | % | 29.1 | % | ||||||
| 3. Mapfre | 12.9 | % | 12.8 | % | 12.6 | % | ||||||
| 4. La Positiva | 9.8 | % | 9.3 | % | 10.4 | % | ||||||
| 5. Interseguro | 5.5 | % | 4.6 | % | 6.2 | % | ||||||
| 6. Protecta | 1.0 | % | 1.3 | % | 1.8 | % | ||||||
| Annual Written Premiums (Soles in millions) | 13,230 | 13,403 | 15,122 | |||||||||
(1) P&C + Life + Corporate Health Insurance Businesses
Source: SBS + Susalud
(i) Life and P&C insurance market
In 2018, total written premiums in the Peruvian life and P&C insurance sectors increased significantly, after a decrease of 4.2% in 2016 and low growth of 0.6% in 2017, according to the SBS. In 2018, written premiums totaled S/12,868.7 million, 13.6% higher than the S/11,327.1 million totals in 2017. Total written premiums in the Peruvian life insurance business grew 17.1% from 2017 to 2018, while its P&C business increased 10.5%. In the same year, Peru’s GDP grew by 4.0% according to the BCRP.
According to SBS, in 2018, Grupo Pacifico’s written premiums in the consolidated life and P&C businesses were 26.4% of the Peruvian market, which was higher than its market share in 2017 (25.9%). Grupo Pacifico’s written premium growth from 2017 to 2018 in these sectors was 15.6%, exceeding Peru’s average growth rate by 13.6%.
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(i.i) Life Insurance market
In 2018, written premiums of Peru’s life insurance market were S/6,272.0 million, according to the SBS, which represents an increase of 17.1% from 2017. The increase in premiums was attributable to growth in individual life, credit life, group life, and annuities (in the case of annuities, mainly through a new product, called Renta Privada).
According to the SBS, in 2018, Grupo Pacifico had the largest market share in the Peruvian life insurance market (28.5%), which was higher than its market share of 27.3% in 2017. Grupo Pacifico’s written premiums increased 22.0% from 2017, exceeding Peru’s average growth rate (17.1%). This increase was attributable to growth in annuities (+83.5%), due to the new “Renta Privada” product, individual life (+29.0%) and credit life (+15.7%).
(i.ii) P&C Insurance market
In 2018, the written premiums of Peru’s P&C insurance market were S/6,596.7 million, according to the SBS, which represents an increase of 10.5% from 2017, after year-over year decreases in the preceding two years. The 2018 increase was attributable to growth in medical assistance and commercial lines, with a slower growth in the automobile line.
According to SBS, Grupo Pacifico had the second largest market share in Peru’s P&C sector (24.4%) in 2018, lower than its 24.7% market share in 2017. Grupo Pacifico’s written premiums increased 9.3% from 2017, however, primarily through growth in medical assistance (+12.6%), personal accident (+29.1%), commercial lines (+7.8%), with slower growth in the automobile line (+2.5%).
(i.iii) Corporate Health Insurance and Medical Services market
According to Susalud, in 2018, written premiums in Peru’s health insurance market were S/2,253.4 million, which represented an increase of 8.5% compared to the previous year. Grupo Pacifico had Peru’s largest market share (44.9%) in this market in 2018, unchanged from 2017. This increase was mainly attributable to an increase in regular corporate health insurance.
| 6.3.2 | Prima AFP |
The SPP consists of four companies, and Prima AFP is the second largest of the four by funds under management (FuMs). As of December 31, 2018, FuMs in the SPP were S/153.4 billion, according to the SBS, while Prima AFP managed S/47.9 billion. This represented a market share for Prima AFP of 31.2%, a slight decrease compared to its market shares of 31.5% and 31.7% in 2017 and 2016, respectively.
Additionally, the FuMs sourced by voluntary contributions in the SPP were S/2.1 billion as of December 31, 2018, of which S/0.9 billion was managed by Prima AFP, which represented a market share of 45.5% for Prima AFP (compared to its market shares of 47.6% and 48.8% in 2017 and 2016, respectively), according to the SBS.
As of December 31, 2018, the number of affiliates in the SPP was 7 million, of which 2.1 million were Prima AFP customers. According to the SBS, this represented a market share of 30.5%, higher than its market shares of 25.5% and 23.4% in 2017 and 2016, respectively; primarily driven by the Third Pension Tender. For further details about the tender process, see “Item 4. Key Information – 4.B Business Overview - (9) Supervision and regulation – 9.5 Prima AFP”
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The average aggregated income of the SPP’s affiliates was S/7.8 billion in 2018, of which S/2.7 billion corresponded to Prima AFP’s affiliates, representing a market share of 34.1%, higher than its market shares of 32.2% and 30.9% in 2017 and 2016, respectively.
According to the SBS, collections in the SPP in 2018 were S/12.7 billion, of which S/4.3 billion was collected by Prima AFP, which had a market share of 34.1%, higher than its market shares of 31.0% and 31.3% in 2017 and 2016.
| 6.4 | Investment Banking and Wealth Management |
Our Investment Banking and Wealth Management LoB is organized into four main business units: asset management, capital markets, corporate finance, and wealth management. In addition, we have a regional business support team, an integrated regional sales force, and a centrally managed Treasury Department.
In the asset management business unit, Credicorp Capital’s proprietary funds saw increasing participation by institutional clients and individuals (the latter supported by the development of wealth management teams in Colombia and Chile and an already established team in Peru). Credicorp Capital has the leading market position in mutual funds in Peru, with a market share of 39.5% by total market AuMs, according to the SMV. We are also developing alternative funds in real estate, infrastructure, and private debt at a regional level and offer third-party funds from global asset managers to our clients.
In our capital markets business unit, our brokerage house in Peru held the largest market share there in equities (47% of traded volume) and the second-largest (11% of traded volume) in fixed income in 2018, according to the BVL (excluding over-the-counter trades). Similarly, in 2018 our brokerage company in Colombia held the largest market share there among brokers in equities and the second-largest among brokers in fixed-income intermediation, in terms of traded volume, with 22% and 20% market shares, respectively, according to the Colombia Stock Exchange. In Chile, we held the third-largest market share there in equities (7%) and the largest in fixed income proprietary accounts (15%) in 2018, in terms of traded volume, according to the Santiago Stock Exchange.
Our corporate finance business unit’s teams are recognized mainly in Peru and Chile. Some of this unit’s main businesses are capital markets and lending, in Peru and mergers and acquisitions (M&A) and capital markets in Chile, and it also has a team in Colombia.
Our wealth management business unit held an estimated market share of AuMs of over 30% in Peru as of December 31, 2018, which represents more than 30% of Peru’s total wealth (based on households with net worth over US$1 million), and market shares in Colombia and Chile of less than 2% in both countries, which gives us a big growth potential in those two countries. In this business, Credicorp competes in a regional market led by global banks and financial institutions, especially in the ultra-high-net-worth segment.
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Credicorp Capital also offers trust services to its clients in Peru and Colombia. In Peru, we have a strong leadership position in fiduciary and custody services to retail and institutional clients, but further growth is limited by market size. On the other hand, we have a relatively low market share in fiduciary services in Colombia (less than 5% measured by number of trust deeds), according to Asociacion de Fiduciarias de Colombia, which also gives us a big growth potential.
| (7) | Peruvian government and economy |
Although Credicorp Ltd. is incorporated in Bermuda, most of BCP Stand-alone’s, Prima AFP’s, Mibanco’s, and a significant part of Credicorp Capital’s and Grupo Pacifico’s operations and customers are located in Peru. In addition, 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. For further detail, 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”.
| 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 country’s economic environment, financial system, and agricultural sector, among other components of its infrastructure. For example, in 1987, President Alan Garcia attempted to nationalize the banking system, including BCP Stand-alone. At that time, the major shareholders of BCP Stand-alone sold their controlling interest in BCP Stand-alone to its employees; this action prevented the government from taking control of BCP Stand-alone.
