|Item 17 &Uml; Item 18 &Uml;|
|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5.Operating and Financial Review and Prospects|
|Item 6.Directors, Senior Management and Employees|
|Item 7.Major Shareholders and Related Party Transactions|
|Item 8.Financial Information|
|Item 9.The Offer and Listing|
|Item 10.Additional Information|
|Item 11.Quantitative and Qualitative Disclosures About Market Risk|
|Item 12.Description of Securities Other Than Equity Securities|
|Item 13.Defaults, Dividend Arrearages and Delinquencies|
|Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15.Controls and Procedures|
|Item 15T.Controls and Procedures|
|Item 16A.Audit Committee Financial Expert|
|Item 16B.Code of Ethics|
|Item 16C.Principal Accountant Fees and Services|
|Item 16D.Exemptions From The Listing Standards for Audit Committees|
|Item 16E.Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F.Change in Registrant's Certifying Accountant|
|Item 16G.Corporate Governance|
|Item 16H.Mine Safety Disclosure|
|Item 17.Financial Statements|
|Item 18.Financial Statements|
|Balance Sheet||Income Statement||Cash Flow|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
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
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ 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
(Exact name of registrant as specified in its charter)
|(Jurisdiction of incorporation or organization)|
|Of our subsidiary|
|Banco de Credito del Peru:|
|Calle Centenario 156|
|Lima 12, Peru|
|(Address of principal executive offices)|
|Chief Financial Officer|
|Banco de Credito del Peru:|
|Calle Centenario 156|
|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
|PRESENTATION OF FINANCIAL INFORMATION||8|
|CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS||9|
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||10|
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE||10|
|ITEM 3. KEY INFORMATION||10|
|3. A||Selected financial data||10|
|3. B||Capitalization and Indebtedness||13|
|3. C||Reasons for the Offer and Use of Proceeds||13|
|3. D||Risk Factors||13|
|ITEM 4. INFORMATION ON THE COMPANY||30|
|4. A||History and development of the company||30|
|4. B||Business Overview||33|
|4. C||Organizational structure||111|
|4. D||Property, furniture and equipment||112|
|ITEM 4A. UNRESOLVED STAFF COMMENTS||113|
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS||113|
|5. A||Operating results||113|
|5. B||Liquidity and Capital Resources||148|
|5. C||Research and Development, Patents and Licenses, Etc.||156|
|5. D||Trend Information||156|
|5. E||Off-Balance Sheet Arrangements||157|
|5. F||Tabular Disclosure of Contractual Obligations||158|
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||159|
|6. A||Directors and Senior Management||159|
|6. C||Board Practices||170|
|6. E||Share Ownership||174|
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||175|
|7. A||Major Shareholders||175|
|7. B||Related Party Transactions||175|
|7. C||Interests of Experts and Counsel||177|
|ITEM 8. FINANCIAL INFORMATION||177|
|8. A||Consolidated Statements and Other Financial Information||177|
|8. B||Significant changes||181|
|ITEM 9. THE OFFER AND LISTING||184|
|9. A||Offer and Listing Details||184|
|9. B||Plan of Distribution||184|
|9. D||Selling Shareholders||186|
|9. F||Expenses of the issue||186|
|ITEM 10. ADDITIONAL INFORMATION||186|
|10. A||Share Capital||186|
|10. B||Memorandum and Articles of Association||186|
|10. C||Material Contracts||186|
|10. D||Exchange Controls||186|
|10. F||Dividends and Paying Agents||195|
|10. G||Statement by Experts||195|
|10. H||Documents on Display||195|
|10. I||Subsidiary Information||195|
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||195|
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||211|
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||212|
|13. A||Material Defaults||212|
|13. B||Dividend Arrearages and Delinquencies||212|
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||212|
|ITEM 15. CONTROLS AND PROCEDURES||212|
|15. A||Disclosure Controls and Procedures||212|
|15. B||Management’s Annual Report on Internal Control over Financial Reporting||212|
|15. C||Attestation Report of Independent Registered Public Accounting Firm||213|
|15. D||Changes in Internal Control over Financial Reporting||215|
|ITEM 15T. CONTROLS AND PROCEDURES||215|
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT||216|
|ITEM 16B. CODE OF ETHICS||216|
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES||216|
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||219|
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||219|
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||219|
|ITEM 16G. CORPORATE GOVERNANCE||219|
|16G. A||The New York Stock Exchange – Corporate Governance||219|
|16G. B||Bermuda Law – Corporate Governance||224|
|16G. C||Peruvian Law – Corporate Governance||227|
|ITEM 16H. MINE SAFETY DISCLOSURE||227|
|ITEM 17. FINANCIAL STATEMENTS||228|
|ITEM 18. FINANCIAL STATEMENTS||228|
|ITEM 19. EXHIBITS||229|
|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|
|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|
|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|
|CID||Corporate and International Division|
|CIMA||Cayman Islands Monetary Authority|
|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|
|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|
|FCG||Financial Consolidated Group|
|FED||Federal Reserve System - US|
|FELABAN||Federation of Latin American Banks|
