|Item 17 ¨ 	Item 18 ¨|
|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 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|
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, 2019
¨ 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||Trading |
|Name of each exchange on which registered|
|Common Shares, par value $5.00 per share||BAP||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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
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
As previously reported by Credicorp Ltd., or the Company, on its Form 6-K furnished on April 27, 2020 to the Securities and Exchange Commission, or the SEC, the Company is relying on the SEC’s Order, or the Order, under Section 36 of the Securities Exchange Act of 1934, as amended, Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465) to file this annual report on Form 20-F for the year ended December 31, 2019 within the time frame of the extension, on or before June 15, 2020.
Due to the circumstances related to COVID-19, on March 15, 2020, the government of Peru declared a national state of emergency. Under the state of emergency, Peru enacted a mandatory quarantine, from March 16, 2020, at which point the government of Peru closed all international borders (land, air, and maritime) and suspended all interprovincial travel within Peru (land, air, and river). The state of emergency also includes a prohibition of large gatherings, the institution of a curfew, and limitations on the use of private vehicles, among other limitations. The government of Peru has extended the quarantine and curfew until June 30, 2020, and has directed the military to detain any persons in noncompliance with these restrictions as well as imposing fines. The prohibition of large gatherings, the institution of a curfew, and limitations on the use of private vehicles, among other limitations, has limited access to our facilities by executives, support staff and professional advisors. This, in turn, delayed the Company’s ability to complete its annual review and prepare the annual report by the original filing deadline of April 30, 2020, and the Company is hereby filing this annual report on Form 20-F, including our audited financial statements in xBRL format, on the date hereof (which date is within 45 days after the original due date, as required by the Order).
|PRESENTATION OF FINANCIAL INFORMATION||10|
|CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS||12|
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||13|
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE||13|
|ITEM 3. KEY INFORMATION||13|
|3. A Selected financial data||13|
|3. B Capitalization and Indebtedness||16|
|3. C Reasons for the Offer and Use of Proceeds||16|
|3. D Risk Factors||16|
|ITEM 4. INFORMATION ON THE COMPANY||41|
|4. A History and development of the company||41|
|4. B Business Overview||48|
|4. C Organizational structure||142|
|4. D Property, plants and equipment||143|
|ITEM 4A. UNRESOLVED STAFF COMMENTS||143|
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS||144|
|5. A Operating results||144|
|5. B Liquidity and Capital Resources||184|
|5. C Research and Development, Patents and Licenses, Etc.||193|
|5. D Trend Information||193|
|5. E Off-Balance Sheet Arrangements||196|
|5. F Tabular Disclosure of Contractual Obligations||198|
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||199|
|6. A Directors and Senior Management||199|
|6. B Compensation||206|
|6. C Board Practices||208|
|6. D Employees||212|
|6. E Share Ownership||213|
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||214|
|7. A Major Shareholders||214|
|7. B Related Party Transactions||215|
|7. C Interests of Experts and Counsel||216|
|ITEM 8. FINANCIAL INFORMATION||217|
|8. A Consolidated Statements and Other Financial Information||217|
|8. B Significant changes||220|
|ITEM 9. THE OFFER AND LISTING||221|
|9. A Offer and Listing Details||221|
|9. B Plan of Distribution||221|
|9. C Markets||221|
|9. D Selling Shareholders||223|
|9. E Dilution||223|
|9. F Expenses of the Issue||223|
|ITEM 10. ADDITIONAL INFORMATION||223|
|10. A Share Capital||223|
|10. B Memorandum of Association and Bye-laws||223|
|10. C Material Contracts||227|
|10. D Exchange Controls||227|
|10. E Taxation||228|
|10. F Dividends and Paying Agents||236|
|10. G Statement by Experts||236|
|10. H Documents on Display||236|
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||237|
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||255|
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||256|
|13. A Material Defaults||256|
|13. B Dividend Arrearages and Delinquencies||256|
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||256|
|ITEM 15. CONTROLS AND PROCEDURES||256|
|15. A Disclosure Controls and Procedures||256|
|15. B Management’s Annual Report on Internal Control over Financial Reporting||256|
|15. C Attestation Report of Independent Registered Public Accounting Firm||258|
|15. D Changes in Internal Control over Financial Reporting||260|
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT||260|
|ITEM 16B. CODE OF ETHICS||260|
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES||261|
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||264|
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||264|
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||264|
|ITEM 16G. CORPORATE GOVERNANCE||264|
|16G. A The New York Stock Exchange – Corporate Governance||264|
|16G. B Bermuda Law – Corporate Governance||270|
|16G. C Peruvian Law – Corporate Governance||273|
|ITEM 16H. MINE SAFETY DISCLOSURE||273|
|ITEM 17. FINANCIAL STATEMENTS||274|
|ITEM 18. FINANCIAL STATEMENTS||274|
|ITEM 19. EXHIBITS||275|
|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|
|ANPDP||Autoridad Nacional de Protección de Datos Personales|
|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|
|ASOMICROFINANZAS||Asociacion Colombiana de Instituciones Microfinancieras or Association of Microfinance Institutions of Colombia|
|ATM||Automated Teller Machine (cash machine)|
|ATPDEA||Andean Trade Promotion and Drug Eradication Act|
|AuC||Assets under Custody|
|AuMs||Assets under Management|
|Bancompartir||Banco Compartir S.A. de Colombia|
|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|
|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|
|CAGR||Compound annual growth rate|
|CCSI||Credicorp Capital Securities Inc.|
|CEO||Chief Executive Officer|
|CET1||Common Equity Tier I|
|CID||Corporate and International Division|
|CIMA||Cayman Islands Monetary Authority|
|CMF||Comision del Mercado Financiero or Financial Markets Commission of Chile|
|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|
|COPEME||Consorcio de Organizaciones Privadas de Promocion al Desarrollo de la Micro y Pequeña Empresa|
|COSO||Committee of Sponsoring Organizations of the Treadway Commission|
|CPS||Comision de Proteccion Social or Social Protection Committee of Peru|
|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 Holding Colombia||Credicorp Holding Colombia S.A.S., holding subsidiary of Credicorp Ltd. Holding of Credicorp Capital Colombia S.A.S. and Banco Compatir S.A.|
|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.|
|CRS||Common Reporting Standards|
|D&S||Disability and Survivorship|
|DTA||Deferred Tax Assets|
|EAP||Economically Active Population|
|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|
|FAE-MYPE||Fondo de Apoyo Empresarial a la MYPE or SME Business Support Fund|
|FARC||Fuerzas Armadas Revolucionarias Colombianas or Revolutionary Armed Forces of Colombia|
|FATCA||Foreign Account Tax Compliance Act|
|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|
|FTA||Free Trade Agreement|
|FuMs||Funds under Management|
|FSD||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.|
|INDECOPI||Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual|
|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|
|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|
|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)|
|RBG||Retail Banking Group|
|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 Superintendence 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 Superintendence of Securities and Insurance|
|SISCO||Disability, survivorship and burial expenses policies for the Private Pension Fund System|
|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|
|USDPEN||Currency exchange in American Dollar against Peruvian Sol in the FX Trading Desk|
|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 Generally Accepted Accounting Principles in the United States (U.S. GAAP).
The balances of financial instruments as of December 31, 2019 and 2018 have been prepared in accordance with IFRS 9 “Financial Instruments”; the balances of the previous periods have been prepared in accordance with IAS 39 “Financial Instruments: Measurement and recognition”, see Note 3(a) (vii) of the Credicorp Consolidated Financial Statements. Also, the balances of leases as of December 31, 2019 have been prepared in accordance with IFRS 16 “Leases”; and the balances of the previous period have been prepared in accordance with IAS 17 “Leases”, see Note 3(j) 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 nine 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 Compañia de Seguros y Reaseguros (which together with its consolidated subsidiaries, is referred to as Grupo Pacifico); (v) Prima AFP; (vi) Edyficar S.A.S. (Encumbra); (vii) Banco Compartir S.A. (Bancompatir); (viii) Credicorp Capital Ltd. (which, together with its subsidiaries, is referred to as Credicorp Capital) and (ix) 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, 2019, BCP Stand-alone represented 74.4% of our total assets, 74.2% of our net profit and 63.9% 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, 2015, 2016, 2017, 2018 and 2019.
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 “US 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 US Dollars and other currencies. As a result, in certain instances throughout this Annual Report, we have translated US Dollars and other currencies to Soles. You should not construe any of these translations as representations that the US Dollar amounts actually represent such equivalent Sol amounts or that such US 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 US Dollar amounts at an exchange rate of S/3.314 = US$1.00, which is the December 31, 2019 exchange rate set by the Peruvian Superintendence of Banks, Insurance and Pension Funds (SBS by its Spanish initials). Converting US 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 US 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 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:
|·||Particular economic conditions in Peru;|
|·||The occurrence of disasters or political or social instability in Peru;|
|·||The adequacy 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 volatility 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/US 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;|
|·||Losses associated with counterparty exposures; and|
|·||The scope of the coronavirus (“COVID-19”) outbreak, actions taken to contain the COVID-19 and related economic effects from such actions and our ability to maintain adequate staffing.|
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 years ended, December 31, 2015, 2016, 2017, 2018 and 2019 were derived from the Consolidated Financial Statements audited by Gaveglio, Aparicio y Asociados S.C.R.L, a 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, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019 appears elsewhere in this Annual Report.
SELECTED FINANCIAL DATA
|Year ended December 31,|
|(In thousands of Soles, except percentages, ratios, and per common share data)||In thousands|
|INCOME STATEMENT DATA:|
|Interest and similar income||9,784,089||10,773,055||11,030,683||11,522,634||12,381,664||3,708,565|
|Interest and similar expenses||(2,527,133||)||(2,914,714||)||(2,959,196||)||(3,033,529||)||(3,290,867||)||(985,683||)|
|Net Interest, similar income and expenses||7,256,956||7,858,341||8,071,487||8,489,105||9,090,797||2,722,882|
|Provision for credit losses on loan portfolio (2)||(2,052,177||)||(2,063,209||)||(2,057,478||)||(1,814,898||)||(2,100,091||)||(629,021||)|
|Recoveries of written-off loans||171,279||277,714||268,313||283,190||254,155||76,125|
|Provision for credit losses on loan portfolio, net of recoveries||(1,880,898||)||(1,785,495||)||(1,789,165||)||(1,531,708||)||(1,845,936||)||(552,896||)|
|Net interest, similar income and expenses, after provision for credit losses on loan portfolio||5,376,058||6,072,846||6,282,322||6,957,397||7,244,861||2,169,986|
|Commissions and fees||2,644,191||2,771,561||2,911,408||3,126,857||3,232,781||968,285|
|Net gain on foreign exchange transactions||773,798||698,159||650,228||737,954||748,382||224,156|
|Net gain on securities||215,106||339,930||760,772||242,829||546,814||163,782|
|Net gain on derivatives held for trading||207,938||44,500||103,580||13,262||6,043||1,810|
|Net gain from exchange differences||46,563||-||17,394||16,022||19,735||5,911|
|Total other income||4,069,250||4,044,061||4,692,579||4,410,806||4,897,984||1,467,048|
|Net premiums earned||1,700,478||1,850,782||1,875,973||2,091,366||2,419,349||724,645|
|Net claims incurred for life, general and health insurance contracts||(1,031,659||)||(1,098,905||)||(1,118,304||)||(1,239,635||)||(1,554,477||)||(465,598||)|
|Total other expenses (3)||(5,559,985||)||(5,738,656||)||(5,888,132||)||(6,247,410||)||(6,666,461||)||(1,996,743||)|
|Profit before income tax||4,360,592||4,891,428||5,574,934||5,592,214||5,975,408||1,789,759|
|Credicorp’s equity holders||3,092,303||3,514,582||4,091,753||3,983,865||4,265,304||1,277,547|
|Number of shares as adjusted to reflect changes in capital (4)||79,478,484||79,466,780||79,480,309||79,499,043||79,510,153|
|Net basic earnings per common share attributable to Credicorp’s equity holders (5)||38.91||44.23||51.49||50.13||53.66||16.07|
|Net dilutive earnings per common share attributable to Credicorp’s equity holders (5)||38.84||44.15||51.35||49.99||53.53||16.03|
|Cash dividends declared per common share Soles (6)||8.1910||12.2865||14.1726||20.0000||30.0000||-|
|Additional cash dividends declared per common share Soles (6)||-||15.7000||-||8.0000||-||-|
As of December 31,
|(In thousands of Soles, except percentages, ratios, and per common share data)||In thousands of US Dollars(1)|
|STATEMENT OF FINANCIAL POSITION DATA:|
|Total loans (7)||90,328,499||94,768,901||100,477,775||110,759,390||115,609,679||34,885,238|
|Allowance for loan losses (2)||(4,032,219||)||(4,416,692||)||(4,943,008||)||(5,314,531||)||(5,507,759||)||(1,661,967||)|
|Total deposits (8)||88,307,962||85,583,120||96,717,674||103,984,124||111,324,194||33,592,092|
|Equity attributable to Credicorp’s equity holders||16,128,016||19,656,135||21,756,567||23,839,243||26,237,960||7,917,308|
|Year ended December 31,|
|Net interest margin – NIM (9)||5.45||%||5.46||%||5.33||%||5.30||%||5.42||%|
|Return on average total assets – ROAA (10)||2.13||%||2.25||%||2.50||%||2.29||%||2.34||%|
|Return on average equity -ROAE (11)||20.54||%||19.64||%||19.76||%||17.47||%||17.03||%|
|Operating efficiency (12)||42.77||%||42.98||%||43.42||%||43.82||%||42.37||%|
|Operating expenses as a percentage of average assets (13)||3.77||%||3.66||%||3.63||%||3.67||%||3.62||%|
|Equity attributable to Credicorp’s equity holders as a percentage of period end total assets||10.37||%||12.57||%||12.76||%||13.45||%||13.97||%|
|Regulatory capital as a percentage of risk weighted assets – BIS ratio (14)||15.95||%||16.33||%||15.92||%||16.22||%||16.65||%|
|Total internal overdue loan amounts as a percentage of total loans (15)||2.56||%||2.77||%||3.01||%||2.82||%||2.86||%|
|Allowance for direct loan losses as a percentage of total loans||4.25||%||4.44||%||4.48||%||4.47||%||4.43||%|
|Allowance for loan losses as a percentage of total loans and other off-balance-sheet items (16)||3.69||%||3.85||%||4.12||%||4.04||%||4.03||%|
|Allowance for direct loan losses as a percentage of total internal overdue loans (17)||166.16||%||160.55||%||148.98||%||158.75||%||155.04||%|
|Allowance for direct loan losses as a percentage of impaired loans (18)||105.35||%||99.90||%||98.36||%||94.56||%||88.05||%|
Note: Total internal overdue includes internal overdue loans and under legal collection loans.