Beginning in 1990, President Alberto Fujimori implemented a series of market-oriented reforms; since that time, despite rhetoric and campaign promises to the contrary, most of these reforms have remained in place.
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 votes (the diference was 41,438 votes). President Kuczynski, a former Wall Street veteran and World Bank official, was expected to maintain the incumbent economic model. This model included: (i) maintaining the Constitution and respect for the already signed trade agreements, (ii) bolstering private investment, and (iii) reducing 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 was a key factor to carry out his political agenda. In October 2016, Peru’s 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) fighting corruption, and (v) citizen security. The Executive Branch enacted a total of 112 legislative decrees under this authority.
During President Kuczynski’s abbreviated tenure, political turmoil was a constant factor. President Kuczynski resigned as President, and his first vice president, Martin Vizcarra, took office in March 2018. President Vizcarra’s term runs until July 2021. At President Vizcarra’s request, a nationwide referendum was held on December 9, 2018. This referendum resulted in some changes to Peru’s constitution. The changes include: (i) Congressmen cannot be immediately re-elected under the same designation (Article N° 90), (ii) the establishment of a National Justice Council to replace the previous public organism which designed judges, prosecutors and attorneys at all levels (Articles N° 154, 155 and 156), and (iii) financing of political parties will be further regulated (Article N° 35). However, it is not expected to have a material impact on the Peruvian business environment.
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For further detail, 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”.
| 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 5.0% since 2000, according to data from the BCRP. In recent years, and as international financial conditions improved following the global financial crisis, 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, Peru’s economy grew 3.3%, a faster pace compared to 2014 due to growth in the primary sector (6.9% in 2015). In 2016, the economy grew 4.0%, above growth rates for 2015 and 2014, mainly due to the expansion of the mining sector (21.2%) as large mines for copper and other metals near Arequipa, Peru, reached peak capacity and Peruvian copper production grew 40.1%. In 2017, Peru’s GDP grew 2.5% due to the adverse effects of El Nino, the Lava-Jato case and political turmoil associated with President Kuczynski’s administration. In 2018, real GDP grew 4.0%, with a strong contribution from the fishing sector and public investment (both aided by a rebound from the effects of El Nino in 2017) and a 26% year-over-year expansion of mining investment (compared to 18% in 2017). Peru has remained as one of the fastest-growing economies in the Latin American region since 2015, with a GDP growth rates above those of Chile, Colombia, Mexico and Brazil.
Peruvian economic policy
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 an FTA with the United States, that went into effect in 2009, and made permanent the special access to the U.S. market previously granted under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). Exports from Peru to the United States were US$7.9 billion in 2018 (16.2% of Peru’s total exports that year). To date, Peru’s FTA with United States remains intact. Peru remains a net importer from the U.S. In 2018, Peru’s net imports from the United States were US$863 million and Peru’s exports do not represent major competition for the U.S. industrial sector. Peru also signed a trade agreement with China in 2009 that went into effect in 2011. Exports from Peru to China reached US$13.2 billion in 2018 (27.0% of Peru’s total exports that year). In addition, Peru has 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, Peru signed the TPP, a proposed trade agreement involving twelve Pacific Rim countries that did not go into effect because the President of the United States indicated that the United States would not ratify it. On December 30, 2018, the remaining Pacific Rim countries, including Peru, entered into the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership as a replacement for the TPP.
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For further information, see “Item 3. Key Information – 3.D Risk Factors – (11) Economic and market conditions in other countries may affect the Peruvian economy and the market price of Peruvian securities.”.
In 2018, Peru’s exports increased 8.1% compared to 2017, to US$48.9 billion. Peru’s Imports amounted to US$41.9 billion in 2018, an 8.2% increase from 2017. Nevertheless, Peru’s 2018 trade surplus was US$7.0 billion, the highest total since 2012. As a result, the current account deficit represented 1.5% of Peru’s GDP in 2018, above the level of 2017 (1.2% of GDP).
Peruvian policymakers have also maintained a conservative approach to fiscal policy and government spending. Peru’s debt-to-GDP ratio has fallen from 51.1% in 1999 to 25.7% in 2018 as the government cut its spending and privatized most state-run enterprises. Peru’s fiscal position also benefited from the accumulation of surpluses most years in the 2004 to 2013 period.
In 1999, Peru’s Congress approved the Law of Fiscal Responsibility and Transparency, which includes the following rules: (i) Peru’s fiscal deficit cannot exceed 1% of GDP; (ii) spending related to government consumption cannot grow faster than 4% per year 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 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 (specifically, 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 (with the latter two able to borrow only for investment projects and debt cannot exceed the four-year moving average of annual revenues). Moreover, the changes introduced in 2013 established a public debt ceiling of 30% of Peru’s GDP by fiscal rule. In March 2016, Peru’s Congress approved the bill that establishes the gradual convergence of the structural deficit for 2017 (1.5% of GDP, previously 2.5%) and 2018 (1.0% of GDP, 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. Peru remains the only MILA country that has not suffered a downgrade or negative outlook revision since commodity prices started to decrease in 2013.
President Kuczynski’s government introduced changes to these fiscal rules with the legislative powers granted by Peru’s 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. In light of the El Nino of 2017, the conventional deficit rule referred to in item (i) of the preceding sentence was modified in order to permit the related reconstruction spending assumed by the government. The new expected levels for the conventional fiscal deficit were 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.
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In 2018, Peru’s non-financial public sector reported a deficit equivalent to 2.5% of GDP (compared to 3.1% of GDP in 2017), considerably below the legal limit of 3.5% of GDP. Fiscal revenues represented 19.3% of GDP in 2018 (compared to 18.1% in 2017), leaving behind five years of decline, and increased 11.6% from 2017, the highest increase in 7 years, due to a recovery of domestic demand. In contrast, non-financial spending from the general government stood at 20.4% of GDP (compared to 20.1% in 2017). In particular, public investment by the general government grew 13.3% in 2018, the largest rate of increase since 2012. Peru ended 2018 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 Peru’s Congress, the executive branch changed certain tax measures, including as follows: (i) it would have cut Peru’s value-added tax (VAT) from 18% to 17% from July 2017 onwards, provided that government revenues from VAT excluding tax refunds reached 7.2% of GDP by May 2017; (ii) the corporate income tax was set to 29.5%, and the dividend tax was cut from 6.8% to 5% (reverting changes made by the previous administration), while additional deductions to the individual income tax were established in the areas of 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. Notably, the condition in item (i) was not met, and the VAT tax rate remains at 18%. The tax amnesty described in item (iii) led to fiscal revenues of S/ 1,007 million during 2017. In 2018, the MEF implemented an increase in the excise tax for specific products such as sugar beverages, alcohol, tobacco and vehicles, among others.
The BCRP, which is officially autonomous and presides over a system of reserve banking, is responsible for monetary policy. The BCRP has had an inflation target of 2.0% (+/-1%) since 2007. The mid-point of this target range, 2.0%, is the lowest in Latin America and reflects the BCRP’s commitment to price stability. The BCRP also has considerable foreign reserves, equivalent to approximately 27% of Peru’s GDP as of year-end 2018, and other mechanisms to provide liquidity to Peru’s domestic financial system. The BCRP 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 the BCRP is an important player in the market, selling or buying U.S. dollars in order to soften volatility.
