|Item 17 &Uml; Item 18 &Uml;|
|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. 	Unresolved Staff Comments|
|Item 5.	 Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Shareholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10.Additional Information|
|Item 11.Quantitative and Qualitative Disclosures About Market Risk|
|Item 12.Description of Securities Other Than Equity Securities|
|Item 13.Defaults, Dividend Arrearages and Delinquencies|
|Item 14.Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15.Controls and Procedures|
|Item 15T.Controls and Procedures|
|Item 16A.Audit Committee Financial Expert|
|Item 16B.Code of Ethics|
|Item 16C.Principal Accountant Fees and Services|
|Item 16D.Exemptions From The Listing Standards for Audit Committees|
|Item 16E.Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F.Change in Registrant's Certifying Accountant|
|Item 16G.Corporate Governance|
|Item 16H.Mine Safety Disclosure|
|Item 17.Financial Statements|
|Item 18.Financial Statements|
|Balance Sheet||Income Statement||Cash Flow|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31st, 2016
¨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
|(Jurisdiction of incorporation or organization)|
|Of our subsidiary|
|Banco de Crédito del Peru:|
|Calle Centenario 156|
|Lima 12, Peru|
|(Address of principal executive offices)|
|Fernando Dasso Montero|
|Chief Financial Officer|
|Banco de Crédito del Peru:|
|Calle Centenario 156|
|Lima 12, Peru|
|Phone (+511) 313 2014|
|Facsimile (+511) 313 2121|
|(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)|
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Title of each class||Name of each exchange on which registered|
|Common Shares, par value $5.00 per share||New York Stock Exchange|
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Common Shares, par value $5.00 per share 94,382,317
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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.
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act
|Large accelerated filer||x||Accelerated filer||¨|
|Non-accelerated filer||¨||Emerging Growth Company||¨|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act ¨
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|U.S. GAAP ¨||International Financial Reporting Standards as issued||Other ¨|
|by the International Accounting Standards Board x|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
|Item 17 ¨||Item 18 ¨|
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|PRESENTATION OF FINANCIAL INFORMATION||7|
|CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS||9|
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS||10|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE||10|
|ITEM 3.||KEY INFORMATION||10|
|3. A||Selected financial data||10|
|3. B||Capitalization and Indebtedness||13|
|3. C||Reasons for the Offer and Use of Proceeds||13|
|3. D||Risk Factors||13|
|ITEM 4.||INFORMATION ON THE COMPANY||29|
|4. A||History and development of the company||29|
|4. B||Business Overview||32|
|4. C||Organizational structure||124|
|4. D||Property, plants and equipment||125|
|ITEM 4A.||UNRESOLVED STAFF COMMENTS||126|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS||126|
|5. A||Operating results||126|
|5. B||Liquidity and Capital Resources||158|
|5. C||Research and Development, Patents and Licenses, Etc.||167|
|5. D||Trend Information||167|
|5. E||Off-Balance Sheet Arrangements||168|
|5. F||Tabular Disclosure of Contractual Obligations||170|
|ITEM 6.||DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES||171|
|6. A||Directors and Senior Management||171|
|6. C||Board Practices||176|
|6. E||Share Ownership||181|
|ITEM 7.||MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS||181|
|7. A||Major Shareholders||181|
|7. B||Related Party Transactions||182|
|7. C||Interests of Experts and Counsel||183|
|ITEM 8.||FINANCIAL INFORMATION||184|
|8. A||Consolidated Statements and Other Financial Information||184|
|8. B||Significant changes||188|
|ITEM 9.||THE OFFER AND LISTING||191|
|9. A||Offer and Listing Details||191|
|9. B||Plan of Distribution||193|
|9. D||Selling Shareholders||195|
|9. F||Expenses of the issue||195|
|ITEM 10.||ADDITIONAL INFORMATION||195|
|10. A||Share Capital||195|
|10. B||Memorandum and Articles of Association||195|
|10. C||Material Contracts||195|
|10. D||Exchange Controls||196|
|10. F||Dividends and Paying Agents||199|
|10. G||Statement by Experts||199|
|10. H||Documents on Display||199|
|ITEM 11.||QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||199|
|ITEM 12.||DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES||217|
|ITEM 13.||DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES||218|
|13. A||Material Defaults||218|
|13. B||Dividend Arrearages and Delinquencies||218|
|ITEM 14.||MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS||218|
|ITEM 15.||CONTROLS AND PROCEDURES||218|
|15. A||Disclosure Controls and Procedures||218|
|15. B||Management’s Annual Report on Internal Control over Financial Reporting||218|
|15. C||Attestation Report of Independent Registered Public Accounting Firm||220|
|15. D||Changes in Internal Control over Financial Reporting||221|
|ITEM 15T.||CONTROLS AND PROCEDURES||221|
|ITEM 16A.||AUDIT COMMITTEE FINANCIAL EXPERT||222|
|ITEM 16B.||CODE OF ETHICS||222|
|ITEM 16C.||PRINCIPAL ACCOUNTANT FEES AND SERVICES||223|
|ITEM 16D.||EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES||225|
|ITEM 16E.||PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS||225|
|ITEM 16F.||CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT||226|
|ITEM 16G.||CORPORATE GOVERNANCE||226|
|16G. A||The New York Stock Exchange – Corporate Governance||226|
|16G. B||Bermuda Law – Corporate Governance||230|
|16G. C||Peruvian Law – Corporate Governance||233|
|ITEM 16H.||MINE SAFETY DISCLOSURE||233|
|ITEM 17.||FINANCIAL STATEMENTS||234|
|ITEM 18.||FINANCIAL STATEMENTS||234|
|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|
|ALICO||American Life Insurance Company|
|ALM||Asset and Liabilities Management Service|
|AMV||Autorregulador del Mercado de Valores de Colombia or Colombia's Stock Market Self-regulator|
|ASB||Atlantic Security Bank|
|ASFI||Autoridad Supervisora del Sistema Financiero or Financial System Supervisory Authority - Bolivia|
|ASHC||Atlantic Security Holding Corporation|
|ATM||Automated Teller Machine (cash machine)|
|ATPDEA||Andean Trade Promotion and Drug Eradication Act|
|AuC||Assets under Custody|
|AuMs||Assets under Management|
|BCB||Banco Central de Bolivia|
|BCI||Banco de Crédito e Inversiones de Chile|
|BCM||Business Continuity Management|
|BCP Bolivia||Banco de Crédito de Bolivia|
|BCP Consolidated||Banco de Crédito del Peru including subsidiaries such as Mibanco. It is also called BCP|
|BCP Stand-alone||Banco de Crédito del Peru without including subsidiaries|
|BCRP||Banco Central de Reserva del Peru or Peruvian Central Bank|
|Bladex||Banco Latinoamericano de Comercio Exterior|
|BLMIS||Bernard L. Madoff Investment Securities LLC|
|BVL||Bolsa de Valores de Lima or Lima Stock Exchange|
|CAF||Corporación Andina de Fomento or Andean Development Corporation|
|CARE||Cooperative for Assistance and Relief Everywhere|
|CID||Corporate and International Division|
|CIMA||Cayman Islands Monetary Authority|
|CMAC||Caja Municipal de Ahorro y Crédito or Municipal Savings Bank|
|COFIDE||Corporación Financiera de Desarrollo S.A. or Peruvian government-owned development bank|
|COO||Chief Operating Officer|
|COSO||Committee of Sponsoring Organizations of the Treadway Commission|
|CRAC||Caja Rural de Ahorro y Crédito or Rural Savings Bank|
|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 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 Peru||Credicorp Capital Peru S.A.A., formerly BCP Capital S.A.A.|
|Credicorp Capital Servicios Financieros||Credicorp Capital Servicios Financieros S.A., formerly BCP Capital Financial Services S.A.|
|Credicorp Capital Titulizadora||Credicorp Capital Sociedad Titulizadora S.A., formerly Credititulos S.A.|
|CRM||Customer Relationship Management|
|CSI||Credicorp Capital Securities Inc. formerly Credicorp Securities Inc.|
|CTS||Severance indemnity Deposits|
|D&S||Disability and Survivorship|
|Edyficar||Empresa Financiera Edyficar S.A.|
|Edpyme||Empresas de Desarrollo de Pequeña y Microempresa or Small and Micro firm Development Institutions|
|EPS||Entidad Prestadora de Salud or Health Care Facility|
|ERM||Enterprise Risk Management|
|FATCA||Foreign Account Tax Compliance Act|
|FATF||Financial Action Task Force|
|FCG||Financial Consolidated Group|
|FCPA||Foreign Corrupt Practices Act|
|FED||Federal Reserve System - US|
|FINRA||Financial Industry Regulatory Authority -US|
|FTA||Free Trade Agreement|
|FuMs||Funds under management|
|GDP||Gross Domestic Product|
|IASB||International Accounting Standards Board|
|IBD||Introducing Broker Dealer|
|IBNR||Incurred but not reported|
|ICBC||Industrial and Commercial Bank of China|
|ICBSA||Inversiones Credicorp Bolivia S.A.|
|IFC||International Finance Corporation|
|IFRS||International Financial Reporting Standards|
|IGBVL||Indice General de la Bolsa de Valores de Lima or General Index of the Lima Stock Exchange|
|IGV||Impuesto General a las Ventas or Value Added Tax|
|IMF||International Monetary Fund|
|Inversiones IMT||Inversiones IMT S.A.|
|IPSA||Indice Selectivo de Acciones or Selective Share Price Index - Chile|
|IRS||Interest Rate Swap|
|KRI||Key Risk Indicators|
|LIBOR||London InterBank Offered Rate|
|LTV||Loan to Value|
|M&A||Mergers and Acquisitions|
|MALI||Museo de Arte de Lima or Lima's Fine Arts Museum|
|MILA||Mercado Integrado Latinoamericano or Integrated Latin American Market -among Chile, Colombia and Peru|
|MODASA||Motores Diesel Andinos S.A.|
|MRTA||Movimiento Revolucionario Tupac Amaru|
|NEP||Net Earned Premiuns|
|NIM||Net Interest Margin|
|NYSE||New York Stock Exchange|
|OFAC||Office of Foreign Assets Control|
|ONP||Oficina de Normalización Previsional del Peru or Peruvian Public Pension System|
|OPA||Oferta Pública de Adquisición or Public Tender Offer|
|P&C||Property and casualty (P&C)|
|PZBA||Paredes, Zaldivar, Burga & Asociados S.C.R.L|
|RAM||Remuneración Asegurable Mensual or Monthly Insurable Remuneration|
|RB&WM||Retail Banking & Wealth Management Group|
|RIA||Registered Investment Advisor|
|ROAE||Return on Average Equity|
|ROAA||Return on Average Assets|
|S&P||Standard and Poor's|
|SAM||Standardized Approach Method|
|SARs||Stock Appreciation Rights|
|SBS||Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones or Superintendency of Banks, Insurance and Pension Funds - Peru|
|SCTR||Seguro Complementario de Trabajo de Riesgo or Complementary Work Risk Insurance|
|SEC||U.S. Securities and Exchange Commission|
|SFC||Superintendencia Financiera de Colombia or Superintendency of Securities and Insurance|
|SIPC||Securities Investor Protection Corporation|
|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|
|SOAT||Seguro obligatorio para accidentes de transito or Obligatory assurance for accidents of traffic|
|Solucion EAH||Solución Empresa Administradora Hipotecaria|
|SPP||Sistema Privado de Pensiones or Private Pension System|
|SUNAT||Superintendencia Nacional de Aduanas y de Administracion Tributaria or Superintendence of Tributary Administration - Peru|
|SVS||Superintendencia de Valores y Seguros de Chile or Superintendence of Securities and Insurance from Chile|
|U.S. GAAP||Accounting principles generally accepted in the United States of America|
|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, and means either Credicorp as a separate entity or as an entity together with our consolidated subsidiaries, as the context may require). We maintain our financial books and records in Peruvian Soles and present our financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS differ in certain respects from Accounting Principles Generally Accepted in the United States (U.S. GAAP).
We operate primarily through our four operating segments: banking, investment banking, insurance, and pension funds. See information about operating segments in “Item 4.-Information on the Company: (A) History and Development of the Company, and (B) Business Overview”.
Our six principal operating subsidiaries are: (i) Banco de Credito del Peru (which, together with its consolidated subsidiaries, is referred to as BCP Consolidated or just BCP); (ii) Atlantic Security Bank, which we hold through Atlantic Security Holding Corporation (which, are referred to as ASB and ASHC, respectively); (iii) El Pacifico-Peruano Suiza Compañia de Seguros y Reaseguros (“PPS”, which together with its consolidated subsidiaries, is referred to as Grupo Pacifico); (iv) Prima AFP; (v) Credicorp Capital Ltd. (“Credicorp Capital”, which consolidates the companies of our investment banking platform); and (vi) Banco de Credito de Bolivia, which we hold through Inversiones Credicorp Bolivia S.A. (“ICBSA”). As of and for the year ended December 31, 2016, BCP contributed with 81.5% of our total assets, 77.0% of our net income and 70.2% of our net equity attributable to Credicorp’s equity holders. Unless otherwise specified, the individual financial information for BCP Stand-alone, ASB, Grupo Pacifico, Prima AFP and Credicorp Capital included in this Annual Report is presented in accordance with IFRS and before eliminations for consolidation purposes. See “Item 3. Key Information – 3.A Selected Financial Data” and “Item 4. Information on the Company - 4.A History and Development of the Company.” We refer to BCP Stand-alone, ASB, Grupo Pacifico, Banco de Credito de Bolivia, Prima AFP and Credicorp Capital as our main operating subsidiaries, and we refer to Grupo Credito S.A. (“Grupo Credito”) and ASHC as our two main holding subsidiaries.
“Item 3. Key Information - 3.A Selected Financial Data” contains key information related to our performance. This information was obtained mainly from our Consolidated Financial Statements as of December 31, 2012, 2013, 2014, 2015 and 2016.
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 to “$”, “US$,” “Dollars,” “foreign currency” or “U.S. Dollars” are to United States Dollars.
In light of changes in the Peruvian economy and Credicorp’s operations in Peru, the Board of Directors of Credicorp determined, in its session held on January 22, 2014, that from and after January 1, 2014 the Peruvian Sol would be the functional currency and the currency in which Credicorp’s financial statements would be presented. This decision was made in accordance with the International Financial Reporting Standards (“IFRS”), and specifically IAS 21, based on an analysis performed by Credicorp’s management, which revealed that the Sol has become since 2014 the most relevant currency for Credicorp’s subsidiaries in Peru, and specifically for Credicorp’s main subsidiary, Banco de Credito del Peru. This decision does not change the currency (U.S. Dollar) in which the nominal value of Credicorp’s shares is denominated. In accordance with Credicorp’s Bye-laws, these values remain in U.S. Dollars, the currency in which Credicorp’s stock is listed on the New York Stock Exchange (the “NYSE”) and on the Lima Stock Exchange (BVL by its Spanish initials). For this Annual Report, we have restated in Soles the financial information presented for years prior to 2014. The methodology used for the restatement is in accordance with the IFRS and specifically IAS 21 "The Effects of Changes in Foreign Exchange Rates". The methodology applied is explained in “Item 4. Information on the Company - 4.B Business overview - (10) Selected Statistical Information”.
Some of our subsidiaries, namely ASB ; Credicorp Capital Securities Inc. (“CSI”); and Credicorp Capital Asset Management (subsidiaries of Credicorp Capital), maintain their operations and balances in U.S. Dollars and other currencies. As a result, in certain instances throughout this Annual Report, we have translated U.S. Dollars and other currencies to Soles. You should not construe any of these translations as representations that the U.S. Dollar amounts actually represent such equivalent Sol amounts or that such U.S. Dollar amounts could be converted into Soles at the rate indicated, as of the dates mentioned herein, or at all. Unless otherwise indicated, these Sol amounts have been translated from U.S. Dollar amounts at an exchange rate of S/3.356 = US$1.00, which is the December 31, 2016 exchange rate set by the Peruvian Superintendent of Banks, Insurance and Pension Funds (SBS by its Spanish initials). Converting U.S. Dollars to Soles on a specified date (at the prevailing exchange rate on that date) may result in the presentation of Sol amounts that are different from the Sol amounts that would result by converting the same amount of U.S. Dollars on a different specified date (at the prevailing exchange rate on such date). The Federal Reserve Bank of New York does not publish a noon buying rate for Soles. Our Bolivian subsidiary operates in Bolivianos, a currency whose value has been stable over recent years. For consolidation purposes, our Bolivian subsidiary’s financial statements are also presented in Soles. Our Colombian and Chilean subsidiaries, Credicorp Capital Colombia S.A. (“Credicorp Capital Colombia”, formerly Correval S.A.) and Inversiones IMT S.A. (“Inversiones IMT”, formerly IM Trust, S.A.), 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 “approximates”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “would”, “may”, or other similar expressions. These forward-looking statements are based on our management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in the forward-looking statements. Therefore, actual results, performance or events may be materially different from those in the forward-looking statements due to, without limitation:
|•||General economic conditions, including in particular economic conditions in Peru;|
|•||Performance of financial markets, including emerging markets;|
|•||The frequency and severity of insured loss events;|
|•||Interest rate levels;|
|•||Currency exchange rates, including the Sol/U.S. Dollar exchange rate;|
|•||Increasing levels of competition in Peru and other emerging markets;|
|•||Changes in laws and regulations;|
|•||Changes in the policies of central banks and/or foreign governments;|
|•||General competitive factors, in each case on a global, regional and/or national basis;|
|•||Effectiveness of our risk management policies; and|
|•||Losses associated with counterparty exposures.|
See “Item 3. Key Information - 3.D Risk Factors” and “Item 5. Operating and Financial Review and Prospects”.