|(1)||Translated for convenience only from Sol amounts to US Dollar amounts using exchange rates of S/3.314000 = US$1.00, which is the December 31, 2019 exchange rate set by the SBS, for statement of financial position data and of S/3.338667 = US$1.00, which is the average exchange rate on a monthly basis in 2019, for income statement data (for consistency with the annual amounts being translated).|
|(2)||Provision for credit losses on loan portfolio and allowance for loan losses include provisions and reserves with respect to direct loans losses and indirect loans losses or off-balance sheet items such as guarantees and standby letters, performance bonds, and import and export letters of credit.|
|(3)||Total other expenses include net loss from exchange differences amounted to S/60.6 million in 2016.|
|(4)||The number of shares consists of capital stock (see Note 18(a) to the Consolidated Financial Statements) less treasury stock (see Note 18 (b) to the Consolidated Financial Statements).|
|(5)||Basic earnings per share is calculated by dividing the net profit for the year attributable to Credicorp’s equity holders by the weighted average number of ordinary shares outstanding during the year, excluding the average number of ordinary shares purchased and held as treasury stock (see Note 30 to the Consolidated Financial Statements).|
|(6)||Dividends based on net profit attained for the financial year 2015 were declared in Soles and paid in US Dollars after converting the Soles amount using the weighted exchange rate of PEN/US$ 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, 2017 and 2018 were declared in Soles and paid in US Dollars on May 12, 2017, May 11, 2018 and May 10, 2019, respectively, using the weighted exchange rate registered by the SBS for the transactions at the close of business on May 10, 2017, May 9, 2018 and May 8, 2019, respectively. In October 25, 2017 and September 25, 2019, the Credicorp Board of Directors agreed to pay an additional dividend from the reserves, which was declared in Soles and paid in US Dollars on November 24, 2017 and November 22, 2019, respectively, using the weighted exchange rate registered by the SBS for the transactions at the close of business on November 22, 2017 and November 20, 2019, respectively. Dividends based on net profit attained for the financial year 2019 were declared in Soles and will be paid in US Dollars on May 8, 2020 using the weighted exchange rate registered by the SBS for the transactions at the close of business on May 6, 2020.|
|(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/19,004.7 million, S/19,832.0 million, S/19,369.6 million, S/20,774.3 and S/21,081.0 million, as of December 31, 2015, 2016, 2017, 2018 and 2019, respectively. See Note 21 to the Consolidated Financial Statements.|
|(8)||“Total deposits” excludes Interest payable. See Note 14 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 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 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 21 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 from 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 in 2009, he was sentenced to 25 years in prison for premeditated murder and aggravated kidnapping, which constitute human right violations, as well as battery. 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 difference 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 the Lava-Jato case investigations in Brazil and various other countries, on-going infrastructure projects in Peru that started during the Garcia and Humala administrations were put on hold. Since early 2017, Peruvian prosecutors have been investigating former and current local officials in Peru for alleged payments from Odebrecht, a Brazilian construction company implicated in the Lava Jato investigation. Furthermore, during 2017 Peru experienced the negative effects of El Nino Phenomenon, 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 (which represents approximately 20% of the Peruvian gross domestic product (GDP)). Moreover, in midst of the Lava-Jato case investigations, in December 2017, a motion to remove the president was proposed by Congress. The vote did not succeed due not meeting the 87 votes threshold required to approve the removal. In March 2018, a second motion to remove the president 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.
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. Moreover, President Vizcarra closed Congress on September 30, 2019 and called for parliamentary elections on January 26, 2020. Importantly, on January 15, 2020, the Constitutional Court of Peru ruled that the dissolution of Congress was constitutional. As a result of parliamentary elections, a new Congress has been formed which will carry out its functions until 2021. The next general elections will occur in April 2021.
Notwithstanding the above, during the past 19 years Peru has experienced a period of relative economic and political stability, especially when compared to the period between 1980 and 2000. This stability has been reflected in Peru’s average growth rate of 4.9% for real GDP and 5.3% for domestic demand (2001-2019); four consecutive democratic transitions; a relatively consistent free-market approach to economic policy; and growth in GDP per capita, which reached US$7,047 in 2019 (equivalent to S/23,353 at an exchange rate of S/3.314 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 first round of the Presidential Elections in 2016, candidate Veronika Mendoza, who also favored a leftist-policy platform, came in third place (with a two percent point difference with Kuczynski) amid promises to vastly further regulate mining projects and to renegotiate gas export contracts. Hence, there is a sizeable portion of the population still asking for an economy that is more reliant on government spending. Further, the macroeconomic impact of the novel COVID-19 outbreak and the government’s response to prevent the spread and mitigate its effects may adversely affect Peru’s economy and lead to social unrest. Therefore, a risk of significant political and economic change remains.
During the 1980’s, Peru experienced significant domestic terrorism. Although the risk of renewed domestic terrorism is not expected, any violence derived from the drug trade or a resumption of large-scale terrorist activities could hurt our operations.
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 2019, 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 6% 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 complained of not receiving the benefits in terms of growth and wealth generated by the mining projects. 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$4.8 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). Any such effect on to the financial system could have a material adverse effect on our business and result of operations.
(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, apart from 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. Further, to mitigate the financial effects of the COVID-19 outbreak and ensure a strong capital base, Credicorp may reduce the dividends declared by its subsidiaries, which may affect Credicorp’s ability to declare dividends to its shareholders.
Finally, 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, US Dollars, Bolivian Bolivianos, 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, US 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 monitor these clients and, on an ongoing basis, we revise our risk policies for underwriting loans and managing 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 operations.
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 Superintendence 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 Superintendence of Securities and Insurance (Superintendencia Financiera de Colombia or SFC by its Spanish initials) and the Colombian Stock Market Self-Regulator (Autorregulador del Mercado de Valores de Colombia or AMV by its Spanish initials). In Chile, we are subject to supervision and regulation through the Chilean Financial Market Commission (Comision para el Mercado Financiero or CMF by its Spanish initials). 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, such as the Foreign Account Tax Compliance Act (FATCA) and well as other international regulations such as the OECD´s Common Reporting Standard (CRS), may have an adverse effect on our financial performance and operations due to significant increase in compliance obligations and their costs going forward.
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 Superintendence of Banks and Financial Entities and the Superintendence of Pensions, Securities and Insurance. As of 2010 the insurance and pensions sectors have come out of this regulation and have their own Supervision Authority, the Pensions and Insurance Inspection and Control Authority (Autoridad de Fiscalizacion y Control de Pensiones y Seguros or APS).
Finally, in Panama, we are subject to the supervision of the Superintendence of Banks of Panama (SBS by its Spanish initials) 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 tax 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 (same rate for semi-integrated regime since 2018).
Foreign individual or legal resident 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 is under the “Income Tax semi-integrated system”. The additional tax rate has not been changed.
The Colombian corporate income tax rate is, in general, 33% in 2019 and will decrease to 32% in 2020, 31% in 2021 and 30% in 2022. However, a temporary surtax will be applied only to financial institutions whose taxable income equal to or exceeds approximately US$1.3 million. (CC Fiduciaria, our Colombia Trustee Company and Banco Compartir, are eligible for this surtax). In 2020 the surtax rate is 4% (same rate since 2018), decreasing to 3% in 2021 and 2022.
Without prejudice of the provisions established in tax treaties, distribution of dividends to non-residents is subject to a 7.5% withholding tax, in 2019 and 10% from 2020. 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% in 2019 and 10% from 2020 tax.
Foreign portfolio investment is also subject to the 10% 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% or 10% withholding tax on dividends, even though if the distribution occurs from and after January 1, 2017.
Finally, as of 2019, profits distributed to Colombian companies are also subject to the 7.5% tax, under similar conditions of non-resident investors, 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 19 (a) and (d) of the consolidated financial statements.
Our Property and Casualty (P&C) and Life insurance business is carried out by Pacifico Compañia de 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.
As such, as it pertains to affiliates close to retirement, the withdrawal of 95.5% of their funds will have an effect on the results of operations due to retirees no longer being obliged to pay a commission for administration of funds. In 2019 the government approved new restrictions to qualify for this retirement alternative for those affiliates that could qualify for early retirement.
In March 2020, in response to the COVID-19 crisis, the Peruvian government and congress took measures to provide liquidity to private pensioners by allowing them to draw down their funds. These measures will have an impact on funds under management and on income at the AFP in 2020.
The measures decreed by the government and congress are:
|·||A temporary and exceptional exemption from making pension fund contributions for the pay period corresponding to the month of April of 2020. There is the possibility that the government will use such relief measure again in the future.|
|·||Affiliates that meet specific requirements can withdraw up to S/ 2,000.|
|·||Affiliates can withdraw up to 25% of their funds with a ceiling equivalent to 3 UIT (equivalent to S/12,900) and a minimum withdrawal equivalent to 1 UIT (equivalent to S/ 4,300). Affiliates can only submit their request to withdraw up to 25% of their funds within sixty calendar days counting from May 18, 2020.|
Additionally, the Congress has formed a special commission that has up to 150 days (starting on May 20th 2020) to evaluate, design and propose an integral reform of the Peruvian pension system. The reform will include both the private and public pension fund systems. The special commission will be manned solely by members of Congress (unlike on previous occasions where commissions included members of congress, the executive branch, regulatory bodies, etc.) but specialists may be invited to participate. It is very difficult to predict what the results of this process will be. As such, there is a high risk of material impact on both the results and financial condition of our pension business.
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. Further, the negative impacts that the COVID-19 outbreak has had on both the global and regional economy will affect the ability of some of our borrowers to make payments, increasing the credit risk of some of our loan portfolios. For more information on the increased credit risk of loan portfolios in light of COVID-19, see “Item 3. Key Information – 3.D Risk Factors – (12) Our business and results of operations could continue to be negatively impacted by the COVID-19 outbreak or other public health crises beyond our control”.
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. Information on the Company – 4.B Business Overview – 10.3 Loan portfolio – (10) Selected statistical information - 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 the 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 2019, due to: (i) a high political polarization, (ii) weak global demand, and (iii) decreased 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.
The Bolivian electoral process of October 2019 was marked by irregularities and a conflicted political environment, which led to the cancellation of the electoral results and the resignation of Evo Morales from the presidency of Bolivia. After that, a new government was temporarily installed. Ex-Senator Jeanine Añez assumed the presidency by constitutional succession; and called for new presidential elections, scheduled for May 3, 2020.The upcoming elections will have the participation of eight candidates. On March 23, 2020 the Supreme Electoral Tribunal announced the postponement of the May elections due to the disruptions caused by the COVID-19 pandemic. A new date for the elections has not been set yet.
During 2019, Bolivia’s macroeconomic conditions showed considerable deterioration. GDP grew 2.49% in 2019, which was below expectations. This was caused by the contraction of the hydrocarbons sector, due to the reduced export of gas. For the fifth consecutive year, Bolivia experienced both fiscal and current account deficits due to lower gas revenues and high government spending. Inflation in 2019 was 1.47%, which was below BCB´s target. Finally, international reserves decreased considerably, accounting for US$6.468 billion, which represented 15% of GDP, a decrease of 28% compared to 2018.
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.
The external and fiscal accounts remain as the main challenge considering that the Colombian economy continues to heavily depend on oil prices while the corporate tax cuts will imply a reduction of fiscal revenues for roughly 1% of GDP in the upcoming years.
On the social front, some demonstrations have occurred since November 2019, but they have mostly been peaceful. In fact, demonstrations have materially been reduced, while it is likely that the negotiations between the government and the protest leaders will continue in 2020.