From May 2017 to March 2018, the BCRP lowered its reference rate from 4.25% to 2.75%, which represented a 150 bps reduction in 10 months. The initial monetary stimulus came in a context of high headline inflation, which decreased from 4.00% in March 2017 (mainly affected by El Nino’s effect on food prices) to 1.4% in December 2017 (as the supply-side shock reversed). This trend remained broadly stable in 2018, and headline inflation for the year in Peru was 2.2% (compared to 1.4% in 2017), comfortably within the BCRP’s target range. In general, economic activity grew consistently below its potential in 2017, and remained below its potential in 2018, which gave the BCRP space to apply and maintain monetary stimulus. Moreover, Peru recorded an inflation rate lower than that observed in other countries in the region (Mexico: 4.8%, Brazil: 3.7%, Colombia: 3.2%, Chile: 2.6%). Also, as of December 31, 2018, the Sol was at S/ 3.373 per U.S. Dollar, which represents depreciation of 4.1% from December 31, 2017. With the exception of the Mexican Peso (which remained stable during 2018), the Sol’s depreciation was among the most moderate in the region (compared to the Brazilian Real’s 17.2% decline, the Chilean Peso’s 12.8% decline, and the Colombian Peso’s 9.0% decline). In the fourth quarter of 2018 many financial markets experienced corrections, which, along with a higher perceived global risk aversion, contributed to the exchange rate fluctuating between S/ 3.35 – 3.40 per U.S. Dollar. The BCRP made net purchases of US$184 million during 2018 (compared to US$5.2 billion in 2017, the highest amount since 2012). Most of the FX intervention by the BCRP in 2018 was in the fourth quarter, through the sale of US$1,542 million of currency swaps.
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For more information about the BCRP’s economic policies and procedures see “Item 4.B Business Overview – (9) Supervision and Regulation – 9.2 BCP Stand-alone and Mibanco – 9.2.7 The BCRP’s monetary and macroprudential policy.”
| (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 |
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 (Basel Committee) guidelines, empowers the SBS to supervise financial 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 (BCRP) |
The BCRP was established in 1922. Pursuant to the Peruvian Constitution, its primary role is to ensure the stability of the Peruvian monetary system. The BCRP 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 intended 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 BCRP 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 BCRP is one of the executive branch nominees but must be approved by Peru’s Congress.
The BCRP’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 BCRP.
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| 8.3 | The Superintendency of banks, insurance and pension funds (SBS) |
The SBS, whose authority and activities are discussed in ““Item 4.B Business Overview – (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.
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.
| 8.4 | Financial System institutions |
Under Peruvian law, financial institutions are classified as banks, finance companies, other non-banking institutions, specialized companies or investment banks. BCP Stand-alone 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; |
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| (xi) | purchasing banks and non-Peruvian institutions that 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; |
| (xiv) | purchasing, holding and selling instruments evidencing public debt, whether internal or external, as well as obligations of the BCRP; |
| (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 capital in Peru of 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 that 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.
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.
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| 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 and Law No. 29946 are the main laws governing insurance companies and insurance in Peru. The SBS is the government agency charged with the supervision and regulation of all insurance companies. The incorporation of an insurance company requires prior authorization of the SBS. The Peruvian insurance industry comprised 20 companies as of December 31, 2018.
| (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. Recent regulation has been enacted in Bermuda, as stated in section “ITEM 3. KEY INFORMATION - 3. D Risk Factors - (17) Bermuda’s continued presence on a list of non-cooperative jurisdictions published by the European Union could adversely affect our financial condition or results of operations.”
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Furthermore, 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 subject to certain requirements set forth by Law No. 26702, as well as certain banking resolutions issued by the Peruvian banking regulator, SBS, including SBS Resolution No. 11823-2010, which was enacted in September 2010 and which approved the “Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates”. Resolution No. 11823-2010 was partially amended by Resolution No. 2945-2013, which was enacted in May 2013. These regulations affect us primarily in the areas of reporting, risk control guidelines, limitations, ratios and capital requirements.
Since our common shares are listed on the BVL in addition to the New York Stock Exchange, we are subject to certain reporting requirements to the SMV, the Peruvian securities market regulator, and the BVL. See “Item 9. The Offer and Listing – 9.C Markets – (1) The Lima Stock Exchange – 1.2 Market Regulation”.
| 9.2 | BCP Stand-alone and Mibanco |
| 9.2.1 | Overview |
BCP Stand-alone’s and Mibanco’s operations are regulated by Peruvian law. The regulations governing operations in the Peruvian financial sector are stated in Law No. 26702. The SBS periodically issues resolutions under Law No. 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 No. 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 Stand-alone’s and Mibanco’s operations are supervised and regulated by the SBS and the BCRP. Those who violate Law No. 26702 and its underlying regulations may be subject to administrative sanctions and criminal penalties. Additionally, the SBS and the BCRP 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.
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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 Stand-alone and Mibanco must inform SMV of significant events that affect its business and is required to provide financial statements to it and the BVL 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.
| 9.2.2 | Authority of the SBS |
Peru’s Constitution and Law No. 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 No. 26702. The SBS is also responsible for supervising the BCRP 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 BCRP, 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 holding companies that are not banks, 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 Stand-alone 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 by banks. 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.
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On April 1, 2018, SBS Resolution No. 37-2008 was replaced by SBS Resolution No. 272-2017. Regarding Risk management, the new regulation has introduced the following modifications:
(i) risk management must also consider the macroeconomic environment that affects the markets in which the company operates;
(ii) the following new types of risk are incorporated in the regulation: (a) money laundering and terrorist financing risk, defined as the possibility of the company being used for money laundering and terrorist financing purposes; and (b) reinsurance risk, defined as the possibility of losses caused by the insufficiency of reinsurance coverage contracted by the assigning insurance company; and
(iii) the definition of liquidity risk has been modified. It is now understood as the possibility of losses due to anticipated or forced sale of assets at unusual discounts in order for the company to meet its obligations, as well as not being able to close open positions or cover positions in sufficient quantity. Before this modification, it was understood as the possibility of losses caused by the failure to comply with the financing requirements and the application of funds arising from the mismatches of cash flows requirements).
In addition, the new regulation provides that companies must incorporate a centralized unit or units specialized in specific risks management. Under the previous regulation this was optional. The SBS may require the companies to create specialized risks units if considered necessary. Under the previous regulation, if the company did not have a specialized risks unit, it was understood that these functions had been assigned to the CEO. With the new regulation such provision has been eliminated.
Companies must submit the annual risks report to the SBS within 90 days as from the end of each year.
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. We also have monitoring and reporting procedures that are 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.
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Pursuant to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we are required to make certain certifications regarding our internal controls over financial reporting as of December 31, 2018. 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 Stand-alone and Mibanco |
Capital adequacy requirements applicable to us are set forth in Law No. 26702 and Legislative Decree 1028. Legislative Decree 1028 was aimed at adapting Law No. 26702 to the capital guidelines and standards established by the second Basel Committee Accord (Basel II). Capital adequacy requirements are also included in Peruvian GAAP guidelines. Pursuant to 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.
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 and guidelines, followed by the SBS, to strengthen the regulation, supervision and risk management of the banking sector. The additional capital requirements include requirements to cover concentration, excessive interest rate risk in the banking book and systemically important 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 comprises:
| (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; banks must deduct the difference between total expected loss and eligible provisions in case internal models are used to estimate credit capital requirements. |
| (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. |
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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 deductions (a), (b) and (c) from “Basic Capital” listed above.
| • | 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 Law No. 26702); 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 Law No. 26702.
| • | 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 Law No. 26702; |
| (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 Law No. 26702; and |
| (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 the components of “Supplementary Capital” listed above.
Article 185 of Law No. 26702 also provides that the following limits apply when calculating regulatory capital:
| (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 deductions (a), (b), and (c) from “Basic Capital” listed above; |
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| (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 deductions (a), (b), and (c) from “Basic Capital” listed above in the amounts assigned to cover market risk. |
SBS Resolution No. 8548-2012, adopted in 2012, modified the regulatory capital requirements for credit risk weighted assets in SBS Resolution No. 14354-2009 and established a schedule for implementing the modifications.