We are not under any obligation to, and we expressly disclaim any obligation to, update or alter any forward-looking statements contained in this Annual Report whether as a result of new information, future events or otherwise.
|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, 2012, 2013, and 2014 was derived from the Consolidated Financial Statements audited by Paredes, Zaldivar, Burga & Asociados S.C.R.L, member of Ernst & Young Global (“EY Global”), independent registered public accountants. The consolidated financial data as of, and for the years ended, December 31, 2015 and 2016 was derived from the Consolidated Financial Statements audited by Gaveglio Aparicio & Asociados S.C.R.L, member of PricewaterhouseCoopers International Limited, independent registered public accountants.
The report of Gaveglio Aparicio & Asociados S.C.R.L on the Consolidated Financial Statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, and the report of Paredes, Zaldivar, Burga & Asociados S.C.R.L on the Consolidated Financial Statements for the year ended December 31, 2014 appear elsewhere in this Annual Report.
SELECTED FINANCIAL DATA
|Year ended December 31,|
|(Soles in thousands, except percentages, ratios, and per common share data)||U.S. Dollars in|
|INCOME STATEMENT DATA:|
|Net Interest, income and expenses||4,262,748||4,969,897||6,409,804||7,464,894||7,902,841||2,339,791|
|Provision for loan losses, net of recoveries (2)||(996,194||)||(1,230,371||)||(1,715,809||)||(1,880,898||)||(1,785,495||)||(528,631||)|
|Net interest, income after provision for loan losses||3,266,554||3,739,526||4,693,995||5,583,996||6,117,346||1,811,160|
|Commissions and fees||1,944,242||2,259,927||2,521,829||2,644,191||2,771,561||820,575|
|Net gains on sales of securities||267,000||96,228||220,737||248,723||336,759||99,704|
|Net gains on foreign exchange transactions||467,912||534,442||453,405||773,798||698,159||206,704|
|Net earned premiums||1,856,666||2,142,777||2,189,666||1,733,978||1,799,115||532,663|
|Net claims incurred for insurance activities||(1,227,204||)||(1,460,461||)||(1,426,733||)||(1,031,659||)||(1,098,905||)||(325,352||)|
|Profit before exchange difference and income tax||2,596,285||2,642,142||3,217,375||4,314,029||4,952,052||1,466,151|
|Credicorp’s equity holders||2,079,647||1,538,307||2,387,852||3,092,303||3,514,582||1,040,561|
|Number of shares as adjusted to reflect changes in capital|
|Net income per common share attributable to Credicorp’s equity holders (3)||26.18||19.35||30.04||38.91||44.23||13.10|
|Diluted net income per share||26.11||19.31||29.97||38.84||44.15||13.07|
|Cash dividends declared and paid per common share U.S Dollar (4)||2.60||1.90||-||-||-||-|
|Cash dividends declared per common share Soles (4)||-||-||6.77||8.1910||12.2865||-|
|BALANCE SHEET DATA:|
|Total loans (5)||54,752,692||64,361,927||79,509,360||90,328,499||94,768,901||28,238,647|
|Allowance for loan losses (2)||(1,898,496||)||(2,385,958||)||(3,102,096||)||(4,032,219||)||(4,416,692||)||(1,316,058||)|
|Equity attributable to Credicorp’s equity holders||10,628,321||11,831,511||13,979,455||16,128,016||19,656,135||5,857,013|
|Year ended December 31,|
|(Soles in thousands, except percentages, ratios, and per common share|
|Net interest margin – NIM (7)||5.02||%||5.01||%||5.66||%||5. 61||%||5.49||%|
|Return on average total assets - ROAA(8)||2.23||%||1.41||%||1.92||%||2.13||%||2.25||%|
|Return on average equity -ROAE (9)||21.03||%||13.70||%||18.50||%||20.50||%||19.64||%|
|Operating expenses as a percentage of net interest and non-interest income (10)||46.93||%||46.45||%||46.06||%||42.84||%||43.12||%|
|Operating expenses as a percentage of average assets (11)||4.30||%||4.25||%||4.32||%||3.77||%||3.64||%|
|Equity attributable to Credicorp’s equity holders as a percentage of period end total assets||10.22||%||10.37||%||10.37||%||10.37||%||12.57||%|
|Regulatory capital as a percentage of risk weighted assets – BIS ratio (12)||15.16||%||15.05||%||14.99||%||15.95||%||16.33||%|
|Total internal overdue loan amounts as a percentage of total loans (13)||1.73||%||2.23||%||2.53||%||2.56||%||2.77||%|
|Allowance for direct loan losses as a percentage of total loans||3.26||%||3.52||%||3.76||%||4.25||%||4.44||%|
|Allowance for loan losses as a percentage of total loans and other off-balance-sheet items (14)||2.86||%||3.08||%||3.20||%||3.69||%||3.85||%|
|Allowance for direct loan losses as a percentage of total internal overdue loans (15)||187.69||%||157.50||%||148.65||%||166.16||%||160.55||%|
|Allowance for direct loan losses as a percentage of impaired loans (16)||110.45||%||102.44||%||99.22||%||105.35||%||99.90||%|
|(1)||The exchange rate used was 3.356 for balance sheet (end of year) and 3.377583 for Profit and Losses (average of the year).|
|(2)||Provision for loan losses and allowance for loan losses include provisions and reserves with respect to total loans and off-balance sheet items such as letters of credit and stand-by letters. The figure in the Income Statement is net of write-off and recoveries.|
|(3)||As of December 31, 2016, we had 94.4 million common shares issued and outstanding. Of this amount, 14.9 million were held by ASHC, BCP and Grupo Pacifico, and are therefore considered treasury shares. The per-common-share data given considers net outstanding shares (total outstanding common shares net of shares held by BCP, ASHC and Grupo Pacifico) of 79.5 million. See Notes 18 and 29 to the Consolidated Financial Statements.|
|(4)||Dividends based on net income attained for the financial years 2012 and 2013 were declared and paid in U.S. Dollar. Dividends based on net income attained for the financial years 2014 and 2015 were declared in Soles and paid in U.S. Dollar after converting the Soles amount using the weighted exchange rate of PEN/US$ registered by the SBS for the transactions at the close of business on the declaration date. Dividends based on net income attained for the financial year 2016 were declared in Soles and we will be paid in U.S. Dollar on May 12, 2017 using the weighted exchange rate registered by the SBS for the transactions at the close of business on May 10, 2017.|
|(5)||Total loans refer to direct loans plus accrued interest minus unearned interest. In our Consolidated Financial Statements, “loans, net of unearned income” refers to direct loans minus unearned interest plus accrued interest. See Note 7 to the Consolidated Financial Statements. In addition to loans outstanding, we had off-balance-sheet items, including those mentioned in note (2), that amounted to S/11,526.3 million, S/13,036.7 million, S/17,319.5 million, S/19,004.7 million and S/19,832.0 million, as of December 31, 2012, 2013, 2014, 2015, and 2016, respectively. See Note 21 to the Consolidated Financial Statements.|
|(6)||Accrued interests are not included in Total deposits.|
|(7)||Net interest income as a percentage of average interest-earning assets, computed as the average of period-beginning and period-ending balances on a monthly basis.|
|(8)||Net income as a percentage of average total assets, computed as the average of period-beginning and period-ending balances.|
|(9)||Net income as a percentage of average equity attributable to our equity holders, computed as the average of period-beginning and period-ending balances.|
|(10)||Sum of the salaries and employee´s benefits, administrative expenses, depreciation and amortization, acquisition cost, all as percentage of the sum of net interest income, fee income, net gain on foreign exchange transactions, net gain from associates, net earned premiums, gross margin from medical services. Acquisition cost includes net fees, underwriting expenses and underwriting income.|
|(11)||Sum of the salaries and employee´s benefits, administrative expenses, depreciation and amortization, acquisition cost, all as percentage of average assets.|
|(12)||Regulatory capital calculated in accordance with guidelines by the Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (or the BIS II Accord) as adopted by the SBS. See “Item 5. Operating and Financial Review and Prospects – 5.B Liquidity and Capital Resources - (1) Capital Adequacy Requirements for Credicorp.”|
|(13)||Depending on the type of loan, BCP considers internal overdue loans for corporate, large business and medium business loans after 15 days; for overdrafts, small and micro business loans after 30 days; and for consumer, mortgage and leasing loans after 90 days. ASB considers internal overdue loans all overdue loans except for consumer loans, which are considered internal overdue loans when the scheduled principal and/or interest payments are overdue for more than 90 days.|
|(14)||Other off-balance-sheet items primarily consist of stand-by letters and letters of credit. See Note 21 to the Consolidated Financial Statements.|
|(15)||Allowance for direct loan losses, as a percentage of all internal overdue loans and under legal collection loans, with no reduction for collateral securing such loans.|
|(16)||Allowance for direct loan losses as a percentage of loans classified in categories C, D and E. See “Item 4. Information on the Company - 4.B Business Overview - (10) Selected Statistical Information - 10.3 Loan Portfolio - 10.3.7 Classification of the Loan Portfolio.”|
|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 effectively operate and our business strategies. You should consider the risk factors carefully and read them in conjunction with all the information in this document. You should note that the risk factors described below are not the only risks to consider. Rather, these are the risks that we currently consider material. There may be additional risks that we consider immaterial or of which we are unaware, and any of these risks could have similar effects to those set forth below.
(1) Our geographic location exposes us to risk related to Peruvian political, social and economic conditions
Most operations of BCP, Grupo Pacifico, Prima AFP, and a significant part of Credicorp Capital’s operations are located in Peru. In addition, while ASB is based outside of Peru, most of its customers are located in Peru. Therefore, our results are affected by economic activity in Peru. Changes in economic conditions, both international and domestic, or government policies can alter the financial health and normal development of our business. The changes may include, but are not limited to, high inflation, currency depreciation, confiscation of private property and financial regulation. Similarly, terrorist activity, political and social unrest as well as 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 by 1995 Fujimori was re-elected. The administration was accused of authoritarian behavior, especially after closing Congress in 1992 and crafting a new constitution. The administration also faced several corruption charges. Shortly after starting a controversial third term, Fujimori resigned the presidency and a transitional government led by Valentin Paniagua called for elections to be held in April 2001. After spending several years in Japan, Fujimori was brought back to Peru and was sentenced in 2009 to 25 years in prison for human rights violations. The governments that have been elected since 2001 are those of Alejandro Toledo, from 2001 to 2006; Alan Garcia, from 2006 to 2011; Ollanta Humala from 2011 to 2016; and Pedro Pablo Kuczynski, whose current term began in 2016 and ends in July 2021 (as described below). These administrations, despite different policy priorities, have been characterized by political fragmentation (more than ten different political organizations have nominated candidates for President in each of the four elections since 2001), low popularity (usually around 20% - 30% approval ratings) and mostly cordial relationships with neighboring countries.
Humala’s presidency ended on July 28, 2016. The first round of presidential elections was held on April 10, 2016. A second round between candidates Ms. Keiko Fujimori and Mr. Pedro Pablo Kuczynski was necessary as none of the candidates obtained more than 50% of the valid votes. The second round was held on June 5, 2016, and Pedro Pablo Kuczynski was elected president for the 2016-2021 term with 50.12% of the vote. Kuczynski’s presidential period started in July 28, 2016, with high economic expectations due to the high skilled technical team that backs him and the government. However, the Lava-Jato corruption case that started in Brazil is starting to implicate and put on hold on-going infrastructure projects in Peru started during the last two governments. This halt in big-scale projects could affect Peru’s GDP and deteriorate the financial situation of some of Credicorp’s clients.
During the last 16 years, Peru has experienced a period of relative economic and political stability, especially compared to the period between 1980 and 2000. This stability has been reflected in Peru’s compounded annual growth rate of 5.2% (2001-2016); four consecutive democratic transitions; a relatively consistent free-market approach to economic policy; and growth in GDP per capita, which reached US$5,727 in 2016 (equivalent to S/ 19,220 at an exchange rate of S/ 3.356), according to the International Monetary Fund (IMF). Nevertheless, political risk is present in any presidential election because it is possible that a radical candidate with more interventionist economic policies could prevail. Ollanta Humala was elected in 2011 on a far-left policy platform, which was cast aside after he assumed office. Moreover, in the 2016 first round Presidential Elections, candidate Verónika Mendoza, also on the left policy platform, came in third place amid promises of curbs on mining projects and renegotiating gas export contracts. Hence, there is a sizeable portion of the electorate still demanding an economy that is more reliant on public spending. Therefore, the risk of political and economic change should be carefully considered.
Peru also has a history of domestic terrorism. Between the late 1970s and the early 1990s, both Shining Path (Sendero Luminoso in Spanish) and Movimiento Revolucionario Túpac Amaru (“MRTA”) conducted a series of terrorist attacks that caused thousands of casualties and affected normal political, economic and social activities in many parts of the country, including Lima, the capital of Peru. In 1992, the leader of Shining Path, Abimael Guzmán, was captured and later sentenced to life in prison (a new trial affirmed the sentence in 2006). By the end of the 1990’s, most other members of Shining Path, as well as MRTA, were also captured and sentenced to prison terms. However, in late 1996 a group of MRTA members stormed the residence of Japan’s Ambassador to Peru and held a group of politicians, diplomats and public figures hostage for approximately four months. In April 1997, a military operation put an end to the hostage situation: all 14 terrorists died in the confrontation while all but one hostage survived. Since then, and for the following 19 years, terrorist activity in Peru has been mostly confined to small-scale operations in the Huallaga Valley and the VRAEM (Valleys of Rivers Apurimac, Ene and Mantaro) areas, both in the Eastern part of the country. In 2012, the Peruvian government captured Florindo Flores, one of the last remaining leaders of Shining Path and thus gravely weakened the organization’s activities in the Huallaga Valley.
Despite these efforts, terrorist activity and the illegal drug trade continue to be key challenges for Peruvian authorities. The Huallaga Valley and VRAEM constitute the largest areas of coca cultivation in the country and thus serve as a hub for the illegal drug trade. Any violence derived from the drug trade or a resumption of large-scale terrorist activities could hurt our operations.
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, represents approximately 12% of Peru’s GDP and approximately 59% of the country’s exports, while oil and gas represents 2% of Peru’s GDP and 6% of Peru’s exports according to the Peruvian Central Bank (BCRP by its Spanish initials). On several occasions, local communities have opposed these operations and accused them of polluting the environment and hurting agricultural and other traditional economic activities. In late 2011 and throughout 2012, social and political tension peaked around Conga, a gold project in the northern region of Cajamarca. The launch of Conga, which involved investments of approximately US$4.5 billion, failed as a result of the protests. The government commissioned an Environmental Impact Study developed by international experts which introduced recommendations for the project.
Therefore, delays or cancellations of mining projects could reduce economic growth and business confidence, thereby hurting the financial system both directly (many mining projects are at least partially financed by local financial institutions) and indirectly (overall economic activity could decelerate).
(2) Foreign exchange fluctuations and exchange controls may adversely affect our financial condition and results of operations
Since January 1, 2014, the functional currency of our financial statements has been the Sol; however, Credicorp’s subsidiaries generate revenues in Soles, U.S. Dollars, Bolivian Pesos, Colombian Pesos, and Chilean Pesos. BCP, BCP Bolivia, ASB, Credicorp Capital Colombia and IM Trust are particularly exposed to foreign exchange fluctuations. As a result, the fluctuation of our functional currency against other currencies could have an adverse impact on our results. In addition, any exchange controls implemented in the countries in which we operate may adversely affect our financial condition and results of operations.
The Peruvian government does not impose restrictions on a company’s ability to transfer Soles, U.S. Dollars or other currencies from Peru to other countries, nor 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. See “Item 10. Additional Information- 10.D Exchange Controls”.
Peru’s foreign reserves currently compare favorably with those of many other Latin American countries. However, a reduction in the level of foreign reserves would impact the country’s ability to meet its foreign currency-denominated obligations. A decline in Peruvian foreign reserves to inadequate levels, among other economic circumstances, could lead to currency depreciation or a volatility of short-term capital inflows.
We also face foreign exchange risk on credit that we extend through our banking business, which is primarily conducted through BCP. To address this risk, BCP’s Foreign Exchange Credit Risk Management identifies borrowers that may not meet their debt obligations due to currency mismatches by applying sensitivity analyses of the credit rating of companies and the debt-service capacity of individuals. Then, we classify borrowers according to their level of foreign exchange credit risk exposure. We closely monitor these clients and, on an ongoing basis, we revise our risk policies to underwrite loans as well as to manage our portfolio of foreign currency denominated loans; however, these policies may not sufficiently address our foreign exchange risk, resulting in adverse effects on our financial condition and results of operation.
We have taken steps to manage the gap between our foreign currency-denominated assets and liabilities in several ways, including closely matching their volumes and maturities. Nevertheless, a sudden and significant depreciation of the Sol could have a material adverse effect on our financial condition and results of operations. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk - (10) Foreign Exchange Risk”.
(3) 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 bring forth a civil suit under the United States securities laws in United States courts. We have 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. Also, judgments of United States courts obtained in actions under the United States federal securities laws may not be enforceable. Similarly, our Bermuda counsel 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 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 any willful negligence, willful default, fraud or dishonesty on the part of the officer or director.
(4) Our ability to pay dividends to shareholders and to pay corporate expenses may be adversely affected by the ability of our subsidiaries to pay dividends to us
As a holding company, our ability to make dividend payments, if any, and to pay corporate expenses will depend upon the receipt of dividends and other distributions from our operating subsidiaries. Our principal operating subsidiaries are BCP, BCP Bolivia, Grupo Pacifico, ASB, Prima AFP and Credicorp Capital. If our subsidiaries do not have funds available, or are otherwise restricted from paying us dividends, we may be limited in our ability to pay dividends to shareholders. Currently, despite the minimum capital requirements, there are no restrictions on the ability of BCP, BCP Bolivia, Grupo Pacifico, ASB, Prima AFP or Credicorp Capital to pay dividends abroad. In addition, our right to participate in the distribution of assets of any subsidiary, upon any subsidiary’s liquidation or reorganization (and thus the ability of holders of our securities to benefit indirectly from such distribution), is subject to the prior claims of creditors of that subsidiary, except where we are considered an unsubordinated creditor of the subsidiary. Accordingly, our securities will effectively be subordinated to all existing and future liabilities of our subsidiaries, and holders of our securities should look only to our assets for payments.