Colombia was the best performing economy in the region last year, growing near 3.3%, above the 2.6% observed in 2018. This result was explained by a strong performance of domestic demand (4.8%) as both private consumption and investment recorded a solid trend (4.6% and 6.5%, respectively). The favorable economic activity is consistent with both a material reduction of political uncertainty after the victory of Ivan Duque in the 2018 presidential election and the reduction of corporate taxes embedded in the 2018 tax reform. On its part, consumption fundamentals are favorable (low inflation and interest rates, higher salaries, stronger consumption loans and remittances).
Colombia is a country that could be seriously affected by movements in crude oil prices. The impact during 2020 would be mainly seen through lower oil investment as oil exploration and production become less profitable. The transmission to private consumption would be slower as the oil industry is not labor-intensive. In general, households would gradually feel a negative effect once the lower national income starts to spread across all sectors, particularly the government via weaker fiscal revenues. In addition, investment other-than-oil could see an impact, especially considering the strong increase in the FX. Therefore, a more visible effect on variables other than investment would be observed in 2021 as public spending would be less dynamic next year amid lower oil-related revenues.
Chile is currently facing an extremely uncertainty following the social crisis that emerged on October 18, 2019. The demonstrations, which ended up in significant violence, were based on popular discontent regarding three main factors: pensions, education and healthcare. As a result, the economic and political agenda has structurally changed, resulting in the approval of a tax reform completely different from the original proposal of President Sebastian Piñera (which aimed to reintegrate the tax system), and in the possibility of an entirely new Constitution.
On the economic front, the activity is already feeling the negative impact of the social crisis, with the GDP contracting 2.3% year on year in the fourth quarter of 2019 and growing only 1% for the full year. This compares to growth of 4% in 2018 and represents the slowest pace since 2009. Currently, both business confidence and household sentiment stand at the lowest levels on record. So far, a reform to the pension system and some changes to the healthcare system have been presented to Congress. Having said that, the most important development ahead will be the constitutional process, starting with a plebiscite to be held on April 26, 2020 in which the electorate will decide if a new constitution should be written. Polls show that 60%-80% of the population wants a new constitution. If this outcome materializes, the constitutional process may last until 2022.
Panama’s model as a regional trade, logistics and financial center, has positioned the country as one of the fastest growing economies in the Latin America region during the last decade. Real GDP expanded at an average rate of 5.7% between 2009 and 2019, and its strong fundamentals reflect open trade, high investment and a stable political environment. This explains why its sovereign credit rating is one of the highest in the region (Fitch “BBB” or two notches above investment grade). However, according to the World Bank, in an increasingly competitive global context, this model could be at risk, since the economy has been based on traffic through the Panama Canal and investment in infrastructure.
In 2019, real GDP grew 3%, its slowest growth rate since the global financial crisis amid a slowdown in the construction and services sectors (70% of GDP). The mining sector supported the economy as Minera Cobre Panama started production. Regarding the risks faced by the economy, given the country’s exposure to international trade through the importance of the Panama Canal and the Colon Free Zone, a global economic downturn, accompanied of a significant dollar appreciation (dollarized economy) and a tightening of financial conditions would have a detrimental effect.
Moreover, Panama faces other important risks related to the exiting of the FATF grey list (included again in June 2019) and public debt sustainability. Recently, Fitch lowered its sovereign credit rating outlook from stable to negative (“BBB”) driven by a marked deterioration in fiscal deficits and a notable increase in the government’s debt burden. Last year, the government modified the social and fiscal responsibility law (SFRL) which raised the fiscal deficit limit from 2% to 3.5% of GDP. Complying with the rule could be challenging.
Significant changes to Bolivian, Colombian, Chilean and Panamanian political and economic conditions could have an adverse effect on our business, financial condition and results of operations.
(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. Further, the COVID-19 outbreak has caused widespread market disruption and may increase our market and liquidity risk. For more information on the potential for increased market and liquidity risk in light of COVID-19, see “Item 3. Key Information – 3.D Risk Factors – (12) our business and results of operations could continue to be negatively impacted by the COVID-19 outbreak or other public health crises beyond our control.”
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 the El Nino Phenomenon, which provokes floods and mudslides in the north and central Andean regions. Due to its very strong intensity, the 1997-1998 the El Nino Phenomenon destroyed crops and infrastructure equivalent to 2.2% of GDP. Heavy rains caused by El Nino Phenomenon 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 contracts 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 environment that may limit our potential to grow, may put pressure on our margins and reduce our profitability.
BCP Stand-alone and Mibanco have experienced increased competition, including increased pressure on margins. This is primarily a result of the following:
Highly liquid foreign-owned commercial banks and microfinance institutions in the market;
Local and foreign financial services, wealth management and capital markets institutions, 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 and Mibanco products and services. Such competition would adversely affect the acceptance of BCP Stand-alone’s and Mibanco products and/or lead to adverse changes in the spending and saving habits of BCP Stand-alone’s and Mibanco 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 and Mibanco, BCP Stand-alone’s and Mibanco products and services may be unable to compete successfully. BCP Stand-alone and Mibanco 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 and Mibanco 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 international banks and microfinance institutions 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 and Mibanco 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 representing 3% of total tax revenues in 2019. In addition, gold and copper exports represented 47% of all exports in 2019 (equal to 2018). 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, 2019 registered a US$6.6 billion trade surplus (2018: US$7.2 billion), due to a US$5.7 billion increase in copper exports and US$1.6 billion increase in gold exports since 2015 (the exported volume of copper increased 54.3% and the average export prices of gold increased 20.0% in the same period). In 2019 the average price of copper stood at US$2.72 per pound, below the US$2.96 per pound average of 2018. In response, terms of trade declined 1.8% compared to 2018.
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.
Particularly important is the relationship between both of Peru’s main trade partners- the United States and China. Throughout 2018 and 2019, there were trade tensions between the United States and China. These tensions included the imposition of tariffs on both US and Chinese products on several occasions, denouncements regarding currency manipulation and filing actions in the World Trade Organization, among others. Trade talks regarding a deal occurred between late 2018 and early 2019, with setbacks. On December 13, 2019, the US and China announced agreement on a Phase One deal. In January 15, 2020, the US and China signed a long-awaited Phase One deal at the White House, easing 18 months of trade tensions between the world’s two biggest economies. 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. Further, the COVID-19 outbreak has adversely affected the global economy, including the economies of China and the United States, resulting in, among other things, decreased demand for goods and services and a negative impact on trade activity, which, in turn, may adversely affect Peru's economy.
Despite the global importance of the United Kingdom (UK) leaving the European Union (Brexit), the effects on the Peruvian economy and Credicorp’ s businesses are estimated to be limited. According to the UK, the agreement is expected to take effect from January 1st, 2021, when existing EU trade agreements no longer apply to the UK.
Peru can also be affected by social and political events in neighbor countries. During the last quarter of 2019, neighboring countries like Chile, Ecuador and Bolivia faced social protests against government measures and political events. These protests in urban areas had a negative effect on economic activity and businesses in general. We cannot assure you that Peru will not experience such events itself or experience any residual effects from events in neighboring countries. Nonetheless, should such events in urban areas arise, that may have a materially adverse effect on our business and result of operations.
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 by the Federal Reserve 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 has some level of loans denominated in US Dollars (26.0% of loans and 32.9% of deposits as of December 2019), which is referred to as financial dollarization, potential statement of financial position effects should be taken into account because 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,” imposing additional US dollar reserve requirements on financial institutions. As of December 2019, this marginal reserve requirement in foreign currency was of 35% (compared to 35% as of December 2018 and 40% as of December 2017), and is applied on based two criteria: (i) balance of total loans in US dollars, and (ii) balance of car and mortgage loans in US dollars.
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 Repurchase Agreements (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 US 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 US Dollars through a Repo – Substitution.|
In conclusion, Peru is a small, open economy highly integrated with the rest of the world and is affected by movements in the external environment (growth of our main trade partners, changes in commodity prices, and movements in external rates and global financial markets). As such, any major deterioration of the international economy can have a materially adverse effect on the Peruvian economy and markets, as well as our businesses and result operations.
(12) Our business and results of operations could continue to be negatively impacted by the COVID-19 outbreak or other public health crises beyond our control.
A more recent event that implies risks for the Peruvian economy and our result of operations is the ongoing outbreak of COVID-19, which was first reported in Wuhan, China, on December 31, 2019. Due to the nature of the outbreak, strong measures to mitigate COVID-19 contagion have been taken by governments all around the world, which include closed international borders and severe mobility restrictions (quarantines). As a result, global GDP is estimated to contract severely in 2020 (lowest since the Great Depression of 1929), which affects Peru’s main trade partners, including China and the U.S. Moreover, Peru’s exports prices will also be affected due to lower global demand.
As a result of COVID-19, the economies in which Credicorp operates (mainly Peru, Colombia and Bolivia) will be severely disrupted by two factors: (i) the effect on the global economy (economic growth of our main trade partners like China and the U.S., as well as lower commodity prices), and (ii) the local effect of government measures to stop the COVID-19 outbreak. Estimates suggest that around 60% of GDP growth volatility in Peru is explained by external factors.
In Bolivia, acting president established a state of emergency on March 21, 2020 ordering a nation-wide quarantine. The quarantine was extended multiple times and dynamic regional quarantines were supposed to start on May 11, 2020. However, the municipal authorities of La Paz and El Alto resolved to maintain strict quarantines until May 31, 2020. The low reproduction rate of COVID-19 in high altitude areas could be a positive factor helping Bolivia to maintain the cases at a low level.
To cope with the economic shock due to COVID-19, Bolivia’s government announced fiscal and monetary measures, including monetary transfers for the unemployed and for families with children, coverage of basic services, credits to companies to cover the payment of wages, and a Microcredit Support Program. In addition, the Central Bank injected liquidity into the local market.
In Colombia, the president established the state of emergency on March 23, 2020. The lockdown has been extended until May 31, 2020. However, sectors such as manufacturing and construction (which account for 10% of GDP) were recently reactivated to minimize the economic shock. The COVID-19 pandemic occurred while the economy was in a process of gradual recovery due to the drop in the price of oil. Further, Colombia has the highest level of current account deficit in the region (4.3% of GDP in 2019) while public debt has been expanding over the last years (50% of GDP in 2019). In addition, the government faces the potential loss of their investment grade rating after S&P and Fitch gave the country a BBB- rating with a negative outlook. Finally, a decrease in exports due to the COVID-19 will be a significant challenge for Colombia to overcome this year.
To cope with the economic shock due to COVID-19, Colombia’s government gradually implemented fiscal measures such as wage subsidies, deferment of payment of corporate income taxes and social transfers. On the monetary side, the Central Bank has injected close to 1.4% of GDP in liquidity into the local market, and the Central Bank cut the reference rate by 100 basis points to 3.25%, the lowest rate since 2013 and the first cut in almost two years.
In Peru, the president established a state of emergency on March 16, 2020, and ordered a general lockdown on the country. Minor exceptions were made for key sectors (food supply, health, and banking). The lockdown was initially established for 15 calendar days, but was extended on several occasions, to last until June 30, 2020, for a total of 107 calendar days. Even though the Peruvian economy has one of the strongest macroeconomic fundamentals among emerging markets, the quality of the health system in Peru stands below the region’s average.
In response to the major sanitary and economic shock from COVID-19, the Ministry of Finance, the Central Bank and the Congress have announced and are implementing ample package of measures to mitigate and stimulate the economy for the equivalent of approximately 20% of GDP. The ability to implement measures of this magnitude stems from prudent macroeconomic policies that have been implemented for decades. The measures enacted include tax relief, public spending, access to private savings (pension fund accounts and severance indemnity deposits), and government-backed liquidity programs.
In particular, the government is supporting the business sector through two government-backed programs:
|·||“Reactiva Peru” is a liquidity program, implemented through BCRP, that has resources of PEN 60 billion (8% of GDP) and will help mainly small and medium-size companies obtain new working capital and continue operating. The government guarantee coverage level for these loans varies between 80% and 98% for loans between PEN 30 thousand and PEN 10 million. The criteria to establish coverage limits the maximum between three times the contribution to social security during 2019 or one month of average sales in 2019, according to SUNAT. These new loans will have terms of up to 36 months, with up to a 12 month grace period. The interest rates for these loans will be capped according to the auction results published by the Central Bank, which charges a flat 0.5% to participating institutions for the transaction.|
|·||The Enterprise Support Fund (FAE, by its Spanish initials) program enables banks and microfinance entities to provide Small and Micro businesses loans for up to S/4 Billion with government guarantee coverage levels between 90%-98%. This amount represents about 9% of the loan portfolio for SMEs systemwide.|
Finally, the Central Bank has lowered its reference rate 200 basis points to 0.25%, a historic minimum, and has provided liquidity for 6 and 12 months through Repo operations since the beginning of March. BCRP has also implemented measures to mitigate exchange rate volatility. Additionally, the SBS has authorized credit extensions for up to 6 months with no effect on client credit ratings.
The COVID-19 pandemic has caused disruptions in the world economy, which, in turn, could disrupt the business of both Credicorp and its customers. Due to the travel restrictions, closed international borders and prolonged lockdown periods decreed by governments around the world to manage the COVID-19 outbreak, Credicorp’s business may be affected.