|FFIEC||Federal Financial Institutions Examination Council|
|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|
|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|
|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|
|IRS||Internal Revenue Service|
|ISACA||Information Systems Audit and Control Association|
|KRI||Key Risk Indicators|
|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|
|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|
|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)|
|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|
|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|
|UAI||Internal Audit Unit|
|VaR||Value at Risk|
|VRAEM||Valley of Rivers, Apurimac, Ene and Mantaro|
|WBG||Wholesale Banking Group|
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”.
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.
|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.
SELECTED FINANCIAL DATA
|Year ended December 31,|
|(Soles in thousands, except percentages, ratios, and per common share data)||U.S. Dollars in |
|INCOME STATEMENT DATA:|
|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
|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|
|Credicorp’s equity holders||2,387,852||3,092,303||3,514,582||4,091,753||3,983,865||1,210,779|
|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,|
|(Soles in thousands, except percentages, ratios, and per common share data)||U.S. Dollars |
|STATEMENT OF FINANCIAL POSITION DATA:|
|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|
|Year ended December 31,|
|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.”|
|3. B||Capitalization and Indebtedness|
|3. C||Reasons for the Offer and Use of Proceeds|
|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.
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.
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).
(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”.
(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”.
(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.
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.
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.
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$268,096.
For 2019, Colombian corporate income tax rate is, in general, 33% and will decrease to 32% in 2020, 31% in 2021 and 30% as from 2022. However, a temporary surtax will be applied only to financial institutions whose taxable income equals to or exceeds US$ 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.
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.
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.
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.
(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.
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.
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.
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.
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.
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.
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$60 billion with a rate varying between 5% - 10%. After resuming negotiations in late November 2018 and during the G20 Summit in Buenos Aires in December 2018, US and China agreed to a temporary truce in which both countries would refrain from increasing tariffs or imposing new tariffs for 90 days (until March 1, 2019) as they work towards a large and complete trade deal. To date, no comprehensive trade deal has been struck. The development of the trade tensions between the US and China is relevant to Peru’s economy and businesses because the US and China are Peru’s main trading partners and are relevant drivers of global demand.
Furthermore, financial conditions in global markets also affect the Peruvian economy, affecting interest rates for local corporate bonds and influencing the exchange rate. Monetary policy tightening in developed economies, particularly on the Federal Reserve System in the United States, could affect economic activity in Peru since it strengthens the US dollar and increases interest rates, thereby reducing access to funding for some local businesses. Also, since the Peruvian economy still has some level of loans denominated in U.S. Dollars (28.2% of loans and 37.3% of deposits as of December 2018), which we sometimes refer to as dollarization, potential statement of financial position effects should be taken into account since a higher exchange rate could increase debt burdens for individuals and businesses that have taken loans in dollars but earn their income in local currency.
However, the BCRP has taken steps to foster de-dollarization and thus reduce this vulnerability by implementing in January 2015 the so-called “De-dollarization Program” that implies additional U.S. dollar reserve requirements on financial institutions if:
|•||The balance of total loans in dollars (excluding loans for foreign trade operations and loans with a term greater than 3 years and over US$ 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.
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".
(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.
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)).
|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.
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.
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%.
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.
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.
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.