As of December 31, 2018, BCP Stand-alone’s regulatory capital was 14.17% of its unconsolidated risk-weighted assets. As of December 31, 2017 and December 31, 2016, BCP Stand-alone’s regulatory capital was 15.05% and 15.35% of its unconsolidated risk-weighted assets, respectively.
In November 2013, BCP Stand-alone’s board of directors decided to track a Basel III ratio known as Common Equity Tier 1 (CET1). CET1 comprises:
| (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, 2018, BCP Stand-alone’s CET1 ratio was 11.55% of its unconsolidated risk-weighted assets, above the 11.00% limit that BCP Stand-alone recently targeted for itself. This limit was raised in October 2018 by BCP Stand-alone’s Risk Committee and is part of BCP Stand-alone’s risk appetite framework. BCP Stand-alone’s CET1 ratio is estimated based on BCP Stand-alone’s understanding, expectations and interpretation of the proposed Basel III requirements in Peru.
Capital management
On February 24, 2016, SBS issued Resolution 975 -2016 - “Subordinated Debt Regulation”, which aims to improve the quality of banks’ 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 |
Under this regulation, subordinated debt issued prior to the regulation 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 following, 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. |
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| · | As of December 31, 2018, BCP Stand-alone’s Tier 1 subordinated debt (issued in 2009) totals S/675 million, and matures in 2069. Thus, as of January 2019, 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 2018. |
In addition, the SBS Resolution also includes changes to the calculation of risk-weighted assets of the following accounting items:
| · | Intangibles (excluding goodwill); |
| · | Deferred tax assets (DTAs) that are originated by operating losses; and |
DTAs that are associated with temporary differences and that exceed the threshold of 10% of the “adjusted total capital”. In each case, DTAs are to be net of deferred income tax liabilities.
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. The risk-weighted assets calculated based on these risk weights will be used exclusively for calculating the Basel III ratios.
Furthermore, the new regulation requires the calculation of a new solvency ratio: Adjusted total capital on adjusted total risk-weighted assets. This methodology is similar to that which is used to calculate the 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 risk-weighted assets (the denominator) does not consider these deductions. As of December 31, 2018, BCP Stand-alone’s CET1 ratio was 11.55%. This ratio will not change because it is already calculated using an adjusted total risk weight.
SBS Resolution 4280-2018, adopted in October 2018, modified the risk weight applied to intangibles (excluding goodwill) to speed up the increase in this risk weight towards 1000%, with the purpose of closing the regulatory gap with Basel III guidelines, which clearly require intangibles to be fully deducted from core capital measurements.
Finally, for transparency purposes and to demonstrate the calculation of the CET1 ratio, Credicorp will periodically publish BCP Stand-alone’s adjusted total risk-weighted assets.
Regulatory capital information for BCP Stand-alone and Mibanco as of December 31, 2016, 2017 and 2018
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| BCP Stand-alone Regulatory Capital and Capital Adequacy Ratios | ||||||||||||
| Soles in Millions | 2016 | 2017 | 2018 | |||||||||
| Capital stock | 7,066 | 7,933 | 8,770 | |||||||||
| Legal and other capital reserves | 3,582 | 3,885 | 4,184 | |||||||||
| Accumulated earnings with capitalization agreement | - | - | - | |||||||||
| Loan loss reserves (1) | 1,181 | 1,235 | 1,307 | |||||||||
| Perpetual subordinated debt | 839 | 729 | 675 | |||||||||
| Subordinated debt | 4,520 | 3,978 | 4,224 | |||||||||
| Unrealized gain (loss) | - | - | - | |||||||||
| Investment in subsidiaries and others, net of unrealized profit and net profit | -1,514 | -1,588 | -1,795 | |||||||||
| Unrealized profit and net profit in subsidiaries | 306 | 347 | 435 | |||||||||
| Goodwill | -122 | -122 | -122 | |||||||||
| Total regulatory capital | 15,859 | 16,398 | 17,679 | |||||||||
| Tier 1 (2) | 10,761 | 11,805 | 12,827 | |||||||||
| Tier 2 (3) + Tier 3 (4) | 5,098 | 4,593 | 4,852 | |||||||||
| Total risk-weighted assets | 103,350 | 108,950 | 124,798 | |||||||||
| Credit risk-weighted assets | 94,496 | 98,800 | 114,006 | |||||||||
| Market risk-weighted assets (5) | 746 | 1,391 | 1,761 | |||||||||
| Operational risk-weighted assets | 8,109 | 8,759 | 9,031 | |||||||||
| Capital ratios | ||||||||||||
| Tier 1 ratio (6) | 10.41 | % | 10.84 | % | 10.28 | % | ||||||
| Common Equity Tier 1 ratio (7) | 11.08 | % | 11.83 | % | 11.55 | % | ||||||
| BIS ratio (8) | 15.35 | % | 15.05 | % | 14.17 | % | ||||||
| Risk-weighted assets / Regulatory capital (9) | 6.52 | 6.64 | 7.06 | |||||||||
| (1) Up to 1.25% of total risk-weighted assets. |
| (2) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + (0.5 x Unrealized profit and net profit 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 profit in subsidiaries - Goodwill). |
| (3) Tier 2 = Subordinated debt + Loan loss reserves + (0.5 x Unrealized profit and net profit in subsidiaries) - (0.5 x Investment in subsidiaries). |
| (4) Tier 3 = Subordinated debt covering market risk only. Tier 3 exists since 1Q10. |
| (5) It includes capital requirement to cover price and rate risk. |
| (6) Tier 1 / Risk-weighted assets |
| (7) Common Equity Tier I = Capital + Reserves – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability) + retained earnings + unrealized gains. |
| Adjusted Risk-Weighted Assets = Risk-weighted assets - (RWA intangible assets, excluding goodwill, + RWA Deferred tax assets generated as a result of temporary differences in income tax, in excess of 10% of CET1, + RWA Deferred tax assets generated as a result of past losses). |
| (8) Regulatory Capital / Risk-weighted assets (legal minimum = 10% since July 2011). |
| (9) Since July 2012, Risk-weighted assets = Credit risk-weighted assets * 1.00 + Capital requirement to cover market risk * 10 + Capital requirement to cover operational risk * 10 * 1.00 (since July 2014). |
| Mibanco - Regulatory Capital and Capital Adequacy Ratios | ||||||||||||
| Soles in Millions | 2016 | 2017 | 2018 | |||||||||
| Total regulatory capital | 1,461 | 1,453 | 1,491 | |||||||||
| Tier 1 (1) | 1,054 | 1,085 | 1,122 | |||||||||
| Tier 2 (3) | 407 | 368 | 370 | |||||||||
| Total risk-weighted assets | 9,404 | 9,516 | 10,394 | |||||||||
| Credit risk-weighted assets | 8,895 | 8,934 | 9,708 | |||||||||
| Market risk-weighted assets (3) | 98 | 60 | 76 | |||||||||
| Operational risk-weighted assets | 410 | 522 | 610 | |||||||||
| Capital ratios | ||||||||||||
| Tier 1 ratio (4) | 11.21 | % | 11.41 | % | 10.79 | % | ||||||
| CET 1 ratio (5) | 14.46 | % | 14.92 | % | 15.52 | % | ||||||
| BIS ratio (6) | 15.54 | % | 15.27 | % | 14.35 | % | ||||||
| Risk-weighted assets / Regulatory capital (7) | 6.43 | 6.55 | 6.97 | |||||||||
| (1) Tier 1 = Capital + Legal and other capital reserves + Accumulated earnings with capitalization agreement + (0.5 x Unrealized profit and net profit 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 profit in subsidiaries - Goodwill). |
| (2) Tier 2 = Subordinated debt + Loan loss reserves + (0.5 x Unrealized profit and net profit in subsidiaries) - (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 – 100% of applicable deductions (investment in subsidiaries, goodwill, intangibles and net deferred taxes that rely on future profitability) + retained earnings + unrealized gains. Adjusted Risk-Weighted Assets = Risk-weighted assets – (RWA intangible assets, excluding goodwill, + RWA Deferred tax assets generated as a result of temporary differences in income tax, in excess of 10% of CET1 + RWA Deferred tax assets generated as a result of past losses). |
| (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 * 1.00 (since July 2014) |
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| 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 profit. 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 profit. As of December 31, 2018, 2017, and 2016, these reserves amounted to approximately S/5,179.0 million, S/4,480.3 million and S/3,987.5 million, respectively.