As of the first quarter of 2020 some of the impacts already generated by COVID-19 at Credicorp are: (i) about 70% of BCP Stand-alone and Mibanco branches are serving nationwide and work at 50% of their capacity; (ii) financial relief measures have been offered to clients, including debt and insurance premium reprograming, cost-free cash management services, COVID-19 health and life insurance coverage and partial reimbursements of premiums on car insurance; (iii) there has been lower business activity as a result of lockdown, (iv) lower reference rates (-200 bps) which impact NIMs; (v) higher market volatility that impact investment portfolios; (vi) lower GDP growth expectations which negatively impact forward looking provisions; and (vii) new expenses including both one-off donations and operating expenses related to crisis management measures.
The impact of the COVID-19 pandemic may adversely affect the credit risk of Credicorp’s investment portfolio and wholesale loan portfolio. In particular, the challenges posed by COVID-19, including reduced business volumes, temporary closures and insufficient liquidity may have a higher impact on clients engaging in certain economic activities such as retail, automobile sales, residential real estate, poultry farming, air travel, tourism, microfinance, transportation and restaurants. As a result, the company expects a downgrade in the financial condition of some of our borrowers, which, in turn, could materially affect Credicorp’s business and result of operations. For example, we understand that on May 25, 2020, LATAM Airlines Group S.A. and its affiliates in Chile, Peru, Colombia, Ecuador and the United States filed for voluntary protection under the U.S. Chapter 11 financial reorganization process, with the goal of working with creditors and other stakeholders to reduce debt, access new sources of financing and continue operating. Credicorp is reviewing the filing and exploring its options.
The impact of the COVID-19 pandemic may adversely affect the credit risk of Credicorp’s retail and microfinance loan portfolio, due to its effect in SME and individual clients. SME clients may be adversely impacted by the lockdown period and the resulting inability to perform operations and generate cash flows. After the lockdown period, SMEs may also face a period of reduced level of operations because of the restrictions that may be imposed on the reopening of different economic sectors. Individuals may be adversely impacted by an increase of the unemployment rate and the reduction of business operations. As a result, the company expects an adverse effect on the credit quality of its loan portfolio and an increase of the cost of risk.
The unprecedented shocks to the economy and the high level of uncertainty regarding its recovery, as a result of COVID-19 may increase market risk by causing fluctuations in market prices and loss of liquidity of financial instruments, which may have an adverse impact on our investment portfolio.
Prolonged economic stress and market disruptions as a result of COVID-19 may generate pressure on our liquidity management. This increase in liquidity risk may result in limited and/or costly access to financing sources, inability to access capital markets, an increase in draws of outstanding credit lines and a change in the expected level of cash inflow as consequence of large-scale loan reprogramming.
In terms of non-financial risks, given the high rate of contagion of the disease, a significant number of our employees may acquire the virus, which may affect our ability to continue operating. Additionally, due to prolonged lock downs, some of our critical suppliers may stop providing us with certain key services for business continuity. Finally, since we have adopted a remote work approach, we may be exposed to a greater risk of cybersecurity threats because many of our employees now connect to Credicorp’s systems from outside our controlled technological environments.
The full extent of the effect on Credicorp’s operating and financial results is still difficult to predict due to the uncertainty about the duration and concentration of the outbreak, but the COVID-19 pandemic, or any other health crisis beyond our control, could have a material adverse effect on our business, financial condition and results of operations.
(13) 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 exposed to, among other risks, fraud by employees or outsiders, unauthorized transactions by employees and other operational errors, including clerical or record keeping errors resulting from faulty computer or telecommunications systems. While we constantly strive to provide more and better functionality to our customers by expanding our mobile and internet-based products and services, at the same time we increase our footprint and visibility, and thus our exposure to cyberattacks.
We maintain an internal control system designed to monitor and control operational and cybersecurity risks; however, we cannot assure that our system of internal controls will be entirely effective. Losses from the failure of our internal control system as well as the necessary investment to discover and rectify such matters could have a material adverse effect on our business, financial condition and results of operations.
(14) 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. 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. While our Corporate Compliance Division has established several programs to strengthen the ethical behavior of Credicorp (see "Item 4. Information on the company – 4.B Business Overview – (2) Corporate compliance”), such measures, policies and procedures may not be completely effective in preventing third parties from using us as a conduit form money laundering (including illegal cash operations) or terrorist financing without our knowledge. Any failure of the measures we take to counter money laundering and terrorist financing 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 operations.
(15) 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 wealth management; insurance; and microfinance 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.
In 2019, Credicorp acquired Bancompartir and Ultraserfinco to consolidate their business in the Microfinance and Wealth Management respectively in Colombia. For further detail about the acquisition, see “Item 15.B. Management’s Annual Report on Internal Control over Financial Reporting”.
(16) 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 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.
(17) 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 condition 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.
(18) Credicorp, as a Bermuda's company, may be adversely affected by any change in Bermuda law or regulation.
Pursuant to the Economic Substance Act 2018 (as amended) of Bermuda (the “ES Act”) that came into force on January 1, 2019, a registered entity other than an entity which is resident for tax purposes in certain jurisdictions outside Bermuda (“non-resident entity”) that carries on as a business any one or more of the “relevant activities” referred to in the ES Act must comply with economic substance requirements. The ES Act may require in-scope Bermuda entities which are engaged in such “relevant activities” to be directed and managed in Bermuda, have an adequate level of qualified employees in Bermuda, incur an adequate level of annual expenditure in Bermuda, maintain physical offices and premises in Bermuda or perform core income-generating activities in Bermuda. The list of “relevant activities” includes carrying on any one or more of: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities.
Companies incorporated in Bermuda must submit a declaration within 6 months after the end of the fiscal year, indicating the relevant activities they carried out during the previous fiscal year. In addition to the annual declaration, companies must submit a separate communication on January 31 of each year to the Registrar of Companies in Bermuda agent, indicating the relevant activities that they carried out the previous year. In Credicorp’s January 2020 communication, we declared two relevant “Holding Entity” and “Headquarter” activities. The competent authority will review the statements submitted by companies by June 30, 2020. In cases where the authority considers that the economic substance requirements have not been met, it may issue a notice to the company and impose a fine between US$7,500 and US$50,000. In addition, the authority would grant a remediation period of 30 to 180 days, depending on the particular facts and circumstances. If the breach continues after that period, the company could be issued second and/or third notices. In such cases, the amounts of the fines would increase to: (i) between US$25,000 and US$100,000, where a second notice has been issued; and (ii) between US$50,000 and US$250,000, where a third notice has been issued. The periods granted for remediation would also be reduced to: (i) between 15 and 90 days, where a second notice has been issued; and (ii) between eight and 45 days, where a third notice has been issued. If, after the civil penalties have been exhausted, the company continues its failure to comply, the Registrar of Companies in Bermuda may apply to the Supreme Court of Bermuda for an order in such terms as it thinks fit. This may include an order for striking off the company from the register. Additionally, making a knowingly false economic substance declaration, carry penalties up to US$10,000 or imprisonment for two years, or both.
Credicorp Capital Ltd is also a Bermuda company, thus the Economic Substance Law will apply to it. Other offshore jurisdictions released similar legislations that affects some of our offshore entities–ASHC and ASB in the Caiman Islands—imposing similar requirements and penalties.
We are undertaking a comprehensive analysis of the regulations to assess their impact on Credicorp and our subsidiaries with operations outside of Peru. Approximately 91% of Credicorp’s income is generated by subsidiaries constituted and operating in Peru.
(19) The U.K. Financial Conduct Authority (“FCA”), which regulates the London Inter Bank Offered Rate (LIBOR), announced in July 2017 that it will no longer require banks to submit rates for LIBOR beyond 2021.
The announcement of discontinuation of this rate has led to uncertainty, since LIBOR references approximately US$350 trillion of global transactions in a broad range of financial products, hence the cessation of LIBOR poses a financial stability risk.
Regulators and market participants in various jurisdictions have been working to identify alternative reference rates that are compliant with the standards of the International Organization of Securities Commissions (“IOSCO”). In the US, the Alternative Reference Rates Committee (the “ARRC”), a group of market participants organized by the US Federal Reserve and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”) as the alternative benchmark rate for US dollar LIBOR. In that sense, the ARRC has put in place a paced transition plan with the goal of ensuring a successful transition from US dollar LIBOR to SOFR.
Since the first half of 2018, Credicorp has had a multidisciplinary group working to define and execute a transition plan away from LIBOR and into SOFR and other alternative reference rates. This group has Credicorp’s CFO and BCP’s Head of the Treasury Division as senior sponsors. The group has measured exposure and risks of the transition in terms of products, clients, funding, contracts, and infrastructure, among others. For each exposure, we have established an individual plan aligned, as far as possible, to the recommendations published by the ARRC and we are starting to execute them.
We consider Credicorp’s net exposure to be non-material, as it represents approximately 1.7% of our assets and 1% of our liabilities. In the short term, infrastructure and contracts are the biggest risks for the transition. In that sense, we are improving data and systems, which allow an easier transition; and we have defined a fallback language, that has been put in place for most of liability contracts and for new client loans within BCP.
We continue to monitor our exposure, along with any new risks that may emerge as new developments and information is released to the market. Nevertheless, the potential cessation of LIBOR by the end of 2021 creates substantial risks to the global banking industry. Unless alternative rates can be negotiated, confusion could disrupt the global capital and credit markets. It cannot be predicted whether SOFR or another index or indices will become a market standard that replaces LIBOR, and if so, the effects on the global banking industry, our counterparties and our customers, and therefore on our future results of operations or financial condition.
(20) We may incur financial losses and damages to our reputation from environmental, social and governance (ESG) risks. In recent years, these risks have been recognized as increasingly relevant, since they can affect the creation of long-term value for stakeholders of the company
Environmental issues may affect our businesses, mainly our banking and asset management business, as the relation with some of our clients may be damaged if the company is perceived as not being environmentally responsible. Also, we may suffer from reputational risk if the projects or companies we finance or we invest into cause environmental damage. Social issues related to managing employee, customers and / or communities relationships may affect our business mainly through talent and or capabilities deficit, high training costs, compliance failures, operational inefficiencies and reputational risks. Corporate governance issues may affect our business mainly through reputational risk, if we are perceived by stakeholders as a company that has any controversy related to transparency, board structure and remuneration or stakeholder governance.
Credicorp has specific subsidiaries´ policies that cover environmental risks. Moreover, the Board of Credicorp has been working on enhancing its corporate governance framework and improving its disclosure related to these matters, as it is evident by the recent changes proposed to the Annual General meeting of shareholders, on section 4.A. History and Development of the Company / Subsequent Events. Finally, the company is currently developing a corporate ESG strategy and management framework to further structurally mitigate these risks.
Credicorp Ltd. is a limited liability company that was formed in Bermuda on October 20, 1995 pursuant to Bermuda Companies Act 1981 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, 97.71% of BCP, 99.96% of BCP Bolivia, 99.92% of Mibanco, 98.79% 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”. In Bermuda, Credicorp operates under the Bermuda Companies Act 1981 (as to date amended).
Our principal activity is to coordinate and manage the business plans of our subsidiaries in an effort to implement a universal banking service mainly in Peru, Bolivia, Colombia and Chile and to develop our insurance and 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. We are domiciled in Bermuda, with a registered address of Clarendon House, 2 Church Street, Bermuda, the phone number is +1 441 295 5950 and the address of our Internet website is https://www.grupocredicorp.com/ (The website and the information on such website are not incorporated in this Form 20-F). 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 of 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, 2019, our total assets were S/187.9 billion and our equity attributable to Credicorp’s equity holders was S/26.2 billion. Our net profit attributable to Credicorp’s equity holders in 2017, 2018 and 2019 was S/4,091.8 million, S/3,983.9 million and S/4,265.3 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). In April 2013, a company incorporated in Peru for our investment banking operations in that country. Assets transferred to Credicorp Capital Peru S.A.A. 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. (Grupo Credito) and Edyficar, subsidiaries of Credicorp Ltd., acquired from the International Finance Corporation (IFC) an additional 6.5% stake in Mibanco (5% through Grupo Credito 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. On July 2014, 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 to acquire that stock. 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 on Credicorp’s in the income statement as a result. As of the date that the merger became effective, 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 Seguros 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. As a result, Pacifico corporate health insurance business and the medical subsidiaries are no longer consolidated with Pacifico Seguros for accounting purposes and are reported as an investment in associates.
Grupo Credito (a Peruvian, wholly owned subsidiary of Credicorp) held a shareholder meeting on February 11, 2015, during which shareholders approved the terms of a split of an 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 equity investment that Grupo Credito held in Credicorp Capital Holding Peru, whose equity totaled 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 (a shareholder of Grupo Credito). In October 2015, Credicorp’s Board of Directors approved the transfer of the shares to Credicorp Capital, completing the reorganization process, which aimed group all investments in subsidiaries related to capital markets under Credicorp Capital.
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 reorganization 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 (which is a shareholder of ICBSA) made a capital contribution to ICBSA in Bolivianos of approximately US$163 million.