In addition, the value of any dividend paid by our operating subsidiaries that declare dividends in a currency different from Credicorp’s dividends (e.g. ASB, BCP Bolivia, IM Trust, and Credicorp Capital Colombia) is exposed 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.
(5) Regulatory changes 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 mainly 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) and the Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates (Reglamento para la Supervisión Consolidada de los Conglomerados Financieros y Mixtos).
The SBS and the Peruvian Central Bank supervise and regulate BCP’s operations. Peru’s constitution and the SBS’s statutory charter grant the SBS the authority to oversee and control banks and other financial institutions, including pension funds and insurance companies. The SBS and the Peruvian Central Bank have general administrative responsibilities over BCP, including defining capital and reserve requirements. In past years, the Peruvian Central Bank has, on numerous occasions, changed the deposit reserve requirements applicable to Peruvian commercial banks as well as the rate of interest paid on deposit reserves and the amount of deposit reserves on which no interest is payable by the Peruvian Central Bank. Such changes in the supervision and regulation of BCP may adversely affect our results of operations and financial condition. See “Item 4. Information on the Company — 4.B Business Overview — (9) Supervision and Regulation — 9.2 BCP and Mibanco”. Furthermore, changes in regulation related to consumer protection may also affect our business.
The Superintendency of the Securities Market (Superintendencia del Mercado de Valores or SMV by its Spanish initials) also supervises some of our subsidiaries such as BCP, Credicorp Capital Sociedad Agente de Bolsa (Credicorp Capital Bolsa) and Credicorp Capital Sociedad Administradora de Fondos (Credicorp Capital Fondos).
In Colombia, we are subject to supervision and regulation through the Superintendency of Securities and Insurance (SFC - Superintendencia Financiera de Colombia) and the Colombia´s Stock Market Self-regulator (AMV - Autorregulador del Mercado de Valores de Colombia). In Chile, we are subject to supervision and regulation through the Superintendency of Securities and Insurance from Chile (SVS - Superintendencia de Valores y Seguros). See “Item 4. Information on the Company — 4.B Business Overview — (9) Supervision and Regulation — 9.5 Credicorp Capital”.
Changes in U.S. laws or regulations applicable to our business, or the adoption of new regulations, such as under the Foreign Account Tax Compliance Act (FATCA) or the Dodd-Frank Wall Street Reform and Consumer Protection Act, may have an adverse effect on our financial performance and operations.
We are also regulated by the United States Federal Reserve System, which shares its regulatory responsibility with the State of Florida Department of Banking and Finance - Office of Financial Regulation, with respect to BCP’s Miami agency, and by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA), with respect to Credicorp Capital Securities, a U.S. broker dealer.
Similarly, we are regulated by other governmental entities in other jurisdictions. In the Cayman Islands, we are subject to the supervision and regulation of the Cayman Islands Monetary Authority (CIMA). In Bolivia, we are subject to the supervision of the Financial System Supervisory Authority (ASFI by its Spanish initials) that has assumed all regulatory functions held previously by the Superintendency of Banks and Financial Entities and the Superintendency of Pensions, Securities and Insurance.
Finally, in Panama, we are subject to the supervision of the Superintendency of Banks of Panama and the regulatory framework set forth in the Decree Law 9 of February 25, 1998. Changes in the supervision and regulation of our subsidiaries in other countries may adversely affect our results of operations and financial condition.
On February 15, 2011, the Peruvian government enacted Law No. 29663. On July 21, 2011, Law No. 29663 was amended by Law No. 29757. These laws partially modified the country’s income tax regime by subjecting to taxation in Peru capital gains derived from certain types of indirect transfers of shares and by expanding the type of income that will qualify as Peruvian-source income. Under the 2011 laws, any transfer of shares of a non-resident entity will be subject to taxation in Peru (30% or 5%) if at any point during the 12 prior months to such transfer:
|·||50% or more of the fair market value of the transferred foreign shares is derived from shares or participation rights representing the equity capital of one or more Peruvian entities. There is a rebuttable presumption that the threshold is met if the non-resident entity is a resident in a tax heaven; and/or|
|·||The transferred shares represent at least 10% or more of the equity capital of the non-resident entity.|
At the same time, the following two new obligations were imposed on Peruvian domiciled companies, which have certain “economic relationships” with non-Peruvian persons:
|·||Reporting to the Peruvian Tax Administration (SUNAT by its Spanish initials) transfers of its shares or transfers of the shares of the non-Peruvian domiciled company that is the owner of its shares; and|
|·||Each Peruvian domiciled company is jointly liable for the income tax not paid by a non-Peruvian domiciled transferor that is directly or indirectly linked to the domiciled company (whether by means of control, management or equity participation) in connection with the transfer of the domiciled company’s shares, except in the event that the purchaser or acquirer of the shares is a Peruvian individual or entity.|
Supreme Decree N° 275-2013-EF enacted by the Peruvian Government on November 7, 2013, defined these certain “economic relationships”. A Peruvian domiciled company is considered to be economically related to a non-Peruvian domiciled transferor, if, at any time during the 12-month period prior to the transfer, one of the following circumstances occurs:
|·||The non-Peruvian domiciled transferor owns more than 10% of the equity of the Peruvian domiciled company, directly or indirectly.|
|·||More than 10% of the equity of the Peruvian domiciled company and the non-Peruvian domiciled transferor are owned by the same shareholders.|
|·||The Peruvian domiciled company and the non-Peruvian domiciled transferor have one or more common directors, managers or administrators that have the power to decide financial, operational and commercial matters.|
|·||The Peruvian domiciled company and the non-Peruvian domiciled transferor consolidate their financial statements.|
|·||The non-Peruvian domiciled transferor has dominant influence over the decisions of the administrative bodies of the Peruvian domiciled company or vice versa.|
The Chilean statutory Income Tax rate to resident legal entities is 25% under the attribution regime and 27% under the semi-integrated regime (25.5% for 2017).
On the other hand, foreign resident individuals or legal entities are subject to a 35% dividend withholding tax. This tax applies at the moment of the effective remittance of the dividend and the corporate income tax can be used as a credit. In case of non-treaty country resident shareholders, the corporate tax credit is limited to 65%. 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 decided to choose the “Income Tax attributed system”. The additional tax rate has not been changed.
The Colombian statutory income Tax rate is 34% (33% as from 2018 and onwards). A temporary income surtax of 6 and 4 percent was introduced for fiscal year 2017 and 2018, respectively. That surtax is not applied on the first USD 280,100 approximately.
In addition, as from 2017 distribution of dividends to non-residents is subject to a 5 percent withholding tax. The withholding tax on dividends would be increased to 35 percent if dividends are distributed out of previously untaxed earnings, after this calculation the 5 percent withholding tax is applied.
Any profits up to December 31st, 2016, is not subject to the 5 percent withholding tax on dividends, even though the distribution occurs as from January 1st, 2017, onwards.
Our insurance business is carried out by Pacifico Seguros Generales and Pacifico Vida which together are 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 would affect its business will be adopted in the future.
On April 14, 2016, the Congress of the Republic of Peru (“Congress”) approved a law that modifies some aspects of the nation’s private pension system. The new law, which was promulgated on April 21, 2016, might continue to have a negative effect on part of Pacifico’s annuities business, which is composed of retirement and disability & survivorship. Retirement annuities, which represents approximately 7.9% of Pacifico’s total gross premiums earned in 2016, is the only business line that has been affected by the change in regulation [thus far].
Grupo Pacifico is also unable to predict the timing of the adoption of any new laws and the effects any such new laws or regulations would 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 accurately assess the risks that it assumes 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, in the case of life insurance reserves: changes in mortality/longevity rates, interest rates, persistency rates and regulation; and 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.
Even though private pension fund managers have always been closely regulated by the SBS, in 2012, the Peruvian government adopted the Law to Reform the Private Pension System (SPP by its Spanish initials). The reform aimed to achieve increased competition and efficiency and to reduce administration costs in the SPP. The law sets forth a new process by which individuals, which are referred to as “affiliates”, may become beneficiaries affiliated with the SPP. The Law to Reform the SPP will be implemented in phases. See “Item 4. Information on the Company – 4.B. Business Overview – (9) Supervision and Regulation – 9.7 Prima AFP”.
(6) A deterioration in the quality of our loan portfolio may adversely affect our results of operations
Given that a significant percentage of our income is related to lending activities, a significant deterioration of loan quality would have a material adverse effect on our business, financial condition and results of operations. We are subject to concentration default risks in our loan portfolio. Problems with one or more of our largest borrowers may adversely affect our financial condition and results of operations. While loan portfolio risk associated with lending to certain economic sectors or clients in certain market segments can be mitigated through adequate diversification, our pursuit of opportunities, in which we can charge higher interest rates, and thereby increase revenue, may reduce diversification of our loan portfolio and expose us to greater credit risk.
In addition, loan concentration in commercial sectors is particularly salient in Peru and significant deterioration in such sectors may have a material adverse effect on our business, financial condition and results of operations. Our current strategy includes increasing our exposure to market segments with heightened credit risk, including middle-market and consumer segments, such as unsecured small companies and consumer loans and consumer mortgages, which have higher risk profiles as compared to loans to large corporate customers. Given the changing composition of our loan portfolio and possible adverse changes in the environment in which we operate, our future results may differ significantly from our past results.
(7) Our banking and capital market operations in neighboring countries expose us to risk related to political and economic conditions
BCP Bolivia, Credicorp Capital Colombia and IM Trust 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 2016, due to: (i) weak global demand, (ii) a fall in export prices, and (iii) sluggish investment. Significant changes to Bolivian, Colombian and Chilean political and economic conditions could have an adverse effect on our business, financial condition and results of operations.
Most of the operations and customers of BCP Bolivia, the Group’s commercial bank in Bolivia, are located in that country. Accordingly, our results of operations and financial condition depend on Bolivia’s economic activity and political environment.
In October 2014, Evo Morales was reelected as President of Bolivia for a third term for a period of five years. During this third term, the government is expected to continue the economic policies and reforms of the first two presidential terms of Mr. Morales, which concentrated on redistribution programs through different bonus schemes, on deepening the industrialization of strategic economic sectors and on closing Bolivia’s infrastructure gap. Given the government’s high dependence on income from exports of natural gas to Brazil and Argentina, declines in the price of the gas exported (which is linked to the price of oil) could strain government finances and reduce its ability to continue the high levels of public spending of the last several years.
In February 2016, the government called up for a referendum on whether President Evo Morales could serve as president for a fourth term. With 51.30% votes against the approval of a third term, Movimiento al Socialismo, (President Morales’ political party) will have to nominate a new presidential candidate for the next presidential election.
During 2016, Bolivia’s macroeconomic indicators continued the positive trend observed over the last several years. In 2016: (i) GDP grew 4.3%, still one of the highest growth rates in South America but below the 4.8% recorded in 2015; (ii) inflation rate remained stable at 4%, below the Central Bank´s target of 5.3% but over the 2015 inflation rate of 2.9%. Nevertheless, in 2016 for a second consecutive year, Bolivia experienced twin deficits due to a decline in the revenue from gas exports to Brazil and Argentina, which also was the primary cause for the international reserves to decline by 23% in 2016. As of December 2016, international reserves represented 27% of GDP.
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 Colombian economy has continued to adjust to lower national income following the sharp drop in oil prices since mid-2014. Economic activity during fiscal year 2016 remained slow evidenced by the decline in public and private spending and a contraction in investments. Although inflation was as low as 5.8% in December of 2016 when compared to 6.8% for 2015, it reached a 16-year high of 9% by mid-year as a result of the El Niño weather phenomenon’s effect on food prices and the pass-through of the strong Colombian peso depreciation to tradable goods. Inflation averaged 7.5% du, which greatly impacted household consumption as disposable income was down. Public spending and investment were negatively impacted by both the need of fiscal consolidation after the collapse of oil-related revenues and the 2016 political cycle, as 2016 was the first year of new terms for regional and local governments, which is usually characterized by slow budget execution. In 2016 GDP growth stood at approximately 1.8% as compared to 3.1% in 2015. In addition, a tax reform went into effect this year, which the government expects will account for 0.7% of GDP in 2017, largely as result of a 3% increase in the VAT. Overall, the government expects that the fiscal deficit will fall from 4.0% of GDP in 2016 to 3.3% in 2017.The tax reform lowers the corporate tax rate to 40% for 2017 as compared to 42% under the prior law.
Chilean GDP grew by 1.5% in 2016 as compared to 2.3% GDP growth for 2015. Overall, economic activity has remained sluggish amid very low sentiment, with consumer and business confidence indicators being pessimistic for 31 and 34 months in a row, respectively. This has been the result not only of the reduction in mining investment and the sharp decline in copper prices, both of which have had negative impacts on the economy, but is also a result of greater uncertainty created by the reforms implemented and proposed by the current government, including tax, labor, education, pension, and constitutional reforms. In general, the lack of clarity regarding future reforms (pension and constitutional changes are yet to be defined) has continued to take a toll on expectations. As a result, investment declined in 2016 for the third year in a row, while private consumption continued to post growth rates close to 2%. In addition, the need for fiscal consolidation after the strong increase in both the fiscal deficits and public debt in the last five years, has also contributed to lower economic performance. Presidential elections to be held in November 2017 will be a key factor for sentiment and economic activity ahead. In addition, Chile faced local government elections last October with the right-leaning “Chile Vamos” (“Go Chile”) emerging as the winner with 38.5% of total votes, gaining support from the most important counties such as Santiago, Providencia, Nuñoa and Maipu. The left-wing “Nueva Mayoria” (“New Majority”) had 37% of the vote, reflecting the government’s low popularity.
(8) Our trading activities expose us to volatility in market prices, declines in market liquidity or fluctuations in foreign currency exchange rates, which may result in losses that could have a material adverse effect on our business, financial condition and results of operations
The securities and derivative financial instruments in our trading portfolio may cause us to record gains or losses, when sold or marked to market, and may fluctuate considerably from period to period due to numerous factors that are beyond our control, including foreign currency exchange rates, interest rate levels, the credit risk of our counterparties and general market volatility. These losses from trading activities could have a material adverse effect on our business, financial condition and results of operations. In this sense, risk is inherent in the Group’s trading activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s continuing profitability.
(9) Natural disasters in Peru could disrupt our businesses and affect our results of operations and financial condition
We are exposed to natural disasters in Peru, such as earthquakes, floods and mudslides. Earthquakes in Peru are common occurrences as the country is located in a seismic zone: the interface between the Nazca and South American tectonic plates. Peru has been adversely affected by earthquakes in the past, including a 7.9 magnitude earthquake that struck the central coast of Peru in 2007. The country is also vulnerable to El Niño Phenomenon, which provokes floods and mudslides in the north and central Andean regions. Due to its very strong intensity, the 1997-1998 El Niño destroyed crops and infrastructure equivalent to 2.2% of GDP. Heavy rains caused by El Niño Costero have severely damaged infrastructure in early 2017. This phenomenon will affect negatively Peru’s GDP and may affect the financial situation of some of Credicorp’s clients.
A natural disaster of this nature or any other type of disaster could impair our operational capacity. Our business continuity plans include emergency response, disaster recovery, operations continuity, crisis management, data protection and recovery, and critical systems redundancy. Although we test our business continuity plans annually, these plans may prove to be ineffective which could have a material adverse effect on our ability to carry out our businesses, especially if an incidence or disaster affects computer-based data systems or damages customer or other data. In addition, if a significant number of our employees were affected by the natural disaster, our ability to conduct business could be impaired.
Our subsidiary Grupo Pacifico is further exposed to risks associated with natural disasters. To protect Grupo Pacifico’s solvency and liquidity, our insurance business historically has obtained reinsurance for a substantial portion of its earthquake-related risks through automatic quota share and excess loss treaties; however, there can be no assurance that a major catastrophe would not have a material adverse impact on our results of operations or financial condition or that our reinsurance policies will be an effective hedge against our exposure to risks resulting from natural disasters.
(10) We operate in a competitive banking environment that may limit our potential to grow, particularly in the medium term, as more foreign banks establish or expand operations in Peru
BCP has experienced increased competition, including increased pressure on margins. This is primarily a result of the following:
|•||Highly liquid commercial banks in the market;|
|•||Local and foreign investment banks with substantial capital, technology, and marketing resources; and|
|•||Local pension funds that lend to BCP’s corporate customers through participation in those customers’ securities issuances.|
Larger Peruvian companies have gained access to new sources of capital through the local and international capital markets, and BCP’s existing and new competitors have increasingly made inroads into the higher margin, middle market and retail banking sectors. Such increased competition, with entrants who may have greater access to capital at lower costs, has affected BCP’s loan growth as well as reduced the average interest rates that BCP can charge its customers.
Competitors may also dedicate greater resources to, and be more successful in, the development of technologically advanced products and services that may compete directly with BCP’s products and services. Such competition would adversely affect the acceptance of BCP’s products and/or lead to adverse changes in the spending and saving habits of BCP’s customer base. If competing entities are successful in developing products and services that are more effective or less costly than the products and services developed by BCP, BCP’s products and services may be unable to compete successfully. BCP may not be able to maintain its market share if it is not able to match its competitors’ loan pricing or keep pace with their development of new products and services. Even if BCP’s products and services prove to be more effective than those developed by other entities, such other entities may be more successful in marketing their products and services than BCP because of their greater financial resources, higher sales and marketing capacity or other similar factors.