| 9.2.6 | Provisions for loan losses |
Until December 31, 2017, Credicorp’s allowance model complied with the IAS 39 requirements to estimate provisions for loan losses for Wholesale Banking and Retail Banking. Depending on the portfolio analyzed, the methodologies took into consideration collateral recovery projections, outstanding debt and qualitative aspects that reinforced the estimate.
That methodology included three estimation scenarios: base, upper threshold and lower threshold. These scenarios were 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 was based on management’s best judgment, complemented by historical loss experience.
Since January 1, 2018, Credicorp’s methodology has been modified to comply with the new requirements introduced by the IFRS 9 impairment model, which is based on expected credit losses and differs significantly from the IAS 39 approach, which was based on incurred credit losses. In accordance with IFRS9 standard, all the financial assets classified or designated as amortized cost, debt instruments classified as investments at fair value through other comprehensive income and indirect loans that are presented in off-balance accounts, are subject to impairment evaluation.
Measurement of the IFRS9 expected loss
The measurement of the expected credit losses is mainly based on the product of three parameters: probability of default (PD), loss given default (LGD), and exposure at default (EAD); discounted at the reporting date using the effective interest rate. The estimation of the IFRS9 parameters not only considers past due information, but also all relevant credit information, including actual conditions and expected macroeconomic effects in three scenarios (base, optimistic and pessimistic).
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Following, the definition of the parameters:
| - | Probability of Default (PD): this is a measurement of credit rating given internally to a customer, designed to estimate their probability of default within a specific horizon. The process of obtaining the PD is carried out through scoring and rating tools. Where the definition of default used in IFRS9 is consistent with the one used for internal credit risk management purposes, as: |
| · | In case of the retail products, clients are in default if in a specific moment have 60 or more days past due, except for mortgage that is from 120 days. Also, if they have operations in one of the following situations: refinanced, restructured, in pre-judicial, judicial or write off. |
| · | In the wholesale banking, clients are in default when they pass to Wholesale Collections area or they have an internal classification of deficient with recurrence, doubtful or loss. Also, if they have operations in refinanced, restructured, in pre-judicial, judicial or write off situation; or if they have significant qualitative signs of impairment. |
| - | Loss Given Default (LGD): Is a measurement which estimates the severity of the loss which would be incurred at the time of the default. It is based on the difference between the contractual cash flows owed and those that the lender would expect to receive, even after the liquidation of the guarantees (for example: Deposits or they equivalent, commodity warrants, immovables properties, ships, machinery and equipment, among others. LGD also considers all the costs incurred during the recovery process. |
In IFRS9 it’s also taken into account the internal policy of write-offs, where the subsidiaries of Credicorp do not have reasonable expectations of recovering the financial asset in its entirety or a portion thereof. It’s important to mentioned that when the group write off a position, it adjust the LGD to 100% to add the allowance necessary to reach the required level.
| - | Exposure at Default (EAD): Is a measurement which estimates the exposure at the time of the customer goes into default, taking into account changes in future exposure, for example, in the case of prepayments and/or greater utilization of unused lines. |
The provisions for credit losses will be measured on each reporting date following a three-stage model of expected credit losses based on the degree of credit impairment from its origin:
| - | Stage 1: Financial assets whose credit risk has not increased significantly since its initial recognition, a reserve will be recognized for losses equivalent to the credit losses expected to occur from defaults in the following 12 months. For those instruments with a maturity less than 12 month, a probability of default corresponding to the remaining term until maturity is used. |
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| - | Stage 2: Financial assets that have presented a significant increase in credit risk in the reporting date compared with initial recognition, but are not considered impaired, a reserve will be recognized for losses equivalent to the credit losses expected to occur during the remaining life of the asset. |
The definition used of “significant increase in credit risk” on the reporting date compared with the origination date, considers the following criteria:
| · | If an account has more than 30 days in arrears. |
| · | Risk thresholds have been established based on the internal models and based on relative difference thresholds (by portfolio and risk level) in which the instrument was originated. Less risky PD assets have a broad threshold to move in without migrating to stage 2, in comparison to risky PD assets where a small increase of their PD can make them migrate to stage 2. |
| · | The follow-up systems, alerts and monitoring of risk portfolios are integrated, as established by the current risk policy in Wholesale and Retail Banking. |
| · | Additionally, alignment criteria are applied with clients that have more than 20% of their position in stage 2. All the rest of their assets in stage 1 get automatically classified in stage |
| - | Stage 3: Financial assets classified as defaults, which have with objective evidence of impairment on the reporting date, a provision for these assets reflects the expected credit losses during the residual life of the assets. Alignment criteria are also applied to be considered in this stage. |
The fundamental difference in the measurement of the expected loss between stage 1 and stage 2 is the PD horizon. The estimates for stage 1 financial assets use a 12-month horizon, while those situated in stage 2 use an expected loss calculated based on the remaining term of the asset and considers the effect of the significant increase in credit risk. Finally, stage 3 estimates of the expected loss are based on the best estimate, according to the situation of the collection process of each asset.
Credicorp’s expected credit losses is a weighted estimate of three macroeconomic scenarios: base, optimistic and pessimistic; that are based on macroeconomic projections provided by the internal team of Economic Studies and approved by Senior Management. In each scenario, the Group bases itself on a wide variety of prospective information such as economic inputs, including: the growth of the gross domestic product (GDP), inflation rate, exchange rate, among others.
The following table provides a comparison between the reported expected credit loss for Credicorp’s loans portfolio and the expected credit loss under three scenarios: base, optimistic and pessimistic.
| At December 31,2018 (Soles in thousands) | Optimistic Scenario | Base Case Scenario | Pessimistic Scenario | Reported ECL under IFRS9 | ||||||||||||
| Total Loans | 5,218,142 | 5,308,346 | 5,422,882 | 5,314,340 | ||||||||||||
For further information about the IFRS9 measurement of the expected credit loss, see Note 3(i) to the Consolidated Financial Statements.
For historical data regarding our loan loss reserves, 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”.
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| 9.2.7 | The BCRP’s monetary and macroprudential policy |
The BCRP periodically revises its reference interest rate in accordance with its monetary policy objectives. Once a month the board of directors of the BCRP approves and announces the monetary program through a press release. The following chart summarizes the reference interest rate changes in 2016, 2017 and 2018:
| Changes in BCRP's reference interest rate (2016-2018) | ||
| Month | Rate | |
| January 2016 | 4.00% | |
| February 2016 | 4.25% | |
| May 2017 | 4.00% | |
| July 2017 | 3.75% | |
| September 2017 | 3.50% | |
| November 2017 | 3.25% | |
| January 2018 | 3.00% | |
| March 2018 | 2.75% | |
The tightening of the BCRP’s monetary policy up to February 2016 intended to anchor inflation expectations within the target range, which ranges from 1% to 3%, in the context of 4.40% inflation in December 2015. Thereafter, the BCRP’s monetary policy rate remained at 4.25% for over a year amid the expectation that inflation would lower towards the target range. Data in this Section 9.2.7 was collected from the BCRP.