On September 30, 2016, Credicorp Capital, through its holding subsidiaries, concluded the acquisition of non-controlling interests in its operating subsidiaries Credicorp Capital Colombia S.A. (Credicorp Capital Colombia, formerly Correval). Later, Inversiones IMT S.A. was dissolved, 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 in the form of 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, aggregated with the holdings of its subsidiary Grupo Credito, controlled 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 (Bolsa de Valores de Lima, or BVL, in Spanish), 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 20, December 2017 to organize Credicorp’s subsidiaries in four Lines of Business: Universal Banking; Microfinance; Insurance and Pension; and Investment Banking and Wealth Management. These changes took effect on April 1, 2018.
On April 18, 2018, Credicorp Ltd., through its subsidiaries Grupo Credito 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 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 Holding Colombia S.A.S., reached an agreement with the shareholders of Ultraserfinco S.A. Comisionista de Bolsa, a financial services company in Colombia, to acquire a 100% stake in Ultraserfinco S.A. Comisionista de Bolsa for approximately US$43.0 million. On November 1, 2019, after obtaining the necessary regulatory approvals, the complete acquisition of 100% of the capital stock of Ultraserfinco S.A. Comisionista de Bolsa completed through Credicorp Holding Colombia S.A.S and Credicorp Capital Fiduciaria S.A. Ultraserfinco S.A. Comisionista de Bolsa has several subsidiaries including Ultralat, a company regulated by the SEC.
On June 28, 2019, Credicorp Ltd., through its subsidiary Credicorp Holding Colombia S.A.S., reached an agreement with the shareholder of Banco Compartir S.A. (Bancompartir) to acquire the majority of stake. On December 2, 2019, Credicorp Ltd. announced that after obtaining the necessary regulatory approvals, it completed the acquisition of 77.46% of the capital stock of Banco Compartir S.A. (Bancompartir), one of the top four microfinance banks in Colombia, which provides microfinance and SME financing solutions to micro entrepreneurs, for approximately US$76.0 million. This acquisition represents an important step expanding Credicorp Ltd.’s microfinance business in Latin America.
(1) Corporate Governance
In its session held on February 5, 2020, Credicorp’s Board of Directors, agreed to make several updates related to corporate governance in line with its objective to become a leader in governance best practices among its peers. These governance improvements will be effective after the Annual General Meeting of Shareholders in 2020.
|·||Simplifying our Committee Structure|
|o||After the Annual General Meeting, Credicorp will reconstitute its committee structure to migrate from seven committees to four|
|o||We will eliminate the Executive and Investment Committees and combine our Compensation and Nominations Committees|
|o||Remaining committees will be Risk, Compensation and Nominations, Corporate Governance, and Audit|
|·||Increasing Committee Independence|
|o||After the election of Board members at the Annual General Meeting, the Chairman will participate at the Risk Committee and the Compensation & Nominations Committee, although not as the committee chairperson|
|o||This means that our Chairman will no longer chair any standing Board committees|
|·||Redefining Independence Criteria|
|o||Board tasked our Corporate Governance Committee with ensuring that we meet the highest international standards for independence|
|·||Expanding Board Size|
|o||Management will submit a proposal at our Annual General Meeting, subject to shareholder approval, to expand the size of the board from eight to nine directors|
|o||We are seeking by this amendment to enhance the independence, diversity, skills, and experiences of the members of our Board of Directors.|
|o||Our Board has tasked our CFO with instituting more stringent policies and procedures at our Holding companies to enhance our internal controls|
On April 24, 2020, Credicorp announced that the Board of Directors, in its session held on April 23rd, 2020, has agreed to schedule the Annual General Meeting of Shareholders to take place on June 5th, 2020, Additionally, Credicorp announced that Dionisio Romero Paoletti, Chairman of the Board of Directors, would not stand for reelection. Moreover, Credicorp’s Board of Directors proposed for re-election the following four existing directors: Fernando Fort Marie, Patricia Lizarraga Guthertz, Raimundo Morales Dasso and Luis Enrique Romero Belismelis; and four new independent directors: Mr. Alexandre Gouvea, Ms. Maite Aranzabal Harreguy, Mr. Antonio Abruña Puyol and Mr. Irzio Pinasco Menchelli. As per Credicorp’s Bye-laws, after the Annual General Meeting, the new Board in its first session shall designate the new Chairman and the new composition of Board committees. Below are brief descriptions of the new director candidates
Mr. Gouvea recently retired as director at McKinsey & Co. He is Brazilian and has 30 years of international experience at the firm and specializes in providing advice to financial services clients. Mr. Gouvea is an expert in retail banking and insurance (including technological transition and digital transformation). He has provided financial services in Latin America and built the Practica de Organizaciones y la Unidad de Recuperacion y Transformacion. Mr. Gouvea is currently on the Board of Lojas Renner (the largest retailer in Brazil) and of Habitat for Humanity International. Mr. Gouvea has a degree in Mechanical Engineering from Universidade Federal do Rio de Janeiro, Brazil and has an MBA from Anderson School of Management, UCLA.
Maite Aranzabal Harreguy
Mrs. Aranzabal is a Spanish executive with an international career and relevant experience on Boards of public and private companies and NGOs. She began her career at McKinsey & Company in Spain and Argentina where she consulted with clients in multiple industries, including retail banking. Following this, she joined Grupo Cortefiel, a family-owned retailer, where she successfully led franchise marketing, strategy and international growth. Focusing on the fashion retail business, she joined Advent International, the private equity firm, as retail expert, supporting analysis of potential acquisitions in the fashion and retail spaces, as well as leading the turnaround of one business (KA International, €40 million in sales). She currently leads her own consulting company, which specializes in retail and real estate businesses, Alir Consulting and Trade, and participates as a member of the Board of Adolfo Dominguez SA (listed company). Mrs. Aranzabal is a graduate in Business Administration by ICADE, Spain, and holds an MBA from The Wharton School of the University of Pennsylvania.
Antonio Abruña Puyol
Mr. Abruña is a Spanish attorney-at-law with deep experience as a legal scholar and manager of academic institutions. Since 2018, Mr. Abruña is Rector of Universidad de Piura, Peru, where he has had a long and successful career. He participated in the process to reorganize General Studies and in the launch of the Law School, where he has been dean and a professor. Recently, Mr. Abruña was part of the Special Commission appointed by the Peruvian government to designate the seven members of the National Justice Council. He was the representative in Peru of the Instituto per la Cooperazione Universitaria (ICU). Mr. Abruña has a law degree from the Universidad Complutense de Madrid and a Doctor in Law from the Universidad de Navarra, Spain.
Irzio Pinasco Menchelli
Mr. Pinasco is a Peruvian executive with more than 30 years of experience leading companies in diverse sectors. Between 2006 and 2019 he was CEO, and is now an Executive Director, of Acurio Restaurantes, leader in the internationalization of Peruvian gastronomy. Since 2008 he has served as a Director/Promoter of SIGMA SAFI, a leading fund manager in Peru. In addition to his extensive past business and professional activities, he chaired the Organization Committee of the Copa America football tournament in 2004. Mr. Pinasco has been an independent board member of BCP since 2018 and holds a BA in Economics and International Relations from Brown University and an MBA from Columbia University.
From the beginning of 2020, a public health emergency caused by the COVID-19 pandemic has been experienced worldwide. In Peru, the government decreed a state of national emergency and a lockdown and imposed other measures to preserve the health of the population. Minor exceptions were made for key sectors such as food supply, health, banking among others. The lockdown was initially established for 15 calendar days, but was extended on several occasions, to last until June 30, 2020 for a total of 107 calendar days.
These measures may have negative impact on the economy and our business. As such, Credicorp reacted to the circumstances, developing simultaneous initiatives on four fronts:
|·||Employees: Credicorp has prioritized guaranteeing that our employees remain healthy and work in optimum conditions. At our branches and within our distribution network, we are taking necessary health prevention measures, such as providing protective equipment, secure environments and programs for employees to ensure the physical, emotional and financial stability. Further 95% of our staff employees are working remotely from home.|
|·||Customers: Credicorp is offering different debt extensions or installment-freezing solutions, cost-free services such as interbank transfers and nationwide money transfers, COVID-19 health and life insurance coverage, and auto-premium payment reimbursements, and has promoted the use of digital channels.|
|·||Business continuity: Credicorp has implemented its continuity plan successfully during the lockdown. We have taken health prevention, capacity management and physical and cyber security measures to ensure operational continuity throughout our channels. At the same time, we have managed liquidity and financial risks to maintain our solid financial condition. In terms of Credicorp’s liquidity, the SBS monitors the 30-day Liquidity Coverage Ratio, and BCP Stand-alone has maintained levels well above the regulatory minimum. However, for management decisions we use a more stringent indicator, relying on Liquidity Coverage Ratios of 15, 30 and 60 days, whose standards are aligned with Basel III, where we have maintained adequate levels of High Quality Liquid Assets.|
|·||Social Commitment: having faced several crises in our 130-year history, we have demonstrated and will continue to show clear commitment to supporting our communities. During this crisis, 160,000 impoverished families in Peru will benefit from BCP´s donation drive #YoMeSumo, which collected PEN 126 million, PEN 100 million from BCP, PEN 10 million from Mibanco, and PEN 16 million from other companies and thousands of individuals. Moreover, front-line national emergency workers, including health professionals, police and the Peruvian armed forces, now have life insurance policies thanks to a donation of PEN 5 million from Pacifico. Finally, we have been working in close coordination with the Health and Social Inclusion Ministries, giving support during crisis response to design measures for subsequent execution through our health and banking networks. This includes providing health services to public sector patients through our health network and distributing government cash payments through our banking network, all of which benefits thousands of families.|
For more details regarding COVID-19’s impact the business refer to “Item 5 Operating and Financial Review and Prospects 5.D Trend Information.”
(3) Credicorp’s declaration of dividends
In its session held on February 27, 2020, Credicorp’s Board of Directors approved the distribution of a cash dividend of S/ 2,831,469,510.00, for a total of 94,382,317 outstanding shares, which is equivalent to S/ 30.0000 per share. The cash dividend was paid on May 8th, 2020, without withholding tax at source, to shareholders of record on April 13th, 2020.
The dividend was paid in US Dollars using the weighted exchange rate registered by the superintendence of Banks, Insurance and Pension Funds (Superintendencia de Banca, Seguros y AFPs) for the transactions at the close of business on May 6th, 2020 (S/3.4081 per US Dollar). In this regard, the dividend paid per share was US$8.8026, equivalent to S/30.00 per share.
(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. We conduct our financial services business through our LoBs as follows: (1) Universal Banking, (2) Microfinance, (3) Insurance and Pensions and (4) Investment Banking and Wealth Management. Each LoB is further broken down into segments. 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.
1.1 Universal Banking
Universal Banking business, which focuses on 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 which are carried out by BCP Stand-alone’s Treasury; 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 each 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”.
1.1.1 BCP Stand-alone
BCP Stand-alone has two branches, one in Miami and one in 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, 2019, BCP Stand-alone represented 74.4% of our total assets, 74.2% of our net profit and 63.9% of our equity attributable to Credicorp’s equity holders.
The following table shows the client segmentation of BCP Stand-alone’s business segments. 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|
Annual sales higher than $100 million
(equivalent to S/331 million)
|Wholesale Banking Group (WBG)(1)|
Annual sales from $10 million to $100 million
(equivalent to S/33 million to S/331 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|
Retail Banking Group (RBG)
|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/33 million; or total debt from S/1.2 million to S/10 million|
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/3.314 per US Dollar, December 31, 2019 - SBS.|
(II) BCP Stand-alone’s Business Segments
(II.I) Wholesale Banking Group (WBG)
As of December 31, 2019, wholesale banking loans represented 51% of BCP Stand-alone’s total loans, while wholesale banking deposits represented 37% of BCP Stand-alone’s total deposits. WBG competes with local and foreign banks in Peru. WBG’s loan book amounted to S/46,042 million in 2019 (a 5.5% YoY increase), compared to average daily balances of S/44,779 million in 2018 (a 9.3% YoY increase) and S/40,964 million in 2017 (a -2.0% YoY decrease). It also maintained its leadership in the Peruvian Wholesale Banking market with a 36.2% 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, which 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, which develops products and services to support clients’ daily activities of cash management, collections, payments, and investments, among others.|
Through the CID, 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, increased from S/26,807 million in 2017 to S/28,083 million in 2018, and to S/28,269 million in 2019.
Despite the intense competition of foreign banks that may offer lower rates to the market, since they finance their operations at lower costs from their headquarters; BCP Stand-alone has a leading position in the Peruvian banking system with 36.2% 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, the Institutional Banking Unit, which operates within the MMD, serves 1,602 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. Also, in the largest provinces in Peru, BCP Stand-alone has deployed a specialized MMD team. On the other hand, in the smaller provinces in Peru, MMD is supported by the Retail Banking Division team who attends the needs of our customers.|
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/14,157 million as of December 31, 2017, S/16,696 million as of December 31, 2018, and S/17,773 million as of December 31, 2019. As of December 31, 2019, BCP Stand-alone had a market share of 36.2% in the Peruvian middle-market segment, according to the SBS and ASBANC.
Correspondent Banking Unit
BCP Stand-alone’s Correspondent 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. The unit also provides funding to some other Latin American banks which send their international trade and guarantee flows to Peru through BCP Stand-alone. BCP Stand-alone’s Correspondent 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 and electronic lending solutions.