As a result of Peru’s strong economic growth, which has outpaced growth by nearby countries, several banks have sought and obtained authorization to open representative offices in Peru. With the increased competition, more individuals will have access to credit, and the percentage of the population using banking services will likely climb. This will eventually put downward pressure on interest rates. Any negative impact on BCP as a result of increased competition could have a material adverse effect on our results of operations and financial condition. See “Item 4. Information on the Company – 4.B. Business Overview – (6) Competition”.
(11) Economic and market conditions in other countries may affect the Peruvian economy and the market price of Peruvian securities.
Economic conditions in other countries and developments in international financial markets can affect Peru’s economic growth. The country’s exports are highly concentrated in the mining industry; with taxes levied on the sector representing approximately 1.6% of the Peruvian government’s total revenues in 2016 (they peaked at 14% in 2007). In addition, gold and copper exports represented 47% of all shipments in 2016. 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, turning a US$6.3 billion trade surplus in 2012 into a US$3.2 billion trade deficit in 2015. In contrast, 2016 registered a US$ 1.7 billion trade surplus due to a US$ 2.0 billion increase in copper exports (the exported volume of copper increased 42.3%) and US$ 0.7 billion increase in gold exports (average export prices of gold increased 7.9%).
In addition to changes in prices, Peru is also vulnerable to fluctuations in foreign demand, especially from the United States and China. A more pronounced economic slowdown in China over the next few years poses a risk to Peruvian growth as it may hurt exports and foreign direct investment. Lower growth in Latin America can also hurt the Peruvian economy and our business, especially in the cases of Chile, Colombia, Bolivia and Panama, where we have operations, as well as Brazil and Mexico, which have a broad impact throughout the region because of their size. Moreover, regarding the Trans-Pacific Partnership (TPP), after long held negotiations between the Trade ministers of the 12 Asia-Pacific countries, a final agreement was signed on February 4th, 2016. The free trade agreement would enter into force 60 days after the date in which all original signatories have notified the Depositary of the Agreement (responsible for receiving and disseminating documents) the approval of the amendment in accordance with their respective applicable legal procedures. However, U.S. elect president, outlined that United States would not ratify the agreement. Hence, the state of the TPP remains uncertain in execution.
Finally, financial conditions in global markets also affect the economy, affecting interest rates for local corporate bonds and influencing the exchange rate. Monetary tightening in developed economies, particularly on the part of the Federal Reserve System in the United States, could affect economic activity in Peru to the degree that it strengthens the dollar and increases interest rates, thereby reducing access to funding for some local businesses. Also, since the Peruvian economy still has some level of dollarization (29.2% of loans and 42.6% of deposits as of December 2016), potential balance sheet effects should also be contemplated since a higher exchange rate could increase debt burdens for individuals and businesses that have taken loans in dollars but earn their income in local currency.
However, the BCRP has taken steps to foster de-dollarization and thus reduce this vulnerability by:
|·||imposing additional foreign currency reserve requirements on financial institutions whose balance of total loans in dollars (excluding loans for foreign trade operations) at December 2015 were above 90% of the balance recorded in September 2013; the target for December 2016 was 80% of the balance of September 2013;|
|·||imposing additional foreign currency reserve requirements on financial institutions whose balance of car loans and mortgage loans in dollars at December 2015 were above 85% of the balance in February 2013; the target for December 2016 was 70% of the balance recorded in February 2013;|
These targets were complemented by the addition of two new types of Currency Report Operations (known as Repo). The instruments complemented the de-dollarization process by:
|·||providing liquidity in local currency to financial institutions for an amount up to 20% of such institution’s Total Liabilities Subject to Reserve Requirements (TOSE by its Spanish Initials) in foreign currency through a Repo - Expansion. However, under no circumstance, can the median reserve requirements decrease below 25%;|
|·||providing foreign currency to financial institutions at spot prices in order to finance the re-denomination of their foreign currency loans through a Repo - Substitution;|
In November 2015, and effective as of December 2016, the Central Bank expanded its credit de-dollarization program, adjusting the present limits used to calculate the rate of the additional reserve requirements based on the reduction of a bank’s foreign currency exposures. The current minimum reduction is 20% of the banks’ total exposure as of September 2013, while in the case of car and mortgage loans, the minimum reduction required by December 2016 is 30% of the February 2013 exposures. Thereafter, the reduction for car loans and mortgage loans will increase by 10% at the end of each year. No further changes were ruled by the BCRP to the credit de-dollarization program during 2016.
In such context, BCP achieved the targets established by the Central Bank in 2016:
|(i)||By December 2016, the total loans in dollars (excluding loans for foreign trade operations) were 71.1% of the balance of September 2013, below the 80% target established by the BCRP;|
|(ii)||By December 2016, car and mortgage loans in dollars were 62.4% of the balance of February 2013, below the 70% target of the BCRP.|
(12) A failure in, or breach of, our operational or security systems could temporarily interrupt our businesses, increasing our costs and causing losses.
We have defined and implemented governance with specific roles for risk and control assessment, monitoring and awareness programs, security initiatives, business objectives, corporate alignment and regulatory compliance with banking, credit card, insurance and pension fund industry requirements in Peru, Bolivia, Chile, Colombia, Panama, the Cayman Islands and the United States of America.
Although we have a strong IT infrastructure and high-skilled professionals managing IT operations, our risk exposure could be significant. We are still vulnerable to failure of our operational systems. This could temporarily interrupt our business, increasing our costs and causing losses. Temporary interruptions or failures in hardware and software that support our business and customers’ transactions could result in regulatory fines, penalties, and reputational loss.
Credicorp has not experienced any material losses related to cyber-attacks or operational stability. Credicorp is continuously working and investing resources in maintaining and updating control processes in order to prepare and adapt to new technologies. However our use of the internet and telecommunications technologies to conduct financial transactions, as well as the increased sophistication and activities of organized criminals, hackers and other external parties can impact the confidentiality, integrity and availability of critical information.
Credicorp have also recovery strategies (disaster recovery plans and operational continuity plans) and response plans (incident management and crisis management) that, in the face of risk situations that interrupt the main products and services, may mitigate the Financial, legal and reputational impact. We are aware that threats can be presented but the company is constantly working to strengthen response mechanisms and recovery strategies if new disruption scenarios may arise, in order to be more resilient to this kind of events.
(13) Acquisitions and strategic partnerships may not perform as expected, which could have an adverse effect on our business, financial condition and results of operation.
Acquisitions and strategic partnerships, including those made in our investment banking and insurance businesses may not perform as expected since our assessment could be based on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions, investments and alliances may not produce the anticipated synergies or perform in accordance with our expectations, which could have an adverse effect on our business, financial condition and results of operation.
(14) 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.
|4. A||History and development of the company|
Credicorp Ltd. is a limited liability company that was formed in Bermuda on October 20, 1995 to act as a holding company, coordinate the policy and administration of our subsidiaries BCP, ASB, BCP Bolivia, Grupo Pacifico and Credicorp Capital. We currently hold, directly and indirectly, 97.7% of BCP, 100% of ASHC, 95.84% of BCP Bolivia and 98.5% of Grupo Pacifico. We acquired the common shares of each entity through an exchange offer. See “Item 4. Information on the Company — 4.C Organizational Structure”.
Our principal activity is to coordinate and manage the business plans of our subsidiaries in an effort to implement a universal banking service mainly in Peru, Bolivia, Colombia and Chile and to develop our insurance business. Though we primarily focus on the aforementioned countries, we also make limited investments in other countries in the same region. Our registered address is Clarendon House, 2 Church Street, Bermuda. The management and administrative office (i.e., principal place of business) of our subsidiary, Banco de Credito del Peru, is located at Calle Centenario 156, La Molina, Lima 12, Peru, and the phone number is 51-1-313-2000.
As of December 31, 2016, our total assets were S/156.4 billion and our net equity was S/20.1 billion. Our net income attributable to our equity holders in 2014, 2015 and 2016 was S/2,387.9 million, S/3,092.3 million, and S/3,514.6 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 Credicorp Capital Colombia, 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. (IM Trust, Corredores de Bolsa), an investment banking entity established in Santiago, Chile, for approximately US$131.5 million (approximately S/447.1 million), of which US$110.9 million was paid in cash at the acquisition date and US$20.6 million was paid in cash in July 2013. For our investment banking operations in Peru, we created Credicorp Capital Peru S.A.A. (formerly BCP Capital), a company incorporated in Peru that was established in April 2012 through the split of an equity block of BCP. This split resulted in a reduction of BCP’s assets, liabilities and net equity in an amount of S/184.7 million, S/46.7 million and S/138.0 million, respectively. Assets transferred included Credicorp Capital Bolsa, Credicorp Capital Titulizadora, Credicorp Capital Fondos and BCP’s investment banking activities. The equity block split had no effect on Credicorp’s consolidated financial statements; no gains or losses arose from it.
On September 25, 2014, Credicorp announced that its subsidiary PPS had reached an initial agreement with Banmedica S.A. (“Banmedica”, a Santiago Stock Exchange listed company with a market capitalization of US$ 1,317 million as of September 25th, 2014), to develop businesses in the healthcare industry in Peru and further providing medical services, health insurance and health plans. This transaction reflects Credicorp’s strategy to capitalize on PPS’s in-depth knowledge of the Peruvian market and Banmedica’s extensive know-how and successful experience in the health care industry. On December 30, 2014, PPS signed the final agreement with Banmedica to enter into the healthcare market in Peru. Based on this agreement, Credicorp lost control of its subsidiary Pacifico Entidad Prestadora de Salud (Pacifico EPS), which became an associate. This agreement came into effect on January 1, 2015. The agreement has two major parts:
|(i)||both parties agreed to develop healthcare plans and medical services in Peru, exclusively through Pacifico EPS and its subsidiaries. Banmedica contributed their Peruvian subsidiaries Clinica San Felipe and Laboratorios ROE, plus US$32 million in cash to obtain 50% interest in the capital stock of Pacifico EPS.|
|(ii)||Banmedica paid US$25 million in cash to PPS to obtain 50% of the results related to PPS’s health insurance business in Peru. The distributable income is held in equal parts (50/50) and it is determined based on a formula agreed to by both parties in the contract. Health insurance business, which is a line of business of Credicorp, via its subsidiary Pacifico, who assumes the risk insurance.|
This transaction resulted in profits of S/99 million, which is recognized in “Net gain on sales of securities” in the consolidated statements of income.
At Grupo Credito’s shareholder meeting held on February 11, 2015, shareholders approved the terms of split of equity block of Grupo Credito in favor of Credicorp Capital Holding Peru S.A., a company incorporated on September 3, 2014 and a subsidiary of Credicorp Capital Ltd. (“Credicorp Capital”). The equity block was composed of the investment that Grupo Credito held in Credicorp Capital Peru, whose net equity was approximately S/511.3 million as of May 31, 2015. As a result, Grupo Credito reduced its share capital by approximately S/491.7 million. Credicorp Capital Holding Peru also increased its share capital by about S/491.7 million and issued 491,686,830 new shares with a nominal value of S/1.00 each in favor of Credicorp Ltd (shareholder of Grupo Credito). In October 2015, Credicorp’s Board of Directors approved the transfer of the shares to Credicorp Capital, finishing the reorganization process to regroup, under Credicorp Capital, all the investments in subsidiaries related to capital markets.
On March 20, 2014, Credicorp, through its subsidiary Edyficar, acquired a 60.68% stake in Mibanco, Banco de la Microempresa S.A. (Mibanco), a local bank that specialized in the micro and small entities sector, for approximately S/504.8 million or US$179.5 million, in cash. On April 8, 2014, Grupo Credito S.A. and Edyficar, subsidiaries of Credicorp Ltd., acquired from the International Finance Corporation (IFC) an additional 6.5% stake in Mibanco (5% through Grupo Credito S.A. and 1.5% through Edyficar) for approximately S/54.1 million. In addition, Credicorp’s subsidiaries made a Public Tender Offer (Oferta Pública de Adquisición or OPA by its Spanish initials) to non-controlling shareholders of Mibanco pursuant to the Capital Markets Law. Credicorp acquired an additional 18.56% of Mibanco’s capital stock for approximately S/153.6 million; and in September 2014, acquired an additional 1.19% for approximately S/10 million. As of December 31, 2014, Credicorp held 86.93% of Mibanco’s capital stock and paid an aggregate of approximately S/722.5 million. A merger transaction between Edyficar and Mibanco, which involved a spin-off of the majority of the assets and liabilities of Edyficar, was made effective on March 2, 2015. No gains or losses were recognized in the income statement. As of the merger day, Credicorp held 95.36% of the new Mibanco's capital stock.
On May 12, 2016 Banco de Credito del Peru (BCP) sold its shares of Banco de Credito de Bolivia (“BCP Bolivia”) to ICBSA, an indirect subsidiary of Credicorp Ltd., through a book auction over the Bolivian Stock Exchange. This transfer was part of the rearrangement of Credicorp’s organizational structure in Bolivia to efficiently manage its investments in that country and to comply with applicable Bolivian rules and regulations. The transaction was executed in the Bolivian Stock Exchange. A total of 43,237 shares were sold at a price of Bs.25,811.00 per share, which account for Bs.1,115,990,207.00 of revenue, equivalent to US$162,680,788.19. In order to finance the acquisition by ICBSA, Grupo Credito S.A. -shareholder of this company and subsidiary of Credicorp Ltd. made a capital contribution in Bolivianos to ICBSA, which was equivalent to US$163 million.
On September 30, 2016 Credicorp Capital, a subsidiary of Credicorp, concluded the acquisition of the non-controlling interest, which it did not own in Credicorp Capital Colombia and inversiones IMT. As a result of these acquisitions, Credicorp Capital is now the owner of 100% of Credicorp Capital Colombia and 100% of inversiones IMT. During this acquisition process and after the approval of its Board of Directors, Credicorp made several capital contributions totalling US$ 120,146,350.00 to Credicorp Capital, which, in addition to other available resources, allowed its subsidiary to proceed with the aforementioned acquisitions.
In January 2017, Credicorp’s Board of Directors approved the transfer of 9% of BCP’s total shares to Grupo Credito. (Credicorp’s Peruvian wholly owned subsidiary) through a capital contribution, in order to facilitate Credicorp’s future investments in Peru without modifying the controlling structure of BCP. The total amount paid for all the shares was S/ 3,505,916.484.50. Under the new structure, Credicorp directly holds 3.7% of BCP’s total shares and, in conjunction with its subsidiary Grupo Crédito, continues to control the same 97.7% of such shares without modifying the internal governance structure. This modified organizational structure did not affect the way Credicorp and BCP manage their day-to-day operations, and Credicorp’s dividend policy has not changed as a result of this transaction.
At the respective mandatory Annual Shareholders' Meetings of PPS and Pacifico Vida, each held on February 23, 2017, the merger between PPS and Pacifico Vida was approved, pursuant to which PPS will transfer all of its equity to Pacifico Vida (including the transfer of all assets, rights, obligations and other legal relationships deriving from or linked to such assets and liabilities), all in accordance with the absorption merger modality contemplated in number 2 of article 344 of the General Companies Law. The merger will come into effect on the date when the respective Public Deed of Merger is granted, which shall only occur after the Superintendent of Banking, Insurance and AFP issues the corresponding Merger authorization. As a result of the dissolution of PPS, the company's shares will be excluded from the Public Securities Market Registry and delisted from the Lima Stock Exchange, without the obligation to make a Public Offering by exclusion. We expect the merger to permit Credicorp to realize synergies in its decision making process and through the integration of all its insurance business lines. The closer proximity between companies will also allow Grupo Pacifico to improve its value proposition to customers, who seek integral insurance solutions
|4. B||Business Overview|
(1) Credicorp operating segments
We are the largest financial services holding company in Peru. For management purposes, Credicorp is organized into four operating segments based on our products and services. According to IFRS, an operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker, who makes decisions about resources allocated for the segment and assesses its performance, and for which discrete financial information is available. We conduct our financial services business through our operating segments as follows: banking, insurance, pension funds and investment banking.
The terms “Peruvian commercial bank,” “Peruvian insurance company” and other similar terms used in this Annual Report do not include the assets, results or operations of any foreign parent company or foreign subsidiary of such Peruvian company.
Our banking business, in terms of lending and investment, is organized into (i) wholesale banking activities, including our corporate and middle-market banking business segments, which are carried out by BCP’s Wholesale Banking Group (WBG); (ii) retail banking activities, including our SME-Business, SME-Pyme, mortgage, consumer financing, credit card and wealth management segments, which are carried out by BCP’s Retail Banking & Wealth Management Group (RB&WM); (iii) treasury activities, including money market trades, foreign exchange trading, derivatives and proprietary trading; (iv) microlending, which is conducted through Mibanco; (v) wholesale and retail banking activities in Bolivia; and (vi) private banking, asset management and proprietary investment activities, which we perform through ASB, a Cayman Islands licensed bank.
The majority of our banking business is carried out through BCP Stand-alone, which together with Mibanco, held 32.8% of the Peruvian market share in loans and 31.2% market share in deposits, as of December 31, 2016. A portion of our banking business is also carried out by ASB. We conduct banking activities in Bolivia through BCP Bolivia, a full service commercial bank, which as of December 2016 maintained a 9.1% market share of current loans and a 9.0% market share of total deposits in Bolivia. BCP Bolivia is fourth with respect to loan market share and fifth with respect to deposit market share in the Bolivian banking system.
We apply uniform credit policies and approval and review procedures, which are based on conservative criteria adopted by BCP, to all of BCP’s subsidiaries. Our Chief Operating Officer (COO) is in charge of setting the general credit policies for our different business areas. These policies are set within the guidelines established by Peruvian financial sector laws and SBS regulations (see “Item 4. Information on the Company – 4.B Business Overview - (9) Supervision and Regulation — 9.2 BCP and Mibanco”) and the guidelines set forth by our Board of Directors.