Headline inflation in Peru reached 4.0% again in March 2017 due to El Nino’s effect on food prices. However, as the supply-side shock reversed, inflation was 1.4% in 2017 (it reached a minimum of 0.4% in March 2018) and then accelerated to 2.2% in 2018, comfortably within the target range. Moreover, economic activity grew consistently below its potential during 2017, and has remained below its potential during 2018, which gave the BCRP space to apply and maintain monetary stimulus.
Under Law No. 26702, banks and financial institutions are required to maintain legal reserve requirements for certain obligations. The BCRP requires financial institutions to maintain marginal reserve requirements for foreign currency obligations and sets the exact level and method of calculation of that 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 BCRP requires reserves on amounts due to foreign banks and other foreign financial institutions. Since January 2011, obligations of foreign subsidiaries and affiliates also have been subject to the reserve requirement.
For 2015, the BCRP set the minimum level of reserves for banks at 6.5% for local currency and 9.0% for foreign currency. However, the BCRP also establishes a marginal reserve requirement of 70.0% in foreign currency for funds that exceed a certain level set by the BCRP. Foreign currency cannot be used to comply with reserve requirements for liabilities in domestic currency, and vice versa. The BCRP oversees compliance with the reserve requirements.
In 2017, the BCRP lowered the local currency reserve requirement rate (from 6.5% in December 2016 to 5.0% in April 2017) and lowered the foreign currency marginal reserve requirement rate (from 70% in December 2016 to 40% in December 2017). In 2018 the BCRP continued to lower the marginal reserve requirements from 40% in December 2017 to 35% in July 2018. According to the BCRP, this reduction in rates aims to maintain flexible credit conditions considering decreasing demands for loans and increasing external rates. By December 2018, Peruvian commercial banks’ average effective reserve requirement ratio for foreign currency was 35.6%.
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In addition to overall changes in reserve requirements, in 2016 the BCRP increased the minimum level for current account deposits that Peruvian banks must keep at the BCRP as reserve funds, from 0.75% at the close of 2015 to 1.00% by March 2016, where it has remained since.
In order to offset the excessive pressure of the derivatives market on the domestic currency, the BCRP has adjusted additional reserve requirements in Soles according to FX derivatives market conditions. Moreover, after significant depreciation of the Sol against the U.S. dollar in 2014 (6.8%) and 2015 (14.6%) the BCRP established a program (De-dollarization Program) aimed at contributing to the de-dollarization of credit to reduce the risks of currency depreciation associated with borrowing in U.S. dollars.
For further information, see “Item 3. Key Information – 3.D Risk Factors – (11) Economic and market conditions in other countries may affect the Peruvian economy and the market price of Peruvian securities.”
By December 31, 2018, BCP Stand-alone achieved the BCRP’s total loans in U.S. dollars target, with total loans in U.S. dollars at 76.1% of BCP Stand-alone’s September 2013 level, but did not meet its car and mortgage loans target, with car and mortgage loans in foreign currency at 51.1% of BCP Stand-alone’s February 2013 level. Pursuant to the BCRP’s rule, we reserved US$27 million as an additional U.S. dollar reserve in connection with the car and mortgage loans target.
Additionally, in order to reduce the pressures on the Dollar/Sol exchange rate, at the end of August 2015, the BCRP established a new instrument called special repo, which consists of the simultaneous sale of a resettable certificate of deposit (CDR) by the BCRP 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 banks receive domestic currency generating a liability and maintains an asset equivalent to the CDR that is left as collateral at the BCRP. As a result of these measures, Peru’s loan dollarization ratio stood at 28.2% as of December 31, 2018, compared to 29.3% in December 2017 and 29.1% in December 2016.
| 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.
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 for any Peruvian borrower is 10% of a 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, 2018, 2017 and 2016, the 10.0% unconsolidated credit limit per borrower of BCP Stand-alone for unsecured loans was S/1,767.9 million, S/1,639.8 million and S/1,585.9 million, respectively. As of December 31, 2018, 2017 and 2016 the 30.0% credit limit for secured loans was S/5,303.7 million, S/4,919.5 million and S/4,757.7 million, respectively.
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Pursuant to Article 52 of the organic law of the BCRP, in certain circumstances, the BCRP has the authority to establish limits on interest rates charged by commercial banks and other financial institutions. Such limits are not currently in place; however, there can be no assurance that the BCRP will not establish such limits on interest rates in the future.
| 9.2.9 | Related party transactions |
Law No. 26702 regulates transactions between financial institutions on the one hand and related parties and or affiliates on the other. The SBS and the 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 No. 26702, as amended by Law No. 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, and (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 “Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.2.8 Lending Activities”. All loans to related parties must be made on terms no more favorable than the best terms that BCP Stand-alone or Mibanco offers to the public.
| 9.2.10 | Ownership restrictions |
Law No. 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 or other felonies, and those who are directors, employees or 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 or 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 other reasons. The decision of the SBS on such matters 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 under the limitations described above.
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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 2018, Equilibrium Clasificadora de Riesgo and Apoyo y Asociados Internacionales rating agencies affirmed their “A+” and “A” risk categories for BCP Stand-alone and Mibanco, respectively. As of December 2018, BCP Stand-alone and Mibanco maintained the risk categories of “A+” and “A”, respectively.
| 9.2.12 | Deposit insurance fund |
Law No. 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 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%, which is applicable to banks in the highest risk category. BCP Stand-alone 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/100,864 as of December 31, 2018 and S/99,949 from the period starting in March 2019 until May 2019.
| 9.2.13 | Intervention by the SBS |
Pursuant to Law No. 26702, as amended by Law No. 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 BCRP, (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, which 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 clause (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 bank 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 Stand-alone 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 No. 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 No. 2 of February 22, 2008 and No. 23 of April 27, 2015, the Law on the Prevention of Money Laundering, Terrorism Financing and Financing of Proliferation of Weapons of Mass Destruction.
| 9.3 | 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. The 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 BCB regulates financial intermediation and deposit activities, determines monetary and foreign exchange policy, and establishes reserve requirements on deposits.
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.
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In December 2015, the additional income tax was elevated to 22%, which was 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 Annual Report, there has been 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 comprise loans to productive sectors and social housing loans.
In 2014, the Bolivian government, through Presidential Decree 2137, provided for 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 profit.
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 profit. In December 2016, Presidential Decree 3036 established an additional obligatory 6% tax on 2016 net profit, 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. In January 2018, Presidential Decree 3459 established an additional obligatory 6% tax on 2017 net profit for the creation of a seed capital fund.
| 9.4 | Grupo Pacifico |
| 9.4.1 | 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 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. Act No. 29946 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. 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.
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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 disability and survivorship (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 Pacifico was not selected, and as a result Pacifico not issue insurance policies in the SPP for D&S and burial expenses from October 2013 through December 2014. However, in December 2014, Pacifico 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. In 2017, Pacifico Vida won the third tender process, which allows the company to continue in the D&S business for 2017 and 2018. Finally, Pacifico has won the latest D&S tender process, which allows it to continue in the D&S business from January 1, 2019 to December 31, 2020.
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.
Peruvian insurance companies are also prohibited by an SBS resolution (Resolution SBS No. 3930-2017) from having an ownership interest in other insurance or reinsurance companies of the same class unless such risks are offset by insurance companies acting as subsidiaries and that risk is withdrawn from the principal insurance company’s activities; or in private pension funds.
| 9.4.2 | 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. As of December 31, 2018, the statutory capital of Pacifico Seguros is S/1,121 milliions.
| 9.4.3 | 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.