Wholesale Banking Group Tribes
In 2019, a new working organization called “The Tribes” was incorporated in the Wholesale Banking Group. The Tribes use the agile methodology to assess different projects during their development cycle. There are three Tribes in the WBG and their main objectives are:
|·||Tribe of Business Credit Products: Giving their business clients efficient financial solutions through an outstanding and unique experience which satisfies their main needs.|
|·||Tribe of Transactional Products for Businesses: Giving their business clients integral solutions which simplify their cash management processes and generate customer loyalty.|
|·||Tribe of Digital Platforms for Businesses: Giving their business clients an outstanding and unique digital experience in order to become their ‘top of mind’ choice.|
(II.II) Retail Banking Group (RBG)
As of December 31, 2019, retail banking-related loans represented 48.5% of BCP Stand-alone’s total loans, while retail banking-related deposits represented 59.3% 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 such as loans and cash accounts. Enalta clients have access to 12 exclusive branches, 11 in Lima and one in Arequipa, and they benefit from the personalized advice of investment, insurance and loan experts, as well as exclusive, invitation-only products. Enalta has approximately 43,000 clients.
Customers in BCP Stand-alone’s 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. Approximately 75% 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. As part of our remote banking model, during 2019 we redeployed the remaining account managers from the physical branches. This has allowed us to offer clients longer service hours, remote processes, and more personalized services through off-branch channels. We ended the redeployment with a total of 248 relationship managers who serve around 245,000 customers through this remote channel. Affluent has approximately 360,000 clients.
Our Consumer Banking segment is in charge of developing strategies for the retail customers who are not included in affluent banking or small business banking. Its customer base consists of approximately 7.6 million (only considers clients with at least one product) medium-to-low-income individuals. Consumer Banking focuses on customers who receive their payroll through BCP Stand-alone (which represent around 1.2 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.
Business and SME-Pyme
BCP Stand-alone’s SME-Business and SME-Pyme Banking segments (as it was defined in client segmentation table, see section 4. B Business Overview - 1.1.1 BCP Stand-alone - (I) Overview) serve approximately 536,097 clients. The customers are divided into two groups with different business models, service levels, and product access. SME-Business serves approximately 19,284 clients and SME-Pyme serves approximately 516,813 small and micro-business clients.
According to the SBS and ASBANC, as of December 31, 2019, BCP Stand-alone was the largest mortgage lender in Peru, with a market share of 32.6%, representing a growth of 100 basis points since December 31, 2018. This increase was mainly attributable to the growth of market share in new mortgages.
As of December 31, 2019, mortgage loans accounted for 14.3% of Credicorp’s total loan portfolio, with an average loan-to-value ratio (LTV) of 53%. 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 low-income segment is MiVivienda. The MiVivienda program provides government-funded loans with down payment aid to purchasers of properties valued up to S/427,600. This program seeks to cover the deficit in housing for lower-income population segments. Under the program, BCP Stand-alone extend mortgages with LTV of up to 90%, and monthly mortgage payments of up to 50% of the client’s stable net profit. Mortgage loans in this sector represent approximately 17.2% of Credicorp’s total mortgage loans and 2.5% of Credicorp’s total loans.
The MiVivienda Sostenible product allows banks to obtain lower-cost funding through Cofide, which translates into lower interest rates and installment payments for clients, which results in more accessible products to clients.
BCP Stand-alone received an award from Fondo MiVivienda for the second consecutive year in 2019, in recognition of its status as the “entity that made the largest number of Mivivienda loans in the financial system,” after BCP placed more than 4,000 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
Within the Credit Card Segment, BCP Stand-alone’s outstanding current balances increased S/504 million in 2019, from S/5,079 million as of December 31, 2018 to S/5,584 million as of December 31, 2019 (a 10% increase), which allowed it to close the 2019 fiscal year with a market share of 21.7%, according to the SBS. In 2019, credit card usage by our Credit Card Segment clients grew 16% due to our actions to promote the credit card as the main form of payment and actively foment the daily use of the cards. These increases in balances and customer transactions allow us to increase interest and non-interest income. BCP continues to apply segmented strategies across the market offering value to its low-income customers by giving them access to credit and to its medium- and high-income customers through loyalty programs mostly through our partnership with LATAM airlines.
By the end of 2019, 14% of credit card sales were made through our digital platform launched in 2018. Our digital platform is expected to be one of the main distribution channels in the near future, which will reduce acquisition costs and allow us to target new segments. Additionally, we developed new servicing functionalities through chatbots and our mobile banking platform.
Consumer loans without collaterals grew from S/.4, 378 million as of December 2018 to S/5,283 million as of December 2019 (21% growth over the year). The growth can be explained by our higher penetration in low income segments and the expansion of our digital platform. Our digital platform currently generates 60% of the loans we sell every month. This high increase allows us to profitably penetrate low income segments with an attractive value proposition and excellent customer experience with an online disbursement.
In 2019, we continued to improve our prospecting tools and customer scoring models, allowing us to generate an offer for over 30% of the working population in Peru. We have also improved our prices and provision/allowance models by efficiently evaluating risk and customer profiles.
Retail Banking Group Tribes
Since 2019, a new working organization has been incorporated in the Retail Banking Group: The Tribes, which use the agile methodology to assess different projects during their development cycle. There are three Tribes in the RBG, and their main objectives are:
Digital Channels Tribe: Facilitating our costumer everyday transactions, providing them with extraordinary digital experiences with a mobile first design.
Alternative Channels Tribe: Improving the lives of Peruvians by offering them simple and efficient “phygital” (physical and digital) solutions such as ATM, Agentes BCP, Kioskos BCP and POS whenever and wherever they need them.
SME-Pyme and SME-Business Tribe: Helping in the development of small and medium size entrepreneurs, simplifying the management of their businesses with relevant products, and advisory services.
BCP Stand-alone’s Treasury function is divided into three primary units: (1) Assets & Liabilities Management (ALM) Group, (2) Sales & Trading Unit, and (3) 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, and manages 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.
Sales and Trading Unit
BCP Stand-alone’s Trading Unit manages both FX and Interest Rate Risk exposure for proprietary trading purposes. The managed risk originates mainly from client transactions and also from open proprietary positions. Market risk exposures and limits are independently defined by the Market Risk Unit and closely monitored by the Treasury Risk Unit. BCP Stand-alone’s Trading Unit is divided into three desks, as follows:
|§||FX Trading: The FX Trading Desk offers liquidity for FX Spot and Forward transactions for its clients in USDPEN, other Latin-American currencies, and G-10 currencies. The FX Trading Desk also manages a FX volatility book for USDPEN. Additionally, the desk participates in FX transactions related to different instruments designed by the BCRP in the local currency market.|
|§||Rates: The Rates Desk manages the risk from both Fixed Income and Interest Rate Swap transactions from clients and also from proprietary positions. Fixed Income portfolio consists mainly of government bonds (both in local and hard currency) from Latin-American countries and the US. The BCP Fixed Income desk is one of the main liquidity providers in the Peruvian government bond market, where it is part of the Market Maker Program of the Ministry of Economy of Peru.|
|§||Structuring: The Structuring Desk is responsible for the development of 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 Stand-alone to provide sound and cost-effective financial solutions to its customer base.|
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 of 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.
(II.IV) BCP Transformation
The Transformation is one of BCP Stand-alone’s primary strategic initiatives. This effort is broad in scope and involves many teams within the organization.
The initiative was born from an exhaustive analysis to understand how digitalization can change the Bank’s business and operating model. We found that digitalization goes beyond merely updating IT frameworks and entails more than just creating digital products and channels. For this reason, in 2015 we created the Centro de InnovaCXion (CIX).
In 2016, the IT, Client Experience and Data and Analytics teams came on board. During that year, Minimum Viable Products (MPVs) were developed as a platform to open accounts at the Branch level; a web platform to sell personal loans; and as an application for cash transfers between accounts via telephone numbers, which we named Yape.
In 2017, we adopted the term “Cultural Transformation,” which acts as an umbrella term for all transformation initiatives. During that year, we incorporated the Digital Risk, Digital Operations, Distribution Model and Governance teams in the effort. We also launched the first digital product for Wholesale Banking: The Digital Guarantee Letter, which received a 90% satisfaction rating from clients.
In 2018, BCP Stand-alone developed a strategy to become the leading bank in client satisfaction in Peru and the most efficient bank in the region by 2021. In 2019, we maintained 10 fronts (Digital Journeys; Data and Analytics; Culture and Leadership; Digital Risk; Distributions model; Agile Scale; Governance; Digital Ops; Customer Experience and IT) that had been initiated in previous years to contribute to achieving these two major objectives.
Along these lines, this year we have worked on developing enablers in our existing points of contacts to provide a differentiated experience to our clients.
The enablers, and their achievements, are segmented into three groups:
We are focusing our efforts on the most effective strategies to reduce our exposure to cybersecurity risk and achieve our objective risk appetite at a significantly lower cost, applying the appropriate level of control to the relevant areas of potential risk. For this reason, we maintain an important investment program, which allows us to have the necessary technologies and processes to keep our operations and assets safe. During 2019, we explored methods to identify, quantify, add and prioritize cybersecurity risks.
We have defined the following cybersecurity priorities for all the Group’s companies:
|§||Cybersecurity governance structure: Each company, according to its complexity, is responsible for defining the structure and responsibilities for cybersecurity risk management. That structure consists of three lines of defense (IT Security, Cybersecurity and Audit). Additionally, all companies have to implement corporate cybersecurity policies.|
|§||Adoption of the National Institute of Standards and Technology (NIST) cybersecurity framework: It is necessary to have a guide to identify the best practices and the minimum necessary controls to manage cybersecurity risk. For this reason, we have taken the NIST cybersecurity framework as a base, and using the Federal Financial Institutions Examination Council (FFIEC) Cybersecurity Assessment Tool, we have performed a self-assessment to determine the risk profile of each company, and based on the results, the required controls, as well as a work plan with periodic objectives, are being implemented.|
|§||Awareness program: The technology to prevent cyber-attacks is not enough; the weakest point in an organization is, usually, the internal user due to the incorrect handling of digital tools and their exposure to possible cyber-attacks. Therefore, BCP generated an awareness strategy at the end of 2018, defining parameters and best practices for training users for preventing and responding to cyber-attacks. This awareness strategy was shared with all the Group’s companies during 2019 and includes periodic phishing tests to improve user response and campaigns to create awareness in order to generate a cultural change in the organization.|
|§||Cybersecurity indicators: It is necessary to verify whether the controls we implement are effective. For this reason, BCP defined significant cybersecurity indicators (KRI’s and KPI’s) for the organization, such as patchs deployment, computers with latest antivirus, legacy servers, etc. which were shared with Credicorp companies and were adopted and adapted according to each company´s particularities and specific needs.|
|§||Third party governance: To ensure that the information we share with our suppliers complies with our standards, we have updated the critical suppliers evaluation process including a questionnaire with cybersecurity controls. Additionally, within BCP Stand-alone we have implemented an online monitoring tool for those critical providers that have access to our information.|
|§||Implementation of cybersecurity technologies: Cyberattacks are increasingly sophisticated, so we periodically analyze the threat trend in order to generate a list of minimum necessary technologies to address these risks. Each company, according to its risk profile, implements the necessary tools according to its strategy and work plan.|
Technology, Data and Operations:
We can now offer our clients a larger array of functionalities, improvements and availabilities. This is evident in the significant reduction we have registered in our average time for pre-production passes despite a 40% increase in the number of pre-production passes in year-on-year terms. Additionally, as of December 31, 2019, the number of mass incidents fell more than 15% since 2018 and 30% since 2017.
We are using advanced analytics to detect opportunities to optimize and generate additional income. We have launched a Center for Excellence in Analytics to broaden this capacity and be more effective when incorporating data for decision-making at the team level.
The applications developed by the data laboratories included 500,000 users, which provided us with better information on our contacts and more updated information on both clients and non-clients. As a result, we closed the year with relevant growth in pre-approved offers of credit products.
At the operations level, we have opened a Whatsapp channel to open savings accounts and a new chatbot platform called “Clara” to serve and inform our clients. Additionally, we are producing Robotic Process Automation solutions and improvements in processes for post-sale teams, which will lead to savings from optimization and allow us to offer a more effective and streamlined experience to our clients.
Agility and Becoming More Client-Focused:
Throughout the year, we designed 16 Tribes and three Centers of Excellence, many of which are now operating. All Tribes and Centers of Excellence follow an agile operating model that allows them to plan, prioritize and focus on initiatives that directly contribute to established objectives, providing flexibility and agility to offer value to clients by maximizing productivity.
These agile organizations operate in quarterly cycles. In each quarter they follow a process of Planning and Value Accountability called QBR (Quarterly Business Review) Process. In this process, all BCP Leaders align their objectives with BCP’s strategy and coordinate interdependencies among them. Agility is aimed at generating value by creating multidisciplinary, stable, self-organized and empowered teams. In any case, applying agility may introduce operational risks to BCP Stand-alone, which are mitigated by these agile organizations following all control processes established in BCP Stand-alone (risk control, budget, audit, security, etc) like any other unit in BCP.