Our deposit-taking operations are principally managed by BCP’s RB&WM group and ASB’s private banking group. See “Item 4. Information on the Company – 4.B Business Overview - (10) Selected Statistical Information — 10.4 Deposits”.
1.1.1 BCP and Subsidiaries
BCP Consolidated consists of a group of subsidiaries offering specialized financial services, which complement BCP’s commercial banking activities. In addition to its local subsidiaries, BCP has an agency in Miami and a branch in Panama. See Item 4. Information on the Company – 4.C Organizational Structure – (2) BCP.
BCP’s activities include wholesale banking, retail banking and wealth management and treasury. As of December 31, 2016, the consolidated operations of BCP ranked first among Peruvian banks in terms of total assets (S/127.6 billion), total loans (S/86.7 billion), deposits (S/74.3 billion) and net equity (S/13.9 billion).
At the end of 2016, BCP’s loans, which included loans made by BCP Stand-alone and Mibanco, represented approximately 32.8% of total loans in the Peruvian financial system. BCP’s deposits, which included deposits with BCP Stand-alone and Mibanco, represented approximately 31.2% of total deposits in the Peruvian financial system.
As of and for the year ended December 31, 2016, BCP contributed with 81.5% of our total assets, 77.0% of our net income and 70.2% of our net equity attributable to Credicorp’s equity holders. BCP’s operations are supervised and regulated by the SBS and the Peruvian Central Bank.
The following table shows the client segmentation of BCP and Mibanco. This segmentation was a result of an analysis, which addressed multiple factors such as the size and volume of activity for each client, our clients’ affiliation with other companies or groups, the degree of follow-up required, and their credit ratings.
|Banco de Credito del Peru||Wholesale Banking Group (WBG)(1)||Corporate||Annual sales higher than $100 million|
|(equivalent to S/336 million)|
|Middle-Market||Annual sales from $10 million to $100 million|
|(equivalent to S/27 million to S/336 million)|
|Retail Banking Wealth Management Group (RB&WM)||Private Banking||Over US$ 1 million in AuMs (Do not include CTS)|
|Enalta||Individual monthly income at least S/20,000; or more than US$ 200,000 in AuMs (Do not include CTS).|
|Affluent||Individual monthly income from S/5,000 to S/20,000|
|Consumer||Focus on medium-low income individuals who receive their payroll through BCP|
|SME - Business||Annual sales from S/4 million to S/32 million; or|
|Total debt from S/1.2 million to S/10 million|
|SME- Pyme||Total debt up to S/1.2 million|
|Mibanco (2)||SME & Microlending||SME – medium (3)||Annual sales up to S/20 million.|
|Total debt higher than S/0.3 million and not issued debt in the capital market.|
|SME – small (4)||Total debt from S/0.02 million to S/0.3 million.|
|Micro-Business (5)||Total debt up to S/0.02 million.|
|Consumer (6)||Focus on debt unrelated to business.|
|Mortgage (7)||Focus on individuals for acquisition, construction of homeownership and granted with mortgages.|
|(1)||Converted into Soles at the exchange rate of S/3.356 per U.S. Dollar, December 31, 2016 - SBS.|
|(2)||As of December 31, 2016, Mibanco registered 942,833 clients.|
|(3)||SME – Medium segment is focused on financing production, trade or service activities, granted to companies, which (1) total debt in the last 6 months was higher than S/300,000, (2) annual sales up to S/20 million in the last 2 consecutive years and (3) that have not participated in the capital markets. This segment represents 3% of total loans in Mibanco and registered 1,802 clients.|
|(4)||SME – Small segment is focused on financing production, trade or service activities, granted to companies, which total debt is between S/20,000 and S/300,000 in the last 6 months (without including mortgage loans). This segment represents 55% of total loans in Mibanco and registered 139.917 clients.|
|(5)||Micro-Business loans focus on financing production, trade or service activities, granted to companies, which total debt is up to S/20,000 in the last 6 months (without including mortgage loans). Micro-Business loans represent 29% of total loans in Mibanco and registered 546,966 clients.|
|(6)||Consumer loans focus on financing individuals to cover payments of goods and services or expenses no related to business. Consumer loans represent 8% of total loans in Mibanco and registered 249,027 clients.|
|(7)||Mortgage loans focus on financing individuals for the acquisition, construction, renovation, remodeling, expansion, improvement and subdivision of homeownership. Mortgage loans represent 5% of total loans in Mibanco, and registered 5,121 clients. Mibanco’s mortgage segment has an average LTV of 47%.|
(2) BCP Stand-alone - business segments
(2.1) Wholesale banking group (WBG)
WBG competes with local and foreign banks. BCP Stand-alone’s traditional long term relationships with medium-sized and large corporate companies provide its WBG with a competitive advantage.
WBG maintained a positive trend in loan placements, posting average portfolio levels of S/33,108 million in 2014 (a 19.3% year-over-year increase), S/40,231 million in 2015 (a 21.5% year-over-year increase) and S/42,957 million in 2016 (a 6.8% year-over-year increase). It also maintained its leadership in the wholesale banking market with a 39.7% market share in loans. Also has 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.
The WBG is divided into the following two divisions:
(i) Corporate and International Division (CID)
|•||Corporate banking subdivision, which provides loans and other credit and financial services, focuses on serving large-sized companies that have an annual turnover of over US$100 million, corporate governance, audited financial statements and dominant market positions in their particular brands or product areas. Even if clients do not meet any of these criteria, the CID may provide services to firms under this category if they belong to a large economic group of an industry that is important to Peru’s economy.|
|•||International banking and leasing subdivision manages the relationship with financial institutions (locally and abroad), trade products, international operational services and financial leasing products.|
|•||Cash management and transactional services subdivision develops products and services to support clients’ daily activities of cash management, collections, payments, and investments, among others.|
BCP Stand-alone continues to meet the needs of its corporate clients, assisting them with financial services, cash management solutions and short and medium-term financing through the CID. As a result, BCP Stand-alone’s corporate banking loans grew from S/20,495 million in 2014 to S/25,924 million in 2015 and S/28,422 million in 2016.
The moderate pace of the CID’s growth is due to (i) intense competition from foreign banks, which finance their operations at lower costs due primarily to the fact that our monetary authority has high reserve requirements for foreign currency for local banks, and (ii) the availability of alternative financing through capital markets, especially in the international capital markets. Nevertheless, BCP has a leading position in the Peruvian banking system with the 43.1% of the market share for loans.
The CID offers a broad range of products and tailors its product offerings to meet each client’s unique requirements. In general, this division is expected to offer high-value-added products, advisory and financial services, particularly cash management solutions, at competitive prices.
The CID’s financing is provided to fund capital expenditures and investments, sales, international trade and inventories. To finance capital expenditures, the CID offers medium and long term financing, financial lease and project finance.
(ii) Middle-market banking division (MMD)
|•||WGB’s middle-market banking subdivision serves mid-sized companies. In determining which clients are best served by this subdivision, WBG considers a mix of different characteristics, such as annual revenues, financial leverage, overall debt and product penetration and complexity. Middle-market clients’ annual revenues generally vary from US$10 million to US$100 million, and are serviced nationwide by 13 BCP regional managers.|
|•||WGB’s institutional banking subdivision focuses principally on serving profit and non-profit organizations, state-owned companies and other major institutions.|
MMD provides banking services targeted to medium-sized companies from various economic sectors. The products offered to middle-market clients are similar to those offered to corporate banking clients. The major types of products are:
|•||Revolving credit lines to finance working capital needs and international trade financing;|
|•||Stand-by letters of credit and bond guarantees;|
|•||Structured long-term and medium-term financing, through loans or financial leasing; and|
|•||Cash Management, Transactional products and electronic banking.|
BCP has identified several opportunities to engage middle-market companies, particularly in Peru’s manufacturing, wholesale, retail, fishing, agribusiness and construction industries. The MMD is organized with multiple teams focused on attending the needs of these economic groups. BCP has a middle-market client portfolio of approximately 5,989 companies, including 1,049 economic groups. Generally, these clients are not listed on any stock exchange; however in certain cases they have accessed capital markets either for bonds or commercial paper. These companies are typically family-controlled but professionally managed, and their financial information is audited.
The MMD has continued to make progress toward implementing its strategic goals by:
|•||Creating dedicated points of contact to meet the needs of its customers more efficiently;|
|•||Streamlining its lending processes to provide middle-market customers with prompt service;|
|•||Introducing new electronic financial products to make its services more accessible to customers;|
|•||Incorporating sophisticated technical tools in order to implement a risk-based pricing model;|
|•||Focusing on fee income and loan portfolio growth;|
|•||Introducing a new commercial planning model that employs an efficient and standardized methodology; and|
|•||Maintaining risk controls using sophisticated tools created by BCP’s Risk Management Unit.|
The MMD loan portfolio reached S/12,623 million in 2014, S/14,288 million in 2015 and S/14,535 million in 2016. As of December 31, 2016 BCP had a market share of 35.0% in this segment.
We believe that middle-market companies have benefited from the overall economic improvements in Peru over the past few years. Loan quality problems have been addressed through procedures and organizational changes that have focused on improving the loan approval and credit-risk assessment processes.
Institutional Banking Unit
BCP’s Institutional Banking Unit, which operates within the MMD, serves 1,207 clients throughout Peru. In Lima, a specialized team in wholesale banking serves governmental entities, educational institutions, religious organizations, international bodies, non-governmental organizations, civil associations and regulated entities such as microfinance institutions, insurance companies, pension funds and private funds. In other provinces, a specialized remote team partners with BCP’s retail banking area to serve clients.
The annual average deposit amount in BCP’s Institutional Banking Unit (Lima and provinces) increased 8.8% reaching S/9,507 million in 2016. The Institutional Banking Unit is also important because its clients offer great potential for generating fee income and other cross-selling opportunities. BCP’s strategy in this unit is focused on building customer loyalty by offering customized services at competitive rates and providing outstanding service. Our institutional banking typically requires remote office banking, collections, automated payroll payment services and structured long-term and medium-term financing loans.
(iii) Support areas
International banking unit
The International Banking Unit focuses on obtaining and providing short-term funding for international trade. Medium-term lines of credit funded by international commercial banks and other countries’ governmental institutions are also provided to clients. In addition, this unit earns fees by confirming letters of credit and guarantees issued by international banks and other fees as a result of the international payment and trade finance business. The International Banking Unit also promotes international trade activities with its local clients by structuring trade products and services, organizing and sponsoring conferences and advising customers through a wide range of trade products.
BCP maintains business relationship with correspondent banks, development banks, multilateral and export credit agencies in different countries around the world. At present, BCP manages credit lines for foreign trade transactions, working capital and medium and long-term investment projects.
BCP has access to a wide network of foreign correspondent banks and can offer several internationally competitive products to its customers. It has correspondent banking relationships and uncommitted credit lines with more than 100 banks for foreign trade operations and financing of working capital as well as medium and long-term investment projects. BCP has also a direct presence abroad through its agency in Miami, a branch in Panama, representative offices in Chile and Colombia and a commercial affiliate bank in Bolivia.
Leasing is one of our most important and profitable products for which BCP specializes in providing financing to our clients in order to allow them to acquire assets and also support their investment projects. This product is primarily focused on our Corporate and Middle-market clients.
Cash management and transactional services unit
Our Cash Management and Transactional Services Unit is in charge of developing transactional services that handle the exchange of information and money transfers among corporations, midsize companies, institutions and micro-business companies. This unit is responsible for both, the development and marketing of transactional (or “cash management”) services for our corporate and institutional clients. We offer more than 30 products aimed at strengthening ties with clients and assuring their loyalty. Our electronic channels allow us to reduce costs and increase fee income. Services managed by this unit include collections (automated trade bill collection), automated payments (loans to personnel and suppliers’ accounts, reverse factoring and money transfers), electronic office banking, electronic lending solutions and cash management through checking accounts with special features.
(2.2) Retail banking and wealth management (RB&WM) group
At the end of 2016, RB&WM related loans represented 46.4% of BCP ’s total loans, while deposits accounted for 61.3% of BCP’s total deposits.
With the segmentation of its retail client base, BCP is able to focus on cross-selling its products and improving per-client profitability. The RB&WM Group has undertaken several projects to improve one-on-one marketing techniques and tools for the sale of its products to profitable market segments. BCP’s management expects the RB&WM businesses to continue being one of the principal growth areas for BCP’s activities.
BCP is constantly improving the value proposition it offers to affluent customers to increase their loyalty and ultimately their profitability. In May 2012, BCP created a new super affluent segment called BCP Enalta. This segment and the Private Banking segment operate under the Wealth management group.
|§||Customers in Private banking receive not only local but also global investment advice. Its value plan is composed of (i) high quality standards in client service by expert account managers, (ii) close and personalized service, (iii) special interest rates, and (iv) exclusive branches. Customers in this segment total approximately 2,394.|
|§||Customers in Enalta have access to ten exclusive branches in Lima, where they can perform financial transactions and obtain personalized advice from investment, insurance and loan experts based on their risk profiles and financial needs. Enalta also offers customers: (i) access to exclusive products, (ii) specialized account managers and/or expert phone banking, (iii) preferential service by tellers at branches, and (iv) preferential interest rates on loans. Enalta has approximately 29,433 customers.|
|(ii)||Banca Exclusiva (BEX)|
Customers in BCP’s “mass affluent” segment receive a differentiated value proposition that includes: dedicated customer services channels, such as specialized account managers, preferential service by tellers at branches and call center phone banking, and preferential interest rates on loans. Approximately 50% of the mass affluent clients are serviced through specialized account managers responsible for improving per-client profitability and achieving long-term relationships through personalized service, cross-selling and share of wallet strategies. BCP has approximately 353,000 mass affluent customers.
Our Consumer Banking division is in charge of developing strategies for the retail customers who are not included in affluent banking or small business banking. Its customer base consists of approximately 5.3 million medium to low income individuals. Consumer Banking focuses on customers who receive their payroll through BCP (which represent slightly more than 1.3 million clients). Its strategies vary from basic acquisition of new accounts for wage-earners with special terms regarding fees and interest rates, to more sophisticated, aggressive cross-sell and retention programs that expand benefits to non-banking products (i.e., access to discounted products) and access to payroll advances.
|(iii)||SME-Business and SME-Pyme|
BCP’s SME-Business and SME-Pyme Banking Segments serve approximately 416,000 clients. Customers are divided into two groups with different business models, services levels, and product access. SME-Business serves approximately 16,019 clients and SME-Pyme serves approximately 402,623 small business clients.
As of December 31, 2016, BCP was the largest mortgage lender in Peru with a market share of 30.8% of total mortgage loans in the Peruvian banking system. This was largely the result of BCP’s extensive marketing campaigns and its improvements to procedures for extending credit and establishing guarantees.
BCP expects the mortgage lending business to continue to grow because of:
|•||low levels of penetration in the financial market;|
|•||increasing demand for housing;|
|•||availability of funds for the Peruvian government’s MiVivienda low-income housing program; and|
|•||current economic outlook for controlled inflation and economic growth in Peru.|
All of our mortgage-financing programs are available to customers with a minimum monthly income of S/1,500. In the past, the Peruvian government sponsored a home ownership program known as the MiVivienda program, which provided assistance to purchasers of homes valued at up to S/395,000. Under the program, BCP financed up to 90% of the appraised value of a property (in local currency) where monthly mortgage payments did not exceed 40% of the client’s stable net income. The maximum maturity of the mortgage loans BCP offered under the program was 25 years.
As of December 31, 2016, mortgage loans accounted for 16% of Credicorp’s total loan portfolio, with an average LTV (loan-to-value) of 76% and internal overdue ratio of 2.4%. Through its subsidiary BCP, Credicorp has increased lending to lower socio-economic segments of the population in Peru through the MiVivienda program sponsored by the government. Mortgage loans to this sector represent approximately 15.8% of Credicorp’s total mortgage loans and 2.4% of Credicorp’s total loans.
Mortgage loans are associated with low losses because of their low LTV, and they have the added benefit of generating opportunities for cross selling other banking products, which has had a positive impact on Credicorp’s results of operations.
|(v)||Credit card and installment loans|
Credit card and installment loans have grown significantly as improving economic conditions have led to increased consumer spending in Peru. BCP expects the strong demand for these products to continue. In addition to interest income, BCP derives income from maintenance, retailer transaction merchant, finance and credit card penalty fees.
In the credit card business, BCP continued to apply segmented strategies. BCP continues to offer value to its high-end customers through partnerships with the airline LATAM for example. These programs, coupled with BCP’s own travel program, enabled BCP to reach record levels, both in points that clients gained for using their credit cards and in points that clients spent to obtain products or services available under loyalty plans. To attract customers in the lower income segment, BCP is streamlining its risk assessment and card delivery processes.
BCP has been improving its credit monitoring systems and optimizing its scoring models, which include, among others, behavior, payments and income forecasting. BCP achieved an increase of over S/1,020 million in outstanding balances from credit cards from 2014 to 2016 (monthly average). According to BCP’s internal records, the number of active credit cards was 993,650 in 2013, 1,083,436 in 2014, 947,611 in 2015 and 762,504 in 2016. Last year the stock of credit cards decreased due to a proactive decision of closing out accounts without balances or transactions in prior months.
In addition, BCP has developed sales capacities in alternative channels, such as sales through telephone contact centers, which now represent 34% of total credit card sales.
Treasury, foreign exchange, derivatives and proprietary trading
BCP’s Treasury function is managed through three different units in order to have strong governance, the Assets and Liabilities Management (ALM) group, the trading unit (comprised of the Foreign Exchange, Derivatives and Proprietary Trading units) and the Foreign Exchange and Derivatives Distribution Unit.