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
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.
|Business||Group||Client Income/Sales/Total debt|
|Wholesale Banking |
|Corporate||Annual sales higher than $100 million|
|(equivalent to S/337 million)|
|Middle-Market||Annual sales from $10 million to $100 million|
|(equivalent to S/34 million to S/337 million)|
|Enalta||Individual monthly income at least S/20,000; or more than US$ 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.|
|(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.|
|•||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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.|
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.
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.
(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.
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.
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.
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.
|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|
|(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%.|
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”.
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.
|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%.|
|1.3||Insurance & Pensions|
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”.
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.
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.
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.
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.
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:
|•||International sanctions and restricted lists|
|•||Ethics and conduct|
|•||Market abuse prevention|
|•||Personal information protection|
|•||Occupational health and safety|
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.
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 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.
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.
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.
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.
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|
|Other income, |
|(Soles in millions, except percentages)|
|Amount||% Total||Amount||% Total||Amount||% Total||Amount||% Total|
|Insurance and Pension funds|
|Pacifico Seguros and Subsidiaries||2,861||15.8||446||5.3||1,181||21.9||12,224||6.9|
|Investment Banking and Wealth Management||886||4.9||98||1.2||634||11.8||9,665||5.5|
|(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.|
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:
|(Soles in millions, except percentages)|
|Amount||% Total||Amount||% Total||Amount||% Total|
|Insurance and Pension funds|
|Pacifico Seguros and subsidiaries (1)||299||8.5||321||7.8||349||8.8|
|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||)|
|(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 |
|For the year ended December 31,||As of December 31,|
|Insurance and Pension funds|
|Pacifico Seguros and subsidiaries (2)||14.2||%||13.9||%||14.9||%||11.0||%||13.0||%||11.0||%|
|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||%|
(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
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|
|(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.|
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 |
(Soles in thousands)
(Soles in thousands)
(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|
|Leasing companies (6)||1||314,853||-||244,033|
|(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|
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.
|As % of total Private Financial System||As % of Banking Sector|
|as of December 31, 2018||Assets||Deposits||Loans||Assets||Deposits||Loans|
|BBVA Banco Continental||17.4||%||18.5||%||17.5||%||19.5||%||20.8||%||20.0||%|
|Banco Interamericano de Finanzas||3.3||%||3.6||%||3.3||%||3.6||%||4.1||%||3.7||%|
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).
(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.|
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.
|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 |
|Assets (Soles in |
|Deposits (Soles |
|Loans (Soles in |
|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|
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.|
|6.3||Insurance & Pensions|
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)
|2. Grupo Pacifico||27.4||%||28.9||%||29.1||%|
|4. La Positiva||9.8||%||9.3||%||10.4||%|
|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%.
(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.
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”
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.
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”.
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.
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”.
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.
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.
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.
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.
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.
|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.
A bank is defined by Law No. 26702 as an enterprise whose principal business consists of (i) receiving money from the public, whether by deposits or by any other form of contract, and (ii) using such money (together with the bank’s own capital and funds obtained from other sources) to grant loans or discount documents, or in operations that are subject to market risks.
Banks are permitted to carry out various types of financial operations, including the following:
|(i)||receiving demand deposits, time deposits, savings deposits and deposits in trust;|
|(ii)||granting direct loans;|
|(iii)||discounting or advancing funds against bills of exchange, promissory notes and other credit instruments;|
|(iv)||granting mortgage loans and accepting bills of exchange in connection with the mortgage loans;|
|(v)||granting conditional and unconditional guaranties;|
|(vi)||issuing, confirming, receiving and discounting letters of credit;|
|(vii)||acquiring and discounting certificates of deposit, warehouse receipts, bills of exchange and invoices of commercial transactions;|
|(viii)||performing credit operations with local and foreign banks, as well as making deposits in those institutions;|
|(ix)||issuing and placing local currency and foreign currency bonds, as well as promissory notes and negotiable certificates of deposits;|
|(x)||issuing certificates in foreign currency and entering into foreign exchange transactions;|
|(xi)||purchasing banks and non-Peruvian institutions 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.
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.
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|
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.”
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|
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.
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 i