In the Centro de InnovaCXion (CIX), we have also been working on client-focused solutions. At the end of 2019, four laboratories were in the production stage: company-supplier payment solutions, a real estate ecosystem, account openings via Whatsapp, and a currency exchange platform.
In addition to working on enablers, we have focused on generating positive change in the life cycle of a typical client and have identified five key stages of client interaction. Transformation has obtained results for each of these stages, which have an impact on how the client experiences our brand, services and products.
The first stage consists of ensuring that the client considers us as an option when seeking banking services. For this purpose, we have worked on different client journeys: five for services and two for products. We have significantly improved our clients’ experience, doubling top to box satisfaction levels in the consumer segment compared to our 2017 figures. In this context, we have obtained our clients’ recognition as the number one bank for client experience.
The second stage consists of being present during the clients’ research and selection process. This has led us to strengthen our presence in digital channels to provide all necessary information clearly and transparently. We have been working on digital advertising of products and services, which has increased the number of visits to BCP Stand-alone’s website by 30%.
The third stage focuses on client requirements of our services in order to them to perform their operations with us. We have two focuses in this regard: new clients and recurring clients. For new clients, we work to pre-approve of Economically Active Population (EAP). In this regard, coverage levels at the end of 2019 were more than double the level reported in 2017.
When it comes to recurring clients, we offer different digital channels to execute transactions. For this purpose, we use Yape, an app that facilitates transfers using a mobile phone number or QR codes. This app has multiplied its base of users by four in the last year alone to reach almost 2 million users as of January 2020. We also have digital channels at the bank level: Mobile Banking and Internet Banking. These channels have seen a 50% increase in their user base over the last year while the number of clients that use the digital token (needed to make money transfers through the bank’s applications) more than tripled during the same period. As such, a quick uptick in the number of digital token users allows us to increase the number of transactions made through digital channels rather than traditional channels, which increases both cost-efficiency and security levels.
The fourth stage focuses on the process used by clients to acquire products. We have promoted the use of digital channels to acquire products through a digital marketing strategy. This strategy, coupled with an increase in the product supply, has allowed us to more than double the number of units sold through digital channels in 2018. In fact, these channels accounted for 19% of the total number of units of products sold in the months of December 2019.
Finally, the fifth stage involves our clients’ transition to the digital world. We have increased the functionalities or our digital channels on the service side and bolstered the availability of new products. We have also made considerable investments in educating our clients at the branch level about the benefits of using digital channels. This has led an increase of more than 50% in the number of digital clients at the end of 2019 compared to the figure to the end of 2018. Our ratio of digital clients was 41.2% with respect to total clients at the end of 2019 versus 29.7% at the end of 2018. Additionally, at the end of 2019, more than 8 million Peruvians chose to work with BCP to meet their business and personal needs.
Yape is an application to make transfers and payments through a mobile phone. Yape users can receive transfers and payments in their accounts, which are linked to a phone number or a QR code. This application’s objective is to replace cash in daily and recurring transactions and to channel small transfers and digital payments.
During 2019, Yape has attracted 130,000 users a month, of which 40,000 represent new clients for BCP. A new user of Yape is twice as likely to acquire more BCP Stand-alone products and become a subject of cross-selling efforts than a non-Yape user.
Yape was created at the end of 2016 through an enterprising effort at CIX. The objective was to simplify payments between BCP Stand-Alone’s clients. In 2017 - 2018, Yape launched strategies to capture more affiliates and increase the bank’s client base given that users needed to have an account at BCP Stand-alone to use Yape. Yape’s strategy for 2019-2021 is to dominate the ecosystem for Peruvian digital payments by creating relations between individuals; small businesses; and retail chains for mass and daily consumption. As part of this strategy, at the end of the first quarter of 2020, strategic alliances were established with Mibanco, Caja Cuzco and Banco de la Nacion so that their clients could make transfers through Yape. The objective is to ensure that the person who wants to make small payments has Yape as an option.
In 2019, Yape created two large ecosystems that feed each other. One is P2P (Peer to Peer), which is facilitating increasingly larger flows of transfers between individuals and the other, P2M (Peer to Merchant), where growing numbers of small businesses are accepting Yape as a means of payment, whether through a QR from Yape or Visa.
At the end of January 2020, Yape had 2 million users, 30% of which had used the application in the last 30 days. At the end of December 2019, Yape was used by more than 100,000 small businesses and 15,000 taxi drivers. The pace of growth in the last quarter of 2019 was situated at 7,000 downloads a day, 70% of which become affiliates. The objective for 2020 is to reach 10,000 downloads a day so that Yape hits the 5 million-user mark at the end of this year.
Yape generates value for BCP in five ways: (i) transactional data is gathered on clients who used to use cash for transactions, which generated no usable data, (ii) deposit balances remain in BCP’s accounts for longer because people take less cash out of ATMs, which reduces the number of withdrawals and ensures that the money remains in bank accounts (iii) less is spent on recharging ATMs, (iv) BCP can capture new clients given that today, many people and businesses open their accounts at BCP to be able to use Yape (approximately 40,000 new accounts are opened each month of 2019 for Yape) and (v) client digitalization levels increase, which decreases service costs.
(III) 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 Division within BCP Stand-alone’s Central Risk Management Group. The adoption of a risk appetite framework reflects 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. Nowadays a significant part of BCP Stand-alone’s credit card and consumer loan, and 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 large body of transactional information that is 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 is 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.
For the WBG, 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 concentration limits in the loan portfolio by industry, which is based on its target risk appetite and market share.
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 are generally required to have prior experience as loan officers.
BCP Stand-alone operates in substantial part as a secured lender. As of December 31, 2019, approximately S/41.2 billion of its loan portfolio and off-balance-sheet exposure was secured by collateral, which represents 38.3% of its total loan portfolio based on unconsolidated figures (excluding BCP Panama and BCP Miami, branch offices located overseas), as compared to 39.3% in 2018 and 44.9% in 2017.
Liquid collateral is a small portion of BCP Stand-alone’s total collateral. BCP Stand-alone requires collateral for the extension of credit depending on the risk profile and the business segment of the client, among other factors. When BCP Stand-alone requires collateral, it is usually 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, 2019, BCP Bolivia has total assets of S/10,480.9 million, total net loans of S/7,388.0 million, deposits of S/8,965.8 million, and equity of S/736.5 million, with a 2019 ROAE of 11.0% (compared to 11.8% in 2018).
As of December 31, 2019, 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.
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/50 million|
|Medium companies (2)||Annual sales from approximately S/3 million to S/50 million|
|Retail Banking (3)||Small business (4)||Annual sales from approximately S/100,000 to S/3,000,000|
|Micro business (4)||Annual sales of at least approximately S/100,000|
|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 755 customers.|
|(2)||Loans to Medium companies account for 12% of BCP Bolivia‘s total loans. This segment accounts for approximately 1,702 customers.|
|(3)||At the end of 2019, retail banking loans accounted for 55% of BCP Bolivia’s total loans, while retail banking deposits accounted for 24% of BCP Bolivia’s total deposits.|
|(4)||Small and Micro business banking accounts for 14% of BCP Bolivia’s total loans; Small business banking serves approximately 10,200 clients while Micro Business serves approximately 11,840 business clients.|
|(5)||Consumer banking accounts for 10% of total loans of BCP. Its customer base consists of approximately 49,170 Payroll and self-employed workers. Our strategies are based on cross-selling and retention programs that expand benefits to non-banking products.|
|(6)||BCP Bolivia serves approximately 11,770 mortgage 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. (whose commercial name is Encumbra), incorporated in 2013 and Bancompartir incorporated in December 2019. As of December 31, 2019, Mibanco represented around 92.0% of the total loans of the Microfinance line of business, 7.2% of Credicorp’s total assets, 9.2% of Credicorp’s net profit, and 8.0% of equity attributable to Credicorp’s shareholders.
In Peru, 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”. Additionally, in Colombia, Bancompatir and Encumbra are regulated by the Superintendencia Financiera de Colombia (SFC) and Asociación Colombiana de Instituciones Microfinancieras (Asomicrofinanzas) respectively.
In Microfinance, transformation entails: ensuring the evolution of our culture; driving a change in mindset; and making innovations in the way we serve our clients and in our business model. We will accomplish this by leveraging new technologies and forms of works to ensure that we are on track to meet our objectives.
Our focus covers three main objectives: to become a reference in terms of customer experience, lead growth in the region and become a benchmark for the microfinance business model.
We are focused on five enabling fronts:
|·||Customer Centric, to provide an extraordinary experience that is in tune with the needs of our clients.|
|·||Digital Business Model, to generate digital capacities and evolve the current business model, focusing on customer experience and efficient growth.|
|·||Collaborative Organizational Culture, focused on implementing a customer-client focus, reinforcing reliability and commitment and ensuring that we have the talent and leadership required for transformation while forming work squads and tribes.|
|·||Data driven: focused on creating a competitive advantage by generating advanced analytical capacities to support core business practices (origination, collections, commercial effectiveness, pricing and key personnel) and analytics to make decisions.|
|·||IT & Digital Risk: Having flexible architecture to support digital transformation and to ensure that cybersecurity is at the required level.|
The following table shows how Mibanco segments its clients. This segmentation is based on an analysis that considered multiple factors such as the size (by income, sales, and/or total debt) and volume of activity for each client, the client’s affiliation with other companies or groups and their credit ratings.
|Client Segmentation (1)|
|SME – medium (2)||Annual sales up to S/20 million|
|Total debt higher than S/300,000, without issued debt in the capital markets|
|SME – small (3)||Total debt from S/20,000 to S/300,000|
|Micro-business (4)||Total debt up to S/20,000|
|Consumer (5)||Focus on debt unrelated to business|
|Mortgage (6)||Focus on individuals for the acquisition and construction of homes and granting mortgages|
|(1)||As of December 31, 2019, Mibanco had 974,045 registered clients. All portfolio percentages and customer counts in this table and the associated notes are as of December 31, 2019, 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 3% of Mibanco’s total loans and 2,050 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 60% of Mibanco’s total loans and 191,387 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 26% of Mibanco’s total loans and 614,026 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 160,771 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 5,811 of its clients. Mibanco’s mortgage segment has a policy of limiting LTV to up to 90%.|
(II) Mibanco Transformation
In 2019, we made the following progress on our transformation strategy:
|·||Customer Centric: by analyzing the journeys of our clients and employees and implementing the actions that cover the most significant “pain points,” we increased our Net Promoter Score (NPS), going from 29% in 2018 to 35% in 2019 and our workplace climate indicator is situated at 88%.|
|·||Digital Business Model: we have made progress in developing our hybrid business model by developing digital tools and implementing new sale channels as alternatives to traditional outlets (business advisor) and to provide customer service such as: telephone sales, APP, home banking, teller and platform. We are also developing a digital instrument for Business Advisors called URPI, which facilitates the advisor’s assessment, sales and collections in the field to ensure that he or she has more face-to-face time with clients. As of December 2019, 16.9% of the credit operations were conducted through alternative sales channels and 75% of our advisors were utilizing the functionalities available on URPI. These functionalities include field information on the clients, an operation simulator (amount, tenure and rate), planning sales priorities and collection in the field. We have also completed the digital model for our alliance with UBER and MO Technologies, which will make a digital assessment of potential clients within the pool of UBER drivers. This will be based on alliance models in the digital ecosystem such as Fintech MO Technologies.|
|·||Collaborative Organizational Culture: We have adopted agile forms of work through squads. In 2019, we had 10 squads that support the originations, collections, digital development, experimental work, client experience, six business models for intelligent business and advanced analytics teams; and one digital channels tribe.|
|·||Data driven: In 2019, we were focused on generating competitive advantages through centralized loan assessment and working on a multi-channel collections strategy. Improvements in this regard were supported by advanced analytics models, which helped us increase the number of approved loans using leads from 19.53% in 2018 to 26.3% in 2019.|
|·||IT & Digital Risk: We made progress with the integration platform that supports digital transformation and in our quest to meet all cybersecurity requirements. We also made progress in implementing tools for digital collaboration.|
The following table shows how Bancompartir segments its clients. This segmentation is based on an analysis that considered multiple factors such as the size (by assets and/or total debt) and volume of activity for each client, the client’s affiliation with other companies or groups and their credit ratings.
|Group||Income/Sales/Total debt (1)|
|Commercial (2)||Debt not categorized as micro, consumer or mortgage.|
|Micro (3)||Total debt up to 120 statutory minimum wages (equivalent to S/100,000).|
|Consumer (4)||Focus on debt unrelated to business.|
|Mortgage (5)||Focus on individuals for acquisition, construction of homeownership and granted with mortgages.|
|(1)||Converted into Soles at the exchange rate of S/0.000997 per Colombian Peso, December 31, 2019 – SBS. As of December 31, 2019, Bancompartir had 92,549 registered clients. All portfolio percentages and customer counts in this table and the associated notes are as of December 31, 2019, unless otherwise disclosed.|
|(2)||Bancompartir’s commercial segment focuses on all credits other than Micro, Consumer and Mortgage. Commercial loans represent 25% of Bancompartir’s total loans and 5,553 of its clients.|
|(3)||Bancompartir’s micro-business segment focuses on financing production, trade, or service activities for companies that have total debt up to 25 statutory minimum wages (approximately S/20M) and workers up to 10. Micro-business loans represent 66% of Bancompartir’s total loans and 79,036 of its clients.|
|(4)||Bancompartir’s consumer segment focuses on financing individuals to cover payments of goods and services or expenses unrelated to business. Consumer loans represent 5% of Bancompartir’s total loans and 7,358 of its clients.|
|(5)||Bancompartir’s mortgage segment focuses on financing individuals’ acquisition, construction, renovation, remodeling, expansion, improvement, and subdivision of homes. Mortgage loans represent 4% of Bancompartir’s total loans and 602 of its clients.|
The following table shows how Encumbra segments its clients. This segmentation is based on an analysis that considered multiple factors such as the size (by assets and/or total debt) and volume of activity for each client, the client’s affiliation with other companies or groups and their credit ratings.