The ALM group is responsible for managing BCP’s balance sheet and for taking reasonable interest rate and liquidity risks under the oversight of our Asset and Liabilities Committee (ALCO). ALM is also responsible for maintaining our liquidity asset portfolio and compliance with Liquidity Coverage Ratio (LCR) and Common Equity Tier 1 (CET1) ratio under Basel III standards. In addition, the ALM group is an active participant in money and debt capital markets, oversees reserve requirements, manage BCP’s liquidity and the bank´s balance sheet. The group has been active in auctions held by the Peruvian Central Bank for certificates of deposit as well as in financing its funding needs through certificates of deposit, interbank transactions and guaranteed negotiable notes, among other instruments.
BCP’s Foreign Exchange Unit participates in foreign exchange trading in money market activities in Soles and in other currencies, and in the activity related to the different instruments designed by the Peruvian Central Bank.
BCP’s Derivatives Unit offers FX forwards, FX options, interest rate swaps, cross currency swaps, as well as tailor-made derivatives for distribution to clients in both, Peru and Latin-America. The team is formed by highly trained market professionals with years of experience in various markets. This allows BCP to provide sounds financial solutions at competitive prices to its clients. To minimize risks, BCP’s Derivatives Unit is closely monitored by BCP’s Treasury Risk Unit, which uses state-of-the-art systems and complies thoroughly with best practices related to risk in international markets.
BCP’s proprietary trading consists of short-term investments in securities (corporate and governmental), which includes instruments from various countries. In terms of securities in local currencies, BCP can participate in the local markets of Mexico and Colombia. In the case of Peru, BCP is one of the main liquidity providers in the government bond local market where it is part of the Market Maker Program of the Ministry of Economy of Peru.
BCP’s Foreign exchange (FX) and Derivatives Distribution Unit helps both individuals and companies with their foreign exchange needs (spot and hedging) through all BCP’s channels (distribution desk, branch network, agents and electronic channels). The broad portfolio of foreign exchange products provided to its ample client base has allowed the Unit to position itself as the most important in the FX business in the Peruvian market.
(2.4) Lending policies and procedures
The Bank has adopted a risk appetite framework and established objective metrics and thresholds to periodically monitor the Bank’s evolving risk profile. The framework was approved by the Board of Directors, and will be managed and monitored by the Risk Management Unit within the Bank’s Central Risk Management Group. The adoption of a risk appetite framework reflects the Bank’s commitment to aligning its forward-looking business strategy with its corporate risk vision.
BCP’s uniform credit policies and approval and review procedures are based upon conservative criteria and are uniformly applied to all of its subsidiaries. These policies are administered in accordance with guidelines established by the Peruvian financial sector laws and SBS regulations. See “Item 4. Information on the Company – 4.B Business Overview - (9) Supervision and Regulation – 9.2 BCP and Mibanco”.
BCP’s credit approval process is based primarily on an evaluation of each borrower’s repayment capacity and commercial and banking references. BCP determines a corporate borrower’s repayment capacity by analyzing the historical and projected financial condition of the company and of the industry in which it operates. Other important factors that BCP analyzes include the company’s current management, banking references, past experiences in similar transactions, and the quality of any collateral to be provided. In addition, BCP’s credit officers analyze the corporate client’s ability to repay obligations, determine the probability of default of the client using an internal risk rating model, and define the maximum credit exposure that BCP wants to hold with the client.
BCP’s individual and small business borrowers are evaluated by considering the client’s repayment capacity, a documented set of policies (including, among other issues, the client’s financial track record and the degree of knowledge of the client), and credit scores, which assign loan-loss probabilities relative to the expected return of each market segment. In BCP, about 80% of credit card and consumer loan application decisions, and about 50% of SME loan application decisions, are made through automatic means. Mortgage and the remaining portions of small business and consumer loan application decisions are made by credit officers who use credit scores and profitability models as inputs for their evaluations and report to a centralized unit.
Our success in small business and personal lending areas depends largely on BCP’s ability to obtain reliable credit and client information about prospective borrowers. The SBS has an extensive credit bureau, which has expanded its credit exposure database service to cover businesses and individuals that have borrowed any amounts from Peruvian financial institutions. This database includes risk classifications for each borrower: “Normal,” “Potential Problem,” “Substandard,” “Doubtful” and “Loss.”
BCP has a strictly enforced policy that limits the lending authority of its loan officers. It also has procedures to ensure that these limits are adhered to before a loan is disbursed. Under BCP’s credit approval process, the lending authority for middle market, small business, and personal loans is centralized into a specialized credit risk analysis area, which is operated by officers that have specific lending limits. In addition to the controls built into the loan approval workflow systems, the credit department and BCP’s internal auditors regularly examine credit approvals to ensure that loan officers and credit analysis officers are complying with lending policies.
In accordance with international standards, BCP has established the limit of the lending authority based on risk rating (probability of default) and particular guarantees of the borrower. Requests for credit facilities in excess of the limits set for Credit Officers are reviewed by the Chief Operating Officer, Executive Committee or, if the amount requested is sufficiently large, by the Board of Directors.
In addition, BCP has approved concentration limits by industry, based on its target market share and loan portfolio participation.
BCP believes that an important factor in maintaining the quality of its loan portfolio is the selection and training of its loan and risk officers. BCP requires loan officers to have degrees in economics, accounting, business administration or related fields from competitive local or foreign universities. In addition, training is based on a three-month “Bank Specialization Program”. Trainees in this program are taught all aspects of banking and finance. After the training program finishes, trainees are hired as loans officers and receive specialized training in credit risk. Loan officers also receive training in specific matters throughout their careers at BCP and also through a comprehensive training program called “Triple A”. Laterally-hired officers generally are required to have prior experience as loan officers.
BCP operates in substantial part as a secured lender. As of December 31, 2016, approximately S/53.0 billion of our loan portfolio and off-balance-sheet exposure were secured by collateral, which represents 48.6% of the total loan portfolio based upon our unconsolidated figures, as compared to 54.0% in 2015 and 53.1% in 2014.
Liquid collateral is a small portion of BCP’s total collateral. In general, when BCP requires collateral for the extension of credit, it requires collateral valued at between 110% and 150% of the principal amount of the credit facility granted. The appraisal of illiquid collateral, in particular real estate assets, machinery and equipment, is performed by independent experts.
Pursuant to a Peruvian regulation (Article 222° under Law No. 26702) that became effective in December 1998, the existence of collateral does not affect the loan classification process. For Peruvian accounting purposes, secured loans (or the portion of any loans covered by collateral) that are classified in Class “B,” “C,” or “D” risk categories or that are otherwise classified as substandard loans (see “Item 4. Information on the Company - 4.B Business Overview - (10) Selected Statistical Information – 10.3 Loan Portfolio – 10.3.7 Classification of the Loan Portfolio”) have a lower loan loss provision requirement than similar unsecured loans. If a borrower is classified as substandard or below, then BCP’s entire credit exposure to that borrower is so classified.
BCP’s internal audit division conducts selected revisions and analyses on borrower’s financial statements, consistent with the local banking regulations of the jurisdictions in which it operates.
(2.5) Digital transformation
In October 2015 the InnovaCXion Center (“Center”) was created, whose mission is to improve the customer experience through digital media. However one key element for BCP Stand-alone in creating value is innovation, therefore at the end of 2016, Digital Transformation unit was created and included the Information technology Division, InnovaCXion Center, Customer Experience Area and Strategic Analysis and Governance Area.
(2.5.1) Information technology (IT)
BCP considers its technology platform as one of its main competitive strengths and continues to invest in this area to maintain a competitive position in the banking sector. During 2012, IT changed its operating model, outsourcing the administration and operation of the IT infrastructure, application development and maintenance of some of the applications to three companies, who are leaders in their field: IBM, Tata Consulting Services and Everis. During the following years, IT has continued to expand the scope of its services. As a result, in 2016, IT delivered more projects/requirements (70% more than 2011), we met our time-to-market objectives (since 2011) and we strengthened our contingency and business continuity plan. Today we are focused on accompanying the business in its digital transformation, incorporating to our processes the use of agile methodologies to achieve the speed and early feedback the environment demands.
BCP’s investments in IT reached S/126.3 million in 2014, S/185.2 million in 2015 and S/227 million in 2016. BCP’s expenses on IT totaled S/588.1 million in 2014, S/648.1 million in 2015, and S/702 million in 2016. The 8% increase in expenses in 2016 is primarily due to economies of scale in consumption of outsourced infrastructure and outsourced application development. Finally, as a result of the new operating model, our ratio of IT expenses as a percent of revenues improved from 9.4% in 2011 to 8.1% in 2016.
(2.5.2) InnovaCXion center and Customer experience transformation
This division is responsible of digital innovation and improves client experience, led by the Center and the Customer Experience Transformation Area, respectively.
During the first year of the Center, our main implementations were i) virtual platforms for self-opening savings accounts in our branches; ii) a payment application called "Yape" which uses the cell phone number as the customer account and two self-service platforms via web, one to grant a personal loan to our clients and other to grant performance bonds.
(2.5.3) Analysis and strategic governance of information
This area is distributed in the following teams:
The main objective of our Strategic Analysis team is to optimize several processes, products or services in the organization based on data analysis and techniques such as statistics and data processing. In 2016, one of the main projects was the improvement of incentive scheme of the Sales and Service Advisors, among others.
BCP Stand-alone also continues to develop strategies to approach different retail customer groups through our customized outreach strategy known as Customer Relationship Management (CRM). This has enabled BCP to reach customers proactively and provide them with personalized offers and terms, in a timely manner while using cost effective channels and maximizing efficiency.
The CRM team is responsible for develop and distribute the right service through the different channels such as telemarketing, sales forces, Sales and Service Advisors, ATM or Online Banking.
|iii.||Architecture and Data Governance|
This team develops projects that allows to process large volumes of information, of variety of typologies, and at great speed. In 2016, we launched the first stage of the improvement of the methodology of Government and Data Quality.
1.1.2 BCP Bolivia
BCP Bolivia’s activities include wholesale banking and retail banking. As of December 31, 2016, the operations of BCP Bolivia in terms of total assets (S/7.9 billion), total loans (S/5.3 billion), deposits (S/6.8 billion) and net equity (S/620.7 million).
At the end of 2016, BCP Bolivia’s loans represented approximately 9.1% of total loans in the Bolivian financial system. BCP Bolivia’s deposits represented approximately 9.0% of total deposits in the Bolivian financial system.
The following table shows the client segmentation of BCP Bolivia. This segmentation was a result of an analysis, which addressed multiple factors such as the size and volume of activity for each client, our clients’ affiliation with other companies or groups, the degree of follow-up required, and their credit ratings.
|BCP Bolivia (1)||Wholesale Banking||Large companies (2)||Annual sales higher than approximately S/34 million|
|Medium companies(3)||Annual sales from approximately S/7 million to S/34 million|
|Retail Banking (4)||Small Business (5)||Annual sales from approximately S/1 million to S/7 million|
|Micro Business (5)||Annual sales of at least approximately S/1 million|
|Consumer (6)||Payroll workers and self-employed workers|
|Mortgage Banking (7)||Payroll workers, independent professionals and business owners|
|(1)||Converted into Soles at the exchange rate of S/3.356 per U.S. Dollar, December 31, 2016 - SBS.|
|(2)||Loans to Large companies account for 30.4% of BCP Bolivia’s total loans. This segment accounts for approximately 650 customers.|
|(3)||Loans to Medium companies account for 11.1% of BCP Bolivia‘s total loans. This segment accounts for approximately 1,700 customers.|
|(4)||At the end of 2016, retail banking loans accounted for 58.5% of total loans of BCP Bolivia, while retail banking deposits accounted for 30.5% of BCP Bolivia's total deposits.|
|(5)||Small and Micro business banking accounts for 18.4% of total loans of BCP Bolivia, small business banking serves approximately 13,000 clients while Micro Business serves approximately 6,900 business clients.|
|(6)||Consumer banking accounts for 10.9% of total loans of BCP. Its customer base consists of approximately 36,700 Payroll and self-employed workers. Our strategies are based on cross-selling and retention programs that expand benefits to non-banking products.|
|(7)||This segment serves 7,300 customers, representing 28.2% of BCP Bolivia’s total loans. BCP Bolivia’s mortgage segment has an average LTV of 80% and represents less than 2% of Credicorp’s total loans.|
1.1.3 Atlantic Security Bank (ASB)
ASB is a Cayman Islands licensed bank that engages in private banking, asset management and proprietary investment. It was incorporated in September 1984 in the Cayman Islands and principally serves Peruvian-based customers. ASB has an international licensee branch in Panama, through which it conducts all commercial business.
As of December 31, 2016, ASB had total assets of S/6,657.3 million and shareholders’ equity of S/864.4 million. Furthermore, as of December 31, 2016, ASB had approximately 3,051 customers, 93% of whom were Peruvian. ASB deposits reached S/5,590.9 million in 2016.
ASB trades on its own account primarily by making medium-term investments in investment grade fixed-income securities and sovereign debt. Non-investment grade fixed-income securities fall behind investment grade securities in terms of portfolio allocation, while equity and hedge-fund positions, though present, are less relevant. As of December 31, 2016, ASB’s investment portfolio was S/2,962.7 million.
Third-party asset management is an important activity for ASB. Total assets under management (AuM) reached S/14,921.3 million as of December 31, 2016, compared to S/12,359.8 million as of December 31, 2015 and S/13,457.7 million as of December 31, 2014. These assets comprise a range of unsolicited securities and ASB acts as an intermediary in the management and custody of such assets in fixed income and variable income securities.
ASB also maintains total loans, which amounted to S/3,079.4 million at year-end 2016, and approximately 89% of these loans were guaranteed by customers’ deposits or investments.
ASB’s overall investment strategy, the general profile of its investment portfolio and its specific investment decisions are reviewed on a monthly basis by an investment committee. Its credit risk by counterparty, including direct and indirect risk, is evaluated on a consolidated basis and covers all activities that generate credit exposure such as interbank placements, commercial loans and securities investment. Market, liquidity and operational risks are monitored by ASB’s Risk Management Unit, which in turn reports to and is supervised by a Corporate Risk Committee, an Asset-Liability Committee and our Board of Directors.
We conduct our insurance business exclusively through Grupo Pacifico, which is the second largest Peruvian insurance company in terms of premiums, fees and net income. Grupo Pacifico provides a broad range of insurance products. Grupo Pacifico focuses on three business areas: property and casualty (P&C) insurance through Pacifico Seguros Generales, life and pension insurance through Pacifico Vida, and health insurance through Pacifico EPS, which also conducts private hospital operations. Grupo Pacifico, like other major Peruvian insurance companies, sells its products both directly and through independent brokers, agents, banking channels and sponsors.
In 2015, Grupo Pacifico signed an agreement with Banmedica to participate as equal partners in the health insurance business. This association includes the private health insurance business managed by Pacifico Seguros Generales, the corporate health insurance for employees sold by Pacifico EPS, and medical subsidiaries that provide medical services.
As a result, Grupo Pacifico transfered the majority control of Pacifico EPS to Banmedica. Therefore, Pacifico EPS and the medical subsidiaries no longer consolidate with Pacifico Seguros Generales and Pacifico Vida for accounting purposes, and are reported as an investment in associates.
1.3 Pension funds
Credicorp conducts all of its pension fund activities through its private pension fund administrator Prima AFP. Prima AFP manages pension funds in the form of individual accounts of capitalization, providing its affiliates with retirement, disability, survival and burial benefits. See “Item 4. Information on the Company - 4.B Business Overview - (5) Review of 2016 – 5.2.5 Prima AFP” and “Item 4. Information on the Company - 4.B Business Overview - (9) Supervision and regulation – 9.7 Prima AFP” for more information about this business.
1.4 Investment banking
The integration of Latin American markets is a strategic focus for Credicorp. The creation of MILA (by its Spanish initials), a Latin American integrated market shared among Chile, Colombia and Peru, has opened up opportunities to further integrate asset management, brokerage and corporate finance cross-border operations. This can offer benefits for companies that have a significant presence in these markets. Since the formation of MILA, Credicorp’s investment banking business units grouped under Credicorp Capital have been very active. Credicorp Capital carries out its operations in the region through Credicorp Capital Peru, Credicorp Capital Colombia and Inversiones IMT, holding a considerable market share in the Peruvian, Colombian and Chilean markets, respectively. Our main business lines are asset management, sales & trading and corporate finance.
Through the regional platform provided by MILA, we offer a wide array of products, including mutual funds, alternative funds and portfolio management, as well as structured products, to a broad base of clients, including clients in our retail, private and high net worth, corporate and institutional segments.
Sales & trading
Our regional investment banking platform has an active role in secondary markets, particularly equity and fixed income products, as well as exchange rate products and derivatives. Participation in the placement of equity and debt instruments, vis-à-vis our corporate finance team, is becoming equally relevant.
Corporate finance provides advisory services to structure mid- and long-term financing and structure and place equity and fixed income instruments in capital markets. It also offers a wide range of financial advisory services and advisory services for mergers and acquisitions.
(2) Corporate compliance
Our Corporate Compliance programs cover all companies within the Group and have been developed under a comprehensive approach based on international best practices and ethical principles and values of the corporation.
Compliance is responsible for managing the following corporate programs:
|·||International Control Lists|
|·||Ethics and Conduct|
|·||Market Abuse Prevention|
|·||Protection of Personal Information|
|·||Occupational Safety and Health|
The corporate program management model includes the designation of Compliance Officers in each company of the Credicorp Group, who report to the Corporate Compliance Officer of Credicorp, who in turn reports to the Board and has autonomy for the development of its functions.
The Corporate Compliance Division establishes the guidelines and policies that regulate compliance programs in order to provide reasonable assurance of compliance with local and international standards, mitigation of conduct risks, and strengthening ethical behavior and values in Credicorp, all with the aim of protecting Credicorp's reputation.