Grupo Pacifico regulatory ratios Soles in thousands | 2016 | 2017 | 2018 | |||||||||
| (A) Capital Adequacy | 1,462,807 | 1,462,936 | 1,511,443 | |||||||||
| (B) Regulatory Capital Requirement | 964,462 | 913,427 | 1,019,984 | |||||||||
| (B.1) Solvency I Required capital | 712,247 | 676,741 | 755,804 | |||||||||
| (B.2) Security Fund | 249,118 | 236,687 | 264,180 | |||||||||
| (B.3) Credit risk | 0 | 0 | 0 | |||||||||
| (B.4) Other Capital Requirement | 3,097 | 0 | 0 | |||||||||
| (C) Leverage | 495,770 | 592,397 | 594,110 | |||||||||
| Surplus 1 = (A) - (B) | 498,345 | 549,509 | 491,460 | |||||||||
| Ratio (A)/(B) | 1.5 | 1.6 | 1.5 | |||||||||
| Surplus 1 = (A) - (C) | 967,037 | 870,539 | 917,334 | |||||||||
| Ratio (A)/(C) | 3.0 | 2.5 | 2.5 | |||||||||
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| 9.4.4 | 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.
| 9.4.5 | 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 incurred but not reported (IBNR) claims that are reflected as a liability, in our Consolidated Financial Statements. Reserves for IBNR claims are estimated by using generally accepted actuarial reserving methods. See 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 5. Operating and Financial Review and Prospects – 5.A Operating results – (4) Lines of Business – 4.3 Insurance & Pensions – (i) Grupo Pacifico”.
According to a new regulation regarding actuarial management, Resolution SBS No. 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.
| 9.4.6 | Investment requirements |
Pursuant to Law No. 26702 and a regulation issued by the SBS (Resolution SBS No 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.
| 9.4.7 | Related party transactions |
Law No. 26702 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.
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| 9.4.8 | 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 Stand-alone and Mibanco – 9.2.1 Overview”.
| 9.5 | Prima AFP |
Prima AFP’s operations are regulated by the Unified Text of the Private System for the Administration of Funds Act, approved by Supreme Decree No. 054-97-EF and modified by the Law No 29903 in force since August 2013. Operations are under supervision of the SBS and the SMV. AFPs must submit reports related to the administration of pension funds and their operations to the SBS, the SMV, and affiliates. Additionally, AFPs must submit audited financial information according to the SBS regulations.
Under Peruvian legislation, AFPs must only have one business activity: managing pension funds through individual capitalization accounts, sourced by mandatory and/ or voluntary contributions. AFPs must also provide benefits for retirement, disability, and survivorship and finance funeral expenses.
SBS authorization is required for an AFP to begin operations. Peruvian law requires a minimum capital requirement, paid in cash by shareholders. There are certain limitations on the ownership and transfer of AFP shares. Additionally, Peruvian law requires that companies maintain a legal reserve funded with 10% of their net profit, until the reserve reaches the equivalent of 20% of their share capital.
The SBS has set investment limits, which restrict investments in certain asset classes, economic groups, and issuers. In addition, some of these limits differ according to the fund’s risk profile. 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 the BCRP cannot exceed 30% of the fund value; |
| • | The total amount invested in instruments issued or guaranteed by the Peruvian State and the BCRP overall cannot exceed 40% of the fund value; and |
| • | The total amount invested in instruments issued by governments, financial institutions, and non-financial institutions whose commercial activities are mostly abroad cannot exceed 50% of the fund value as of the end of 2018. |
The SBS requires that AFPs ensure a minimum yield. Part of the guarantee is the obligatory reserve requirement, which is paid with resources belonging to the AFPs. The amount depends on the assets in the portfolio, but it is approximately 1% of the AFP’s FuMs.
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Reform of the SPP in 2012
In 2012, the Peruvian government passed a law to reform the SPP (SPP Reform Law). The relevant changes contemplated in this reform were the following:
| • | Tender processes held every 24 months were incorporated, in which the AFP that offers the lowest administration fee wins the tender. As a result, workers who enter the SPP for the first time become members of the tender holder and remain in it for at least 24 months. It should be noted that a prior 8-month tender procedure was won by Prima AFP. |
The following table shows SPP tender processes held to date and their winners:
| No. | Date Held | 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 | |||
| 4th | December 2018 | June 2019 – May 2021 | AFP Integra |
| • | Tender processes to manage the SPP’s collective insurance policy for disability, survivor and burial expenses were also introduced. These insurance lines are managed by the insurance company that wins the tender, for both new and existing affiliates. |
| • | A mixed-commission scheme was incorporated and included two administration fees: the first charged on the affiliates’ monthly salary, and the second charged on the client’s pension fund sourced by contributions from 2013 onwards. In 2013, affiliates had to choose between the new scheme and the prior scheme, in which a fee was charged on the affiliates’ monthly salary. On the other hand, the mixed-commission scheme is mandatory for new affiliates since 2013. |
| • | A Fund Type Zero (Capital Protection Fund) was created by each AFP and became effective in April 2016. This fund focuses on low-risk assets to ensure stable yields and is mandatory for affiliates over the age of 65 (retirement age). |
Changes to Private Pension System in 2014
In 2014, new local and foreign investment regulations made the SPP’s registration process for new investment securities more flexible. Under the new regulations, AFPs can make non-complex investments in 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 were expected to improve the management and risk-return profiles of our portfolios while providing flexibility and additional opportunities to execute transactions in these securities and instruments.
Changes to Private Pension System in 2015
In 2015, the SPP Reform Law continued to be implemented, mainly through the publication of the SBS Resolution No. 3233-2015, which introduced 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 were related to the minimum requirements to be met by structured products, bonds for infrastructure projects, and participation fees of mutual and investment funds, as well as repurchase agreements and securities lending.
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SBS Resolution No. 5540-2015 was also published in 2015 and regulates the new Fund Type Zero, which is mandatory for participants from the age of 65 and up who opt for a statutory retirement pension. The Fund Type Zero invests only in short-term instruments and debt securities and became effective on April 1, 2016.
Changes to Private Pension System in 2016
In April 2016, Peruvian Law No. 30425 (further modified by Law No. 30478) was passed and came into force in Peru. 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 a first house (any beneficiary); and (iii) withdraw up to 50% of their pension funds in case of affiliates with terminal illness.
The new law also extended the Special Regime of Early Retirement (REJA by its Spanish initials) until December 31, 2018, for affiliates who had 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. In 2016, the withdrawal of funds in Prima AFP was approximately S/2,238 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 maximum had been gradually raised from 36.5% in 2013.
In July 2017, a procedure related to the affiliates’ contributions wrongly transferred by local and regional governments to the National Pension System was approved. This procedure requires that authorities schedule the transfer of these contributions to AFPs.
In January 2017, the 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.
In 2017, the withdrawals of funds in Prima AFP was approximately S/ 2,156 million.
Changes to Private Pension System in 2018
Between February and September 2018, the BCRP raised the foreign investment limit for pension funds at a rate of 0.5 percentage points per month until it reached the 50% limit set by the SBS.
In 2018, the withdrawals of funds in Prima AFP was approximately S/ 2,992 million.
| 9.6 | Credicorp Capital |
| 9.6.1 | Credicorp Capital Securities, Inc. (CCSI) |
CCSI is a broker-dealer registered 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 licensed. At the trading desk, all registered representatives maintain their Series 7 and Series 63 licenses. We also have one Series 27 licensed representative (our Financial and Operations Principal).