|Group||Income/Sales/Total debt (1)|
|Commercial (2)||Debt not categorized as micro.|
|Micro (3)||Total debt up to 120 statutory minimum wages (equivalent to S/100,000).|
|(1)||Converted into Soles at the exchange rate of S/0.000997 per Colombian Peso, December 31, 2019 – SBS. As of December 31, 2019, Encumbra had 32,625 registered clients. All portfolio percentages and customer counts in this table and the associated notes are as of December 31, 2019, unless otherwise disclosed.|
|(2)||Encumbra’s commercial segment focuses on all credits other than Micro, Consumer and Mortgage. Commercial loans represent 10% of Encumbra’s total loans and 388 of its clients.|
|(3)||Encumbra’s micro-business segment focuses on financing production, trade, or service activities for microenterprises that have total debt up to 120 statutory minimum wages (approximately S/0.1M). Micro-business loans represent 90% of Encumbra’s total loans and 32,237 of its clients.|
1.3 Insurance & Pensions
1.3.1 Grupo Pacifico
We conduct our insurance business exclusively through Grupo Pacifico, which operates in Peru and Bolivia and is the second-largest Peruvian insurance company by written premiums in 2019, 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: 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”.
(II) Pacifico Transformation
Grupo Pacifico is going through a transformation process, with the objective of accompanying our clients at every moment of their life. This involves different actions, from the automation of its internal processes to the creation of digital tools and services, through the creation of new products and channels; and the modernization of current ones.
During 2019, we have continued moving towards the best insurance company in growth, client experience and efficiency. We see this in achievements such as: Reaching 76% of self-managed broker transactions; launching the app “Mi Espacio Pacifico”, which allows our clients to have complete information on their products and resolve requirements and queries in a digital space, and already has 35,000 affiliates; launching the new product “Plan Kilometros”, where the customer pays monthly only for the kilometers he drives; and we implement the Bancassurance tribe in conjunction with BCP, which is the first organizational change focused on agility, outside our innovation unit known as “Chackra”. This tribe already has seven teams developing solutions in an agile way.
1.3.2 Prima AFP
Credicorp conducts its pension fund business through 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 by it 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 investment banking and wealth management operations in the Latin America 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 Investment Banking & Wealth Management LoB included the addition of BCP Stand-alone’s Wealth Management Division and ASB to Credicorp Capital. The main objective of this new LoB is to operate 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). With the same objective, in 2019, Credicorp Capital completed the acquisition of Ultraserfinco and its subsidiaries expanding our Wealth Management business in Colombia and also strengthening our geographical presence in Medellin.
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 Latin-American Integrated Market (Mercado Integrado Latinoamericano, 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 those in our retail, private and high-net-worth, corporate, and institutional segments. We also act as a third-party distributor in Latin America, representing other global asset managers.
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 for the structuring of mid- and long-term financing and the structuring and placement of 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 tailored 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.
1.5 Open Innovation
Krealo, Credicorp’s open innovation arm, was created in March 2018 with the purpose of re-imagining financial services through digital sustainable businesses which will complement Credicorp’s financial transformation. The company is dedicated to building, growing and investing in Fintechs (new technologies that seeks to improve and automate the delivery and use of financial services) with the objective of reaching 100 million people across Peru, Chile and Colombia. Krealo leverages Credicorp’s experience and financial knowledge combined with the agility and disruption components of Fintechs, offering a new user-centric view of the business.
To accomplish its objective, Krealo combines the activities of a company builder with those of a corporate venture capital fund. We focus on defining the strategic direction of each venture. At the center of each venture stands the team of founders, which is charged with executing the product roadmap assuring strong unit economics and enabling a fast, sustainable growth with scalable technology and operations.
In Latin America, 50% of people do not own an investment product or have a bank account, 90% do not own an insurance product and 70% of SME’s do not have a payment solution. Therefore, Krealo is targeting two main segments: consumers and SME’s.
With respect to consumer segment, Krealo focuses on satisfying the needs of users that are not currently served by the financial sector. To achieve this, Krealo has deployed two initiatives: Tyba and Tenpo. Tyba is a financial advisor that provides access to investments to the Colombian population from $25 upwards. There is no investment limit. Tempo is a 100% digital account which allows Chilean population to make online payments.
With respect to SME’s, Krealo has focused on solving day-to-day issues for clients who lack financial knowledge and tools. To achieve this, Krealo has deployed three initiatives: First, in January 2019, Credicorp acquired a majority stake in Culqi, a Peruvian payment processing company, which launched a mobile point-of-sale (MPOS) solution to offer loans in October 2019. Second, by the end of 2019 Krealo acquired a minority stake in two Peruvian start-ups: Wally, Software as a Service (SAAS) Company which offers sales conciliations, inventory management and e-billing to SME’s, and Lumingo, a marketplace which offers SME’s an online channel to increase sales.
In 2020, Krealo and its ventures will focus on growing their user base and enhancing unit economics.
(2) Corporate compliance
Our corporate compliance programs apply to Credicorp and all its subsidiaries and have been developed using a comprehensive approach based on international best practices and as well as our principles and ethical values.
Corporate compliance is responsible for managing the following corporate programs:
|·||International sanctions and restricted lists|
|·||Fiscal transparency (FATCA & CRS)|
|·||Ethics and conduct|
|·||Market abuse prevention|
|·||Personal information protection|
|·||Occupational health and safety|
Our corporate compliance division is managed by compliance officers in each of Credicorp’s subsidiaries, 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 mitigate conduct risks and encourage ethical behavior and values, all with the aim of protecting the reputation and business of Credicorp.
In 2019, our corporate compliance division focused on consolidating the advanced management model that integrates the compliance processes within the business, the application of agile methodologies and the culture of the organization These strategies will allow us to improve our use of big data and analytics to increase efficiency and effectiveness in the identification of financial crimes and reduce non-financial risk, advise our businesses immediately of any risk of noncompliance, generate value and provide alternative solutions.
The Fiscal Transparency group within Credicorp oversees the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA) and the OECD´s Common Reporting Standard (CRS) which are the global standard for the automatic exchange of financial information between governments; and apply these standards to all Credicorp financial institutions. Understanding FATCA and CRS requirements and having a comprehensive Fiscal Transparency compliance program are essential for financial institutions to limit non-compliance risk and meet the obligations set out by applicable country Intergovernmental Agreements (IGAs) with the U.S. Internal Revenue Service (IRS) and the commitments signed with Organization for Economic Co-operation and Development (OECD).
FATCA at Credicorp: Credicorp has investment vehicles 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 and EE.UU.). Obligations include complying with client due diligence, client annual reporting and financial counterparties exchange of status information. Peru still holds the status of “agreement in substance” while the Peruvian government and the U.S. Department of Treasury continue with the negotiations to sign an IGA Model I. Considering this, in 2018 the Ministry of Economy and Finance of Peru (MEF) announced that the Annual Client Reporting obligation would be put on hold, while negotiations continue. However, all Peruvian financial institutions must comply with all other FATCA obligations as if the IGA were already in force.
CRS at Credicorp: Credicorp has financial institutions located in countries that started CRS implementation in 2016 (Colombia, the Cayman Islands and Luxembourg), 2017 (Panama and Chile) and 2019 (Peru). In the countries that adopted CRS in 2016 and 2017, our main activities will continue to focus on (i) keeping the information of our clients and counterparts updated, (ii) sending annual reports to tax authorities and (iii) completing the certifications and audits according to the laws applicable to each country.
In Peru, the implementation of CRS is part of the mandatory requirements of the OECD to grant full membership status to Peru. Therefore, all Credicorp financial institutions in Peru, including BCP, Pacifico, Mibanco, Prima, Credicorp Capital Bolsa, Credicorp Capital Fondos, and Credicorp Capital Titulizadora; implemented the first set of obligations successfully by January 1, 2019 and performed the due diligence of high value accounts by the deadline of December 31, 2019. The information gathered during this period will be used to draft the first Annual Report that will be submitted to the Peruvian Tax Authority (SUNAT) in May 2020.
(3) Internal Audit
In 2019, 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 formulated the Annual Audit Plan using a risk-based audit methodology, which is aligned with the rules of the Global Institute for Internal Auditors (IIA) and approved by the SBS. Based on industry-specific concerns, topics related to data analytics and cybersecurity were given special attention.
During 2019, for the ninth consecutive year, an internal evaluation was conducted in compliance with Standard 1311 of the Global IIA. During this evaluation, we received the qualification of “General Compliance” (the maximum possible rating according to IIA) due to our Quality Assurance and Improvement Program. The evaluation also verified that our internal audit function complies with the International Standards for Professional Practice, Fundamental Principles and the IIA Code of Ethics.
During 2019, our Chief Internal Auditor was nominated as Chairman of the Financial Services Guidance Committee of IIA Global, whose mission is to strategically direct the development of the International Framework for Professional Practice of Internal Auditing to support the advancement of the professional auditing practice in the global financial services industry by identifying, prioritizing, launching and, ultimately, approving guidelines specifically geared to the special needs of internal auditors who provide services to the financial services industry.
In 2019, the Corporate Auditor and Pacifico Group’s Auditor participated on behalf of Credicorp in the preparation of the document “Agility in Internal Audit – Latin American Banks” which was presented at the Latin American Audit Congress of the Latin American Foundation of Internal Auditors (FLAI). This document was one of the first to introduce Agile Audit practices to banks in the region.
Consistent with recommended industry practices, Credicorp continued to apply the Cybersecurity Assessment Tool (CAT) of the U.S. Federal Financial Institutions Examination Council (FFIEC) to its operations. In addition, Credicorp also implemented a centralized methodology to apply data analytics in a coordinated and integrated manner and promoted the use of the Agile Audit Methodology guidelines.
In 2019, we provided 14,775 hours of training our internal auditors, with an average of 72 hours per auditor (above the 40 hours per auditor recommended by international practices) in topics related to fraud prevention, IFRS 9, new cybersecurity frameworks such as those promulgated by the 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$230 billion in 2019 (according to BCRP’s figures) that has grown at a compound annual growth rate (CAGR) of 8.3% from 2001 to 2019, 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 nearly 25 years ago, it has evolved into a much larger and complex company. In 2018, the management of the several businesses was organized into the four LoBs: Universal Banking, Microfinance, Insurance & Pension and Investment Banking & Wealth Management.
The Universal Banking LoB 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. In 2019, we continued to advance in our transformation strategy by improving our digital sales and customer satisfaction. This LoB aims to maintain an adequate balance between risk, growth, profitability and operating efficiency.
The Microfinance LoB continues to invest in building capacities to fuel local and regional growth based on its current business model. This will be accomplished by focusing on consolidating the new hybrid model and in creating new business alliances to scale the business. 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. In 2019, we acquired Bancompartir, a subsidiary that will allow us to consolidate our business in the Microfinance market in Colombia with Encumbra.
The Insurance & Pension LoB continues to focus on capturing growth in the Peruvian market, which has one of the lowest penetration levels in the region. As such, this 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 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. In 2019, we continued to improve the synergies between various teams from Prima AFP and Pacifico, which will help us reduce our operating expenses and improve our efficiency.
The Investment Banking & Wealth Management LoB continues 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. In 2019 we acquired Ultraserfinco, which will increase our business in Colombia.
The following table provides certain financial information about our LoBs as of and for the year ended December 31, 2019 and 2018:
|As of and for the year ended December 31, 2019|
|External income (2)||Net interest, similar |
|(Soles in millions, except percentages)|
|Amount||% Total||Amount||% Total||Amount||% Total||Amount||% Total|
|Insurance and Pension funds|
|Pacifico Seguros and Subsidiaries||3,249||16.5||493||5.4||348||6.4||13,785||7.3|
|Banco Compartir S.A.(1)||18||0.1||13||0.1||2||-||1,046||0.6|
|Investment Banking and Wealth Management||968||4.9||69||0.8||885||16.4||9,423||5.0|
|(1)||Bancompartir has been included since December 2019.|
|(2)||Corresponds to total interest and similar income, other income (includes income and expenses on commissions) and net earned premiums from insurance activities.|
|(3)||Corresponds to total other income (include income and expenses for commissions) and insurance underwriting result.|
|As of and for the year ended December 31, 2018|
|External income (1)||Net interest, similar |
|(Soles in millions, except percentages)|
|Amount||% Total||Amount||% Total||Amount||% Total|