In that sense, the main aspects worked during 2016 have been focused on the strengthening the management model; the innovation in the use of technological tools to improve the effectiveness and efficiency in the identification of financial crimes; and the integration of Compliance processes within the business and culture of the organization, in order to establish a relationship with the business and make it a co-owner of the risk together with Compliance.
Fiscal Transparency oversees the implementation of two regulations for International Exchange of Tax Information: FATCA1 and CRS2 .
FATCA: The first report was submitted in 2015 in all jurisdictions where Credicorp operates and has FATCA Intergovernmental Agreements (IGA) in force. In 2015, Panama and Peru had “agreements in substance”; however only Peru complied with the reporting obligation that year. In 2016, Panama signed the IGA3 and Financial Institutions (FI) are expected to submit their first report in 2017. Peru is still negotiating the conditions of their agreement and the Ministry of Economy and Finance (MEF) issued a note to postpone reporting obligations, while negotiations are still under way. The MEF had until December 31, 2016 to provide the IRS with a timeline and step-by-step plan in order to sign the IGA. The MEF met with The Peruvian Bank Association (ASBANC by its Spanish initials) at the end of February 2017 where it was confirmed that the December 31, 2016 deadline had been met, though the details of such timeline have not been provided. At the same time, and in order to comply with the requirements of certain international treaties signed by Peru, the Peruvian government enacted new bank secrecy provisions to implement new tax reforms under DL 1313, which allows the Peruvian tax authorities to file a request with a court to have the bank secrecy legislation lifted. These initiatives open the road for the implementation of FATCA and also assist with Peru´s plans to become an Organisation for Economic Co-operation and Development (OECD) member country in 2021, which will also allow it to start exchanging tax information under the CRS.
CRS Activities: Cayman Islands and Colombia belong to the Early Adopters Group and, in 2016, our Financial Institutions in those jurisdictions started the implementation of the CRS by complying with clients’ due diligence requests. Our FI´s in Chile and Panama will follow as Late Adopters in 2017.
1 Foreign Account Tax Compliant Act, law enacted by the US Government in 2010
2 Common Reporting Standard, developed in response to the G20 request and approved by the OECD in 2014.
3 Intergovernmental Agreement
(3) Internal Audit
In accordance with the Framework for Professional Practice of the Institute of Internal Auditors (IIA), Internal Auditing’s activities seek to permanently assess the efficacy and efficiency of processes for risk management, monitoring and governance at Credicorp Ltd, its subsidiaries and affiliates in order to improve and protect the Corporation’s value and to provide assurance, advisory services and risk-based analysis.
In 2016, the result of our internal assessment, in accordance with Standard 1311 at IIA, was “Generally Complies” for the fifth consecutive year due to our Program to Assure and Improve the Quality of Internal Auditing. It is important to note that the corporation’s auditing units obtained, on September 2013, international recognition for the quality of their internal auditing activity from IIA, receiving the highest rating “Generally Complies,” in accordance with Standard 1312 of IIA. Both results show that the internal auditing activities of the Corporation’s internal auditing units fulfill International Standards for Auditing and IIA’s Code of Ethics.
At BCP Stand-alone, we have launched the Chaninchay projects, which means “to give value” in Quechua. The objective of this project is to tie together the concepts of on-going auditing, data analytics and cryptography to implement a working philosophy that ensures that all of our auditing processes are oriented toward protection rather than focusing solely on detecting errors through data mining.
A team of auditors at BCP Peru won the 3rd Competition for Essays on Internal Auditing for Banking, which was organized by the Latin American Committee of Internal Auditing (CLAIN) of the Latin American Federation of Banks (FELABAN); the winning topic was “Auditing Methodology to Assess Goodwill Valuation.” This is proof or the leadership and innovation of our Bank and its employees with regard to Internal Auditing procedures in the region.
Our corporate auditor was named member of the Financial Services Guidance Committee Board of IIA Global, which shows the innovation and leadership of Credicorp’s auditing team in Latin America. We continue to preside over the Latin American Committee for Internal Auditing (CLAIN) of the Latin American Federation of Banks (FELABAN).
Credicorp was established to create a financial group that would benefit from synergies among the Group’s companies and our companies’ boards.
Credicorp endeavors to become a leader within each business market in which the companies operate to maximize our shareholders’ return on equity. Our long-term strategy consists of four strategic pillars: efficient growth; adequate risk management; focus on client satisfaction; and motivated employees. We seek to achieve an optimal balance of market share, profitability and operating efficiency.
Credicorp through its subsidiary BCP initiated an efficiency initiative with two approaches, one tactical the Continuous Improvement Program, and the Efficiency Program. However this is an initiative that is deployed in our other main subsidiaries.
The Continuous Improvement Program is designed to improve efficiency throughout Credicorp by promoting consciousness in our management of expenses and investments. This approach is based on: i) productivity management; ii) the establishment of new mechanisms for approving, managing and reporting budget execution; and iii) process improvement. The Continuous Improvement Program will be based on the Jaw concept; this means it will be focused on managing the gap between income growth and expenses growth, in an effort to achieve higher growth in income than in expenses.
The Efficiency Program is designed to address five different strategic areas. The first is our product portfolio. Under the program, we will reduce the complexity of our product portfolio and manage each product based on productivity and client satisfaction. The second area is our service model. Under the program, we will evaluate our footprint and formats, channel efficiency and multichannel strategy. The third strategic area comprises our organization and support functions. With respect to this area, we will evaluate how we are organized, including the span of control, the decision network and the number of layers in our operating units. The fourth strategic area includes operations and IT. In this area we will define key processes and optimize our operational model. The fifth strategic area is culture. Through this strategic area, we will seek to instill the concept of efficient growth as a core value in our organization’s culture.
Adequate risk management
This strategic pillar of Credicorp’s strategy is based on the corporate principles approved by the Corporate Governance Committee: involvement of executive management; independence of the risk functions; corporate governance, including risk appetite, corporate risk policies, and risk-adjusted performance measures; and sufficiency and quality of resources dedicated to the risk management role.
Credicorp is committed to applying best practices to assess, quantify and manage the different risks to which we are exposed to, such as credit, market, compliance and operational, reputational, and insurance underwriting risks. We are constantly fine-tuning our models for risk management and our stress-testing methodologies. Our strategy is based on implementing an advanced and fully integrated risk management approach to achieve sustainable growth and enhanced profitability.
In the area of credit risk management, we have implemented enhanced risk-adjusted pricing models and in-house credit models (origination, scoring, behavioral and collection models) that maximize the use of our proprietary information and knowledge about the Peruvian system. These are essential sources of competitive advantage. We have also developed a risk monitoring process that provides a timely and comprehensive picture of risk exposures across risk types and from multiple business lines.
We are highly dedicated to providing products and services that offer strong value propositions for the clients we serve through each of our businesses. Our main value proposition will be our digital banking initiative that would allow us to get to know and satisfy our customers through a prompt digital solution.
We will continue to educate our customers by helping them understand the different financial products and services they can access through our distribution channel network and sales force.
We have improved our communication with clients to keep them well informed of the products and services we launch and the product enhancements we implement. We continuously upgrade our platform in response to questions, complaints and requests from customers.
In human resources management we continue to focus on maximizing the efficiency of our talent management, developing an adequate structure for incentives and benefits to motivate and retain employees, and improving our selection and training processes.
In the banking business, we will continue to implement our strategy to improve our client experience through different points of access. We will focus particularly on improving and innovating in digital banking, which will set the pace for how we communicate with and satisfy the needs of our clients. We will also work to strengthen risk management in different segments of Retail Banking with acceptance, follow up and collections models that are calibrated and aligned with pricing models to ensure that we achieve the profitability we seek. In the microlending business, we will continue to work to consolidate and improve Mibanco’s profitability. We will strive to fine-tune our segmentation to align our value propositions with the needs of each segment, optimizing commercial, risks and collections models.
In terms of our insurance business, we will continue to grow through diverse channels and will continue to strengthening our bancassurance strategy to take advantage of the synergies that can be developed in Credicorp. Also, we will work to improve how efficiently we use our resources, with a renewed focus on the client to enhance capture and retention of them. We will work to innovate in digital insurance through our different channels and product lines.
In the pension fund business, the medium and long term strategy is to maintain the attractiveness and profitability of the business by improving operating efficiency: optimizing risk management; innovating through our virtual channels; and enhance our client retention.
In the investment banking business, we will strengthen our business model by offering a full range of products and services with a regional scope. In this way, we seek to capture the growth potential of our three main business lines (asset management, sales and trading, and corporate finance) in the capital markets of Chile, Colombia and Peru and the Latin American region in general.
(5) Review of 2016
The following table provides certain financial information about our principal business segments as of and for the year ended December 31, 2016 (see Note 30 to the Consolidated Financial Statements):
|As of and for the Year ended December 31, 2016|
|Total Income||Operating Income(1)||Total Assets|
|(Soles in millions)|
|Eliminations and adjustments||(305||)||(64||)||(42,567||)|
|(1)||Operating income includes the net interest income from banking activities in the Banking operating segment; the amount of the net earned premiums, less insurance claims plus net interest income in the Insurance operating segment; the net interest income in the Pension Fund and in the Investment Banking operating segments|
5.1 Consolidated contributions
The following table sets forth the contribution to the consolidated net income attributable to our equity holders by each of our principal subsidiaries:
|(Soles in millions, except percentages)|
|(1)||Includes Mibanco (the combined entity), which contributed S/320.4 million in 2016, S/212.4 million in 2015, S/77.6 million in 2014. Also includes BCP Emisiones Latam 1 S.A., Solución EAH and others. For comparative purposes, BCB 2015 and 2014 profit is shown in another line.|
|(2)||In 2015 and 2014 the profit was part of BCP.|
|(3)||Credicorp Capital Ltd (which includes Credicorp Capital holding Chile, Credicorp Capital Holding Colombia, Credicorp Capital Securities and Credicorp Capital Peru (which include Credicorp Capital SAF, Credicorp Capital SAB, Credicorp Capital Sociedad Titulizadora and Credicorp Capital Servicios Financieros).|
|(4)||Includes Credicorp Ltd. which mainly includes expenses and the tax withheld in connection with the estimation of the dividends to be distributed to us by our Peruvian subsidiaries (BCP and Grupo Pacifico); eliminations for consolidation; and others. In 2016 includes the profit from the sale of 50% of BCI shares to a third party.|
The following table shows our main subsidiaries’ percentage contribution to our total assets, total revenues, net income and net equity attributable to Credicorp´s equity holders for the year ended December 31, 2016:
|As of and for the Year ended December 31, 2016 (1)|
|Total Assets||Total Revenue||Net Income /|
|Equity attributable to|
|Grupo Pacifico (3)||6.5||%||14.2||%||8.5||%||11.0||%|
|Credicorp Capital (4)||2.1||%||4.2||%||2.3||%||4.0||%|
|(1)||Percentages determined based on the Consolidated Financial Statements.|
|(2)||Includes Mibanco, BCP Emisiones Latam 1 S.A., Solución EAH and others.|
|(3)||Includes Pacifico Vida.|
|(4)||Credicorp Capital Ltd (which includes Credicorp Capital Holding Chile, Credicorp Capital Holding Colombia, Credicorp Capital Securities and Credicorp Capital Peru (which include Credicorp Capital SAF, Credicorp Capital SAB, Credicorp Capital Sociedad Titulizadora and Credicorp Capital Servicios Financieros).|
|(5)||Includes Grupo Crédito S.A., CCR Inc, Inversiones Credicorp Bolivia, eliminations for consolidation and others.|
The following table shows the percentage contribution of BCP main subsidiaries to its total assets, total revenues, net income and net equity for the year ended December 31, 2016:
|As of and for the Year ended December 31, 2016 (1)|
|Total assets||Total revenue||Net Income/(Loss)||Net equity|
|(1)||Percentages determined based on BCP’s consolidated financial statements of and for the year ended December 31, 2016.|
|(2)||Includes Solución Empresa Administradora Hipotecaria S.A., Edyficar Peru S.A. and BCP Emisiones Latam 1 S.A.|
5.2 Financial performance
In 2016, we recorded net income after non-controlling interest of S/3,514.6 million (S/3,092.3 million in 2015 and S/2,387.9 million in 2014). This represented a 13.7% increase with regard to 2015’s figure, which led to a ROAE of 19.6% (20.5% in 2015 and 18.5% in 2014) and ROAA of 2.3% (2.1% in 2015 and 1.9% in 2014).
The results of 2016 include some non-recurring income and expenses, which after tax adjustments totaled approximately S/75.5 million. The recurring net income totaled S/3,439.0 million, which represented a 16.5% increase with regard to 2015’s figure. As such, excluding the effect of non-recurring items, ROAE and ROAA at Credicorp were situated at 19.3% and 2.2%, respectively (vs 19.7% and 2.0% in 2015, respectively).
The main non-recurring income and expenses net of tax are:
|§||Non-financial income due to the sale of BCI shares for S/ 121.0 million; and|
|§||A translation loss of S/ 45.5 million.|
The main factors behind Credicorp’s results were:
|§||Growth of 5.9% in net interest income in comparison to the level posted in 2015. The increase was primarily attributable to expansion in interest income on loans in line with the increase of 8.3% above 2015’s interest income, all of which offset the increase in interest expenses (15.3% above the level in 2015). The NIM for 2016 is situated at 5.49%, 12 basis points below 2015’s figure. It is important to note that this indicator was affected by strong growth year-over-year in average interest-earning asset.|
|§||Net provisions for loan losses fell -5.1% year-over-year, which was due to a significant increase in recoveries and reversals during the year, which reflects the fact that this portfolio’s risk profile improved throughout the year. All of the aforementioned translated into an improvement in the cost of risk, which rose to 1.88%, comparing favorably to the 2.08% posted in 2015. The credit quality ratios are explained below in section “5.2.1 Assets Structure - (i) Portfolio quality”.|
|§||The 5.3% year-over-year increase in non-financial income due to growth in fee income (+4.8%), and gains on sales of securities (+35.4%), which in turn was attributable to extraordinary income from the sale of BCI shares in 2016.|
|§||Net earned premiums increased 3.8% as a result of higher net earned premiums of Property and Casualty business, mainly explained by the insurance business with individuals.|
|§||Operating expenses grew 1.7% due to the expansion of administrative expenses as a result of higher expense on consultants and marketing campaigns.|
See Item 5.Operating and financial review and prospects – 5.A. Operating results – (2) Historical Discussion and Analysis - 2.1 Results of Operations for the Three Years Ended December 31, 2014, 2015 and 2016.
(i) Main ratios
|2014||2015||2016||2015 - 2014||2016 - 2015|
|Net interest margin (3)||5.66||%||5.61||%||5.49||%||-5||-12|
|Funding cost (4)||2.0||%||2.0||%||2.1||%||0||10|
|Cost of risk (5)||2.16||%||2.08||%||1.88||%||-8||-20|
|Loan to deposit (6)||103.2||%||101.9||%||110.3||%||-130||840|
|Internal overdue ratio (7)||2.53||%||2.56||%||2.77||%||3||21|
|Non-performing loan ratio (8)||3.34||%||3.41||%||3.66||%||7||25|
|Coverage of Internal overdue loans (9)||148.6||%||166.2||%||160.6||%||1,760||-560|
|Coverage on NPL (10)||112.4||%||124.7||%||121.4||%||1,230||-330|
|Operating efficiency (11)||46.1||%||42.8||%||43.1||%||-400||30|
|(1)||Net income attributable to Credicorp / Average* equity before non-controlling interest.|
|(2)||Net income attributable to Credicorp / Average* assets.|
|(3)||Net interest margin / Average* interest earning assets.|
|(4)||Interest expense / Average* liabilities|
|(5)||Provisions for loan losses, net of recoveries / Total loans.|
|(6)||Total loans / Total deposits.|
|(7)||Internal overdue loans / Total loans.|
|(8)||Non-performing loans / Total loans. Non-performing loans = Internal Overdue Loans + Refinanced Loans + Restructured Loans|
|(9)||Allowance for loan losses / Internal overdue loans.|
|(10)||Allowance for loan losses / Non-performing loans.|
|(11)||(Operating expenses - Other expenses + Acquisition cost) / (Net interest income + Fee income + Net gain on foreign exchange transactions + Net gain from associates + Net earned premiums + Gross margin from medical services).|
|*||Averages are determined as the average of period-beginning and period-ending balances.|
5.2.1 Assets structure
Our total assets amounted to S/156.4 billion in 2016 (S/155.5 billion in 2015 and S/134.8 billion in 2014). The 0.6% increase in total assets in 2016 as compared to 2015 was a result of: (i) the slower growth of our loan portfolio, which grew by 4.9% in 2016 (13.6% in 2015 and 23.5% in 2014), (ii) a 25.7% decrease of cash (which includes cash collateral, reverse repurchase agreements and securities borrowings) mainly at BCP due from banks, primarily associated with a decrease in reserves held at BCRP (an increase of 3.2% in 2015 and a decrease of 0.3% in 2014), and (iii) a 0.44% decrease in investments available-for-sale (an increase of 19.2% in 2015 and a decrease of 13.5% in 2014). See Item 5.Operating and financial review and prospects – 5.A. Operating results –(3) –Financial Position.
As of December 31, 2016, Credicorp’s total loans increased 4.9% year-over-year (13.6% and 23.5% in 2015 and 2014, respectively), which represented an expansion of 5.6%, after excluding the impact of the U.S. Dollar depreciation on our loan book (currency-adjusted growth).