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| 9.6.2 | Credicorp Capital Peru, S.A.A. |
Credicorp Capital Peru falls under the supervision of the SMV, a specialized technical body attached to the MEF, aimed to ensure the protection of investors and the efficiency and transparency of the markets, as well as the diffusion of the information required for such purposes. The SMV enjoys functional, administrative, economic, technical, and budgetary autonomy. The Securities Market Law (Legislative Decree No. 861), as amended, governs the public offering and trading of securities listed on the SMV and the BVL. The latter institution, as the only stock exchange in Peru, also provides internal regulations that form part of the regulations and administrative rulings that govern the offering and trading of securities.
| 9.6.3 | 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 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. Separately, the AMV supervises and regulates the conduct of securities intermediaries, as well as the certification of those who carry out such activities. The AMV is a private entity and is the product of a self-regulatory scheme established after the termination of Law 964 of 2005.
| 9.6.4 | 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 CMF also authorizes companies to manage mutual funds (Mutual Fund Administrators and General Fund Management or AFM and AGF, respectively, by their 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 Chilean Securities Market Law, which governs the functioning of the Chilean market and the laws related to corporations, management of third-party funds (investment funds, mutual funds, pension funds and others), and deposit and custody of securities.
| 9.7 | Atlantic Security Bank (ASB) |
| 9.7.1 | 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 Superintendency of Banks of Panama (SBP by the initials for its Spanish name, Superintendencia de Bancos de Panama). On November 22, 2017, ASB acquired Correval Panama, S.A., a brokerage company in Panama with operations in the local and international markets. This subsidiary is regulated by the Superintendency of the Securities Market of Panama (SMVP by the initials for its Spanish name, Superintendencia de Mercado de Valores de Panama).
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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.
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 (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/1,686,500), 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.
| 9.7.2 | 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 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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ASB has a registered branch in Panama (ASB Panama Branch), which holds an International Banking License issued by the SBP. 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 ASB Panama Branch, although supervision activities are closely coordinated with CIMA as regulator for the Head Office in the Cayman Islands.
Correval Panama S.A. is a wholly owned subsidiary of ASB, incorporated in Panama. Correval Panama S.A. 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 Panama S.A. 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.
| (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 Consolidated Financial Statements). The statistical information and discussion and analysis given below for the years 2014 through 2018 reflect our consolidated financial position as well as that of our subsidiaries, as of December 31, 2014, 2015, 2016, 2017 and 2018 and our results of operations for such years.
| 10.1 | Average statements of financial position and income from interest-earning assets |
The tables below set forth selected statistical information based on our average statements of financial position 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. For the years 2018, 2017 and 2016 the average balances are computed as the average of period-beginning and period-ending balances on a monthly basis. Any of these month-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 believes that the stated averages are representative of our operations, and that it would be too costly to produce daily averages using daily book balances in IFRS, but does not believe that the stated averages present trends in a materially different manner from those that would be presented by daily averages.
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Average Statements of Financial Position
Assets, interest earned and average interest rates
| Year ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||
| Average | Interest | Nominal | Average | Interest | Nominal | Average | Interest | Nominal | ||||||||||||||||||||||||||||
| ASSETS: | Balance | Earned | Avg. Rate | Balance | Earned | Avg. Rate | Balance | Earned | Avg. Rate | |||||||||||||||||||||||||||
| (Soles in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Deposits in BCRP | ||||||||||||||||||||||||||||||||||||
| Soles | 182,411 | 8,694 | 4.77 | % | 450,352 | 12,299 | 2.73 | % | 152,306 | 3,603 | 2.37 | % | ||||||||||||||||||||||||
| Foreign Currency | 11,460,028 | 13,964 | 0.12 | 11,794,540 | 37,146 | 0.31 | 12,587,920 | 100,296 | 0.80 | |||||||||||||||||||||||||||
| Total | 11,642,439 | 22,658 | 0.19 | 12,244,892 | 49,445 | 0.40 | 12,740,226 | 103,899 | 0.82 | |||||||||||||||||||||||||||
| Deposits in other Banks | ||||||||||||||||||||||||||||||||||||
| Soles | 91,219 | 9,256 | 10.15 | 136,359 | 7,576 | 5.56 | 348,152 | 11,544 | 3.32 | |||||||||||||||||||||||||||
| Foreign Currency | 15,060,698 | 16,712 | 0.11 | 12,084,168 | 31,338 | 0.26 | 7,154,138 | 43,938 | 0.61 | |||||||||||||||||||||||||||
| Total | 15,151,917 | 25,968 | 0.17 | 12,220,527 | 38,914 | 0.32 | 7,502,290 | 55,482 | 0.74 | |||||||||||||||||||||||||||
| Investment securities | ||||||||||||||||||||||||||||||||||||
| Soles | 14,472,747 | 702,910 | 4.86 | 20,331,681 | 904,881 | 4.45 | 20,630,689 | 830,958 | 4.03 | |||||||||||||||||||||||||||
| Foreign Currency | 12,510,462 | 402,128 | 3.21 | 11,379,424 | 394,964 | 3.47 | 12,710,524 | 421,841 | 3.32 | |||||||||||||||||||||||||||
| Total | 26,983,209 | 1,105,038 | 4.10 | 31,711,105 | 1,299,845 | 4.10 | 33,341,213 | 1,252,799 | 3.76 | |||||||||||||||||||||||||||
| Total loans (1) | ||||||||||||||||||||||||||||||||||||
| Soles | 56,027,984 | 7,128,293 | 12.72 | 56,005,287 | 7,498,053 | 13.39 | 61,525,068 | 7,772,611 | 12.63 | |||||||||||||||||||||||||||
| Foreign Currency | 36,942,460 | 2,351,574 | 6.37 | 39,379,438 | 2,048,401 | 5.20 | 42,514,346 | 2,268,486 | 5.34 | |||||||||||||||||||||||||||
| Total | 92,970,444 | 9,479,867 | 10.20 | 95,384,725 | 9,546,454 | 10.01 | 104,039,414 | 10,041,097 | 9.65 | |||||||||||||||||||||||||||
| Total dividend-earning assets | ||||||||||||||||||||||||||||||||||||
| Soles | 739,555 | 43,798 | 5.92 | 735,850 | 32,207 | 4.38 | 657,736 | 11,578 | 1.76 | |||||||||||||||||||||||||||
| Foreign Currency | 744,223 | 8,033 | 1.08 | 418,714 | 20,699 | 4.94 | 161,226 | 12,812 | 7.95 | |||||||||||||||||||||||||||
| Total | 1,483,778 | 51,831 | 3.49 | 1,154,564 | 52,906 | 4.58 | 818,962 | 24,390 | 2.98 | |||||||||||||||||||||||||||
| Total interest-earning assets | ||||||||||||||||||||||||||||||||||||
| Soles | 71,513,916 | 7,892,951 | 11.04 | 77,659,529 | 8,455,016 | 10.89 | 83,313,951 | 8,630,294 | 10.36 | |||||||||||||||||||||||||||
| Foreign Currency | 76,717,871 | 2,792,411 | 3.64 | 75,056,284 | 2,532,548 | 3.37 | 75,128,154 | 2,847,373 | 3.79 | |||||||||||||||||||||||||||
| Total | 148,231,787 | 10,685,362 | 7.21 | 152,715,813 | 10,987,564 | 7.19 | 158,442,105 | 11,477,667 | 7.24 | |||||||||||||||||||||||||||
| Noninterest-earning assets: | ||||||||||||||||||||||||||||||||||||
| Cash and due from banks | ||||||||||||||||||||||||||||||||||||
| Soles | 2,127,988 | 2,335,051 | 2,583,630 | |||||||||||||||||||||||||||||||||
| Foreign Currency | 1,658,451 | 2,034,910 | 2,818,460 | |||||||||||||||||||||||||||||||||
| Total | 3,786,439 | 4,369,961 | 5,402,090 | |||||||||||||||||||||||||||||||||
| Allowance for direct loan losses | ||||||||||||||||||||||||||||||||||||