In terms of average daily balances, Credicorp’s loan book expanded 4.1% year-over-year, which represents a 4.6% currency-adjusted growth rate. This growth was, primarily due to:
|§||The 0.4% year-over-year increase of our Wholesale Banking’s loan book and 1.0% in currency-adjusted terms.|
|§||The 5.2% year-over-year increase of our Retail Banking’s loan book, which represented a currency-adjusted growth rate of 5.4% year-over-year.|
|§||BCP Bolivia and ASB’s expansion of their loan books by 15.9% and 0.1%, respectively; which represented currency-adjusted growth rates of 18.9% and 5.3%, respectively.|
|§||Mibanco’s posting of higher growth rates of 10.1% as a result of the loan growth in the small business segment.|
(i) Portfolio quality
In terms of portfolio quality, our internal overdue ratio (which includes loans under legal collection) was 2.77% at the end of 2016, 21 basis points higher than the 2.56% ratio recorded at the end of 2015 (2.56% and 2.53% at the end of 2015 and 2014, respectively). The increase reported in our internal overdue ratio over the last year reflects deterioration in segments such as SME-Pyme and Mortgage, which were affected by the presence of real estate collateral (commercial properties). This means that loans that are more than 150 days overdue cannot be written-off despite the fact that they are fully provisioned given that it is necessary to first undergo a judicial process to execute foreclosure and liquidate the collateral, which takes on average four years.
An analysis of the internal overdue ratio by business segment shows that:
|§||Wholesale Banking closed the year with an internal overdue ratio that was slightly lower to the ratio that was reported last year (0.29% in 2016, 0.32% in 2015, and 0.32% in 2014). The ratio remained very stable, but with a downward trend throughout the year.|
|§||Delinquency ratios at BCP Bolivia have remained at very low levels this year (1.80% in 2016, 1.57% in 2015, and 1.37% in 2014). The increase in internal overdue loans came mainly from consumer and mortgage segments.|
|§||Mibanco’s internal overdue ratio was 4.39% at the end of 2016 (4.76% in 2015 and 5.61% in 2014). This level is quite close to Edyficar’s historic level (approximately 4%). Good evolution in terms of the portfolio’s quality control was attributable primarily to continuous improvements in the risk profile used in the origination process as well as to write-offs that were made to clean up the portfolio after the acquisition and during the process to merge Edyficar and Mibanco.|
|§||The SME-Pyme segment reported an increase in its internal overdue ratio (12.41%, 11.10% and 10.61% in 2016, 2015 and 2014, respectively). However, the level of real estate guarantees in this segment is approximately 54%, which means, as noted above, that loans that are more than 150 days overdue cannot be written-off.|
|§||In the SME-Business segment, the internal overdue ratio decreased 72 basis points as compared to 2015 level (4.49%, 5.21% and 4.38% in 2016, 2015 and 2014, respectively). This decrease was due to the very slow growth in internal overdue loans, which in turn was reinforced by strong loan growth in the segment. The clients in the SME-Business segment have a high level of real estate coverage, which is currently at approximately 72%.|
|§||The Credit Card segment’s internal overdue ratio in 2016 was 4.65%, which was an increase from 4.17% in 2015 and 4.26% in 2014. This increase corresponds mainly to the maturity of vintages originated in 2015 and to the slowdown in loan growth that surfaced at the beginning of 2016, which accentuated the impact of higher levels of past due loans.|
|§||The Consumer segment’s internal overdue ratio in 2016 was 3.02%, an increase from 2.62% in 2015 and 2.35% in 2014. This was due to growth in internal overdue loans (in value), which in turn was reinforced by weak loan growth in the segment.|
|§||The Mortgage segment reported an increase in its internal overdue ratio (2.66%, 2.10% and 1.73% in 2016, 2015 and 2014, respectively), due the effect of loan amortizations by clients that dipped into 25% of their pension funds and the distortion created by the existence of real estate collateral.|
As a result, provisions for loan losses (the P&L account) decreased by -5.1%, which was in line with the evolution of delinquency in the Wholesale, SME-Business and Mibanco segments. This decrease helped the cost of risk to improve, reaching a 1.88% level in 2016 (2.08% in 2015 and 2.16% in 2014). At the end of 2016, the coverage ratio was 160.6%, which was a slight decrease from the 166.2% recorded at the end of 2015 (148.6% at the end of 2014).
5.2.2 Funding structure
At the end of 2016, Credicorp’s total liabilities were S/136.3 billion, which represents a 1.8% decrease as compared to 2015’s figure (S/138.8 billion and S/120.2 billion at the end of 2015 and 2014, respectively). See Item 5.Operating and financial review and prospects – 5.A. Operating results – (3) –Financial Position. The slight contraction in total funding reflects a context marked by low loan growth. In this scenario, less funding was needed in 2016 than in 2015. The reduction in total funding was due primarily to a decrease in deposits, which was offset by growth in accounts Payables related to repurchase agreements and security lending activities.
Deposits continued to represent the main source of financing within total liabilities, with a share of 63.0% for fiscal year 2016 (63.9% in 2015 and 64.1% in 2014). Contraction in deposits was mainly associated with a decrease in time deposits (-13.3%), and Bank’s negotiable certificates (-56.8%). The decrease in time deposits was as a result of the lower level of time deposits in foreign currency, mainly at ASB and BCP Stand-alone, given that some Private Banking deposits that had entered in September 2015 were withdrawn in mid-2016. It is important to note that although deposits contracted, core deposits (in particular savings and CTS, which are our most stable deposits) increased their share of the funding mix at Credicorp.
Bonds and notes issued maintained their 11.7% share of BAP’s total funding mix, despite their contraction due to (i) maturities of subordinated debt, and (ii) maturities of securitized issuances of remittances, which offset the debt issuances of BCP Stand-alone and Mibanco during year 2016.
The account payables related to repurchase agreements and security lending activities, which includes BCRP instruments, posted an ongoing growth and represented 11.1% of BAP’s total funding at the end of 2016 (10.5% at the end of 2015 and 6.9% at the end of 2014). The aforementioned was due primarily to the higher volume of repurchase agreements for certificates of deposit (regular repos) with BCRP mainly at BCP.
5.2.3 Distribution channels
Credicorp’s distribution network had 9,854 points of access to our clients at the end of 2016, which represented a 5.44% increase as compared to 2015’s level. This increase was due primarily to efforts to implement Agentes BCP and ATMs in 2016, which reflected the banking penetration strategy and migration to cost-efficient channels. In the case of BCP Bolivia, the increase in points of contact was due to growth in Agente BCP, which was in line with the goal to implement 150 agents by the end of 2016.
The table below shows the evolution of the points of contact (branches, ATM, Agentes) of each of Credicorp’s subsidiaries:
(1) The information also includes the distribution channels for Edyficar. The information for Mibanco was only incorporated in 2014, after the acquisition by Edyficar. It is important to note that the drop in Mibanco’s channels from 2014 to 2015 is attributable to the fact that contracts with agents ended in 2014 and Mibanco’s ATMs were shut down to leverage the synergies created by the consolidation process. Now, Mibanco has access to BCP’s distribution channels.
5.2.4 Grupo Pacifico
Grupo Pacifico is the second largest Peruvian insurance company, with a market share of 27.43% based on written premiums in 2016 (25.93% in 2015). This market share calculation includes premiums from Pacifico Seguros Generales, Pacifico Vida and Pacifico EPS and represents our total market share in the insurance market and the healthcare sector.
Grupo Pacifico achieved net income of S/303.3 million in 2016, 13.23% lower than the S/349.5 million reported in 2015 (S/205.9 million in 2014). The aforementioned is a result of non-recurring income registered in 2015 (S/99.1 million), which came from an agreement between Grupo Pacifico and Banmedica from Chile. Excluding that effect, the net income would have increased 21.1% in both the Life insurance and P&C businesses. These higher results are associated with the important recovery in net financial income as a result of the improved performance of capital markets at national and international levels.
|S/ in thousands||2014||2015||2016|
|TOTAL WRITTEN PREMIUMS (1)||3,156,365||2,719,809||2,757,045|
|Health Insurance (2)||1,082,323||360,481||381,730|
|Individual Annuity Line||343,294||378,763||222,074|
|Fire and Allied Lines||244,978||241,487||271,742|
|(1)||Without eliminations. Includes premiums assumed from other companies|
|(2)||Since 2015, corporate health insurance business and medical services (network of clinics, medical centers and laboratories) are excluded from Grupo Pacifico consolidated financial statements. Since 2015, Health insurance only includes Medical Assistance.|
Grupo Pacifico reported written premiums of S/2,757.0 million in 2016, which represent a 1.4% increase compared to 2015’s figure. It is important to mention that the life insurance market declined due to a decrease in individual annuities associated with reforms in the private pension system. The aforementioned is related with the release of Law N° 30425 which allows affiliates over the age of 65 years old to choose between receiving a pension or requesting AFPs to free up to 95.5% of their funds. This effect generated a decrease in individual annuities business in Pacifico Vida; nevertheless, all the other line of businesses increased, mainly credit life, individual life and group life. As a result, Grupo Pacifico achieved 24.1% of market share (22.9% in 2015).
Claims and Reserves
In 2016, Grupo Pacifico’s net loss ratio reached 58.4%, which decreased compared to the 58.9% and 63.3% recorded in 2015 and 2014, respectively.
|Net Loss Ratio(1)||2014||2015||2016|
|Pacifico Seguros Generales||56.8||%||52.4||%||51.4||%|
|(1)||Net claims / Net earned premiums|
|(2)||2015 figure does not include Pacifico EPS results due to the agreement with Banmedica.|
|(3)||Figures do not include eliminations for Credicorp’s consolidation purposes.|
The decrease in Pacifico Seguros Generales net loss ratio is attributable to two lines of business: Commercial P&C (loss ratio decreases from 43.3% to 38.4%) and Private Health insurance (loss ratio decreases from 71.8% to 68.9%). In the Private Health line of business, the improvement is due to moderate rate increases above inflation along with changes in deductibles and copayments. In the Commercial P&C business, improvement is due to a better risk selection.
Underwriting, clients and reinsurance
Underwriting guidelines for substantially all P&C and health insurance risks are developed by profit centers in conjunction with the actuarial staff. Pacifico Seguros Generales has engineering staff, which inspects most medium and medium-to-large commercial property insured risks prior to underwriting, whereas third party surveyors are employed to inspect smaller risks and/or lower risk property. Underwriting guidelines, rates and approval thresholds for these types of insurance are periodically reviewed by the profit centers with the actuarial staff, and informed to the risk committee.
Pacifico Seguros Generales transfers risks to reinsurers in order to limit its maximum aggregate potential losses and minimize exposures on large individual risks. Reinsurance is placed with reinsurance companies based on the evaluation of the credit quality of the reinsurer, terms of coverage and price. The P&C business acts as a reinsurer on a very limited basis, providing excess facultative reinsurance capacity to other Peruvian insurers that are unable to satisfy their reinsurance requirements, and/or to interests of Peruvian clients in the Latin American region.
Historically, Pacifico Seguros Generales has obtained reinsurance for a substantial portion of its earthquake-related insurance portfolio through excess loss reinsurance treaties. In addition, in 2012 Pacifico Seguros Generales negotiated proportional reinsurance support for this portfolio, which it maintains as of December 31, 2016. Pacifico Seguros Generales has property catastrophe reinsurance coverage in place that covers its probable maximum loss under local regulatory requirements. However, there can be no assurance that a major catastrophe would not have a material adverse impact on Grupo Pacifico’s financial condition and/or its operations.
Pacifico Vida holds excess of loss reinsurance contracts for Individual Life, Personal Accident, Group Life and Credit Life products; and in the case of Work Compensation Risk Insurance, it holds a quota share contract. Catastrophic reinsurance contracts cover all the company’s lines (Individual Life, Personal Accident, Group Life, Credit Life, SCTR and D&S), except for the Individual Annuity line. Premiums ceded to reinsurers represented less than 2.9% of written premiums in 2016.
Grupo Pacifico’s investments are made primarily to meet its solvency equity ratio and to provide reserves for its claims. Grupo Pacifico manages its investments under three distinct portfolios, designed to contain sufficient assets to match the liabilities of the group’s property and casualty, life and annuities lines, and health care lines. Each portfolio is managed under the authority of its own committee, which reviews portfolio strategy on a monthly basis. Grupo Pacifico invests in local and international markets, emphasizing investments in Peru, the U.S. and Latin America. Grupo Pacifico has adopted strict policies related to investment decisions. Its investment strategies and policies are reviewed and approved by Grupo Pacifico’s Board of Directors. Senior management also takes a leading role in devising investment strategies.
As of December 31, 2016, the market value of Grupo Pacifico’s investment portfolio was S/8,444 million, which included mainly S/485 million in equity securities, S/1,143 million in investment properties, and S/6,816 million in fixed income instruments. The portfolio is well diversified and it follows an asset-liability management strategy which is based on matching assets (portfolio) and liabilities (reserves) cash flow and duration matching, currency matching and improving the capital structure of the company. Grupo Pacifico’s financial income increased 27.9% in 2016 (S/432.0 million in 2016, S/337.6 million in 2015, S/337.2 million in 2014).
5.2.5 Prima AFP
Prima AFP managed 1.5 million affiliate accounts in 2016, similar to the number of affiliate accounts managed in the previous year. This represented a 23.4% of market share.
Funds under management (FuM) at Prima AFP increased from S/39.3 billion as of December 31, 2015 to S/43.2 billion as of December 31, 2016 (+9.9%). In 2014, this indicator reached S/36.7 billion. By year-end 2016, Prima AFP’s market share of total FuM was 31.7%. The profitability of our funds in the 12 months ended December 31, 2016 was 8.6%, 10.2% and 10.0% for Funds 1, 2 and 3, respectively.
Given that pension funds are long-term investments, it is best to observe their returns over a long period. For the 10 years ended December 31, 2016, covering the lifetime of Prima AFP’s three funds to date (without considering the Fund Type Zero), nominal annual profitability was 6.50%, 7.40% and 6.70% for Funds 1, 2 and 3 respectively. These figures place the company in first, second and third place, respectively, for profitability in the SPP system.
In 2016, Prima AFP registered total revenues of S/407.2 million (S/402.2 million in 2015 and S/391.9 million in 2014) and net income of S/155.8 million (S/162.1 million in 2015 and S/153.4 million in 2014). This was accomplished by expanding Prima AFP’s revenue base and controlling its operating expenses. Net income incorporates a tax change decreed by the Peruvian government, which cut corporate income taxes as of 2015. The statutory tax rate for 2014 was 30%, and 28% for 2015 and 2016.
In December 2016 Prima AFP won the third tender for affiliates by offering the lowest mixed fees: 0.18% of monthly remuneration and an annual fee of 1.25% over the balance, both of which will come into force in June 2017. From June 2017 to May 2019, Prima AFP will exclusively manage all new affiliate accounts. Notably, in 2016, under the mixed scheme, monthly remuneration was at 1.19% and the annual fee over the balance was at 1.25%. Due to the 2012 pension system reform, the monthly remuneration commission (mixed fee) will decline to 0.87% in February 2017, and because of the result of the third tender process, will drop to 0.18% in June 2017. This mixed fee will apply to new affiliates and current affiliates who chose to pay commissions under the mixed scheme.
5.2.6 Credicorp Capital
In 2016, Credicorp Capital continued establishing itself in the MILA markets through the following:
|§||Its active participation in advising major companies in the region with respect to their funding needs, issuances and transactions. The Investment Banking business participated in key deals at regional scope, especially in Equity Capital Markets (Entel capital increase, Cencosud block trade, and BCI capital increase and block trade), Debt Capital Markets (Kallpa Senior Notes issuance in international markets, and Primax, the largest corporate issuance in Peru local currency in a decade), Lending (participated as Joint Lead Arranger in the acquisition financing of Duke Energy Peru by iSquared Capital), and Advisory (financial advisors to Autopistas del Nordeste in Colombia).|
|§||With regard to its asset management business, as of December 31, 2016, Credicorp Capital Peru reached S/.23,958 million AuM, of which S/10,703 million corresponded to mutual funds (with a market share of 42.2%), and S/13,255 million corresponded to alternative investments, mandates and third party funds. Credicorp Capital Colombia reached S/7,530 million AuM, including S/3,862 million in mutual funds and S/.3,668 million in alternative investments. Finally, Inversiones IMT reached S/16,911 million AuM, including only S/1,014 million in mutual funds and the remaining in alternative investments. In regards to assets under custody, Credicorp Capital posted a total of S/.56,337 million, of which Peru represented 78%, Colombia 12% and Chile 10%.|
|Soles in millions|
|AuM – Credicorp Capital Peru (1)||14,778||17,414||23,958|
|AuM – Credicorp Capital Colombia||5,335||5,423||7,530|
|AuM – Inversiones IMT||5,453||7,505||16,911|
|Total AuM - Credicorp Capital||25,566||30,342||48,399|
|Total AuC - Credicorp Capital (2)||36,789||38,885||56,337|
|(1)||Includes AuM for which there is a service agreement between ASB and Credicorp Capital for the latter to perform functions as Portfolio Manager (ASB funds in millions of Soles are: S/5,683, S/5,302 and S/5,366 in 2014, 2015 and 2016, respectively).|
|(2)||Asset under custody.|
The sales and trading business was the main driver for surpassing the forecasted revenues for 2016. Despite a slow start, the market improved relatively compared to the previous year and the brokerage business had a good performance which was complemented by positive results in the market making portfolios.
Additionally, in 2016, our broker in Peru reaffirmed its leadership in trading activity, with 38.8% and 16.9% market share in equities and fixed income, respectively. Likewise, our brokerage firm in Colombia reached first place in fixed income and equities. In Chile, our brokerage firm remained in first place in fixed income, and reached second place in equities.
|Soles in millions|
|Equity securities – Credicorp Capital Peru||9,430||3,683||6,974|
|Fixed income – Credicorp Capital Peru 1||2,455||2,303||762|
|Equity securities - Credicorp Capital Colombia||20,350||15,582||16,102|
|Fixed income - Credicorp Capital Colombia 2||265,282||220,910||249,444|
|Equity securities – Inversiones IMT 3||15,588||14,434||21,759|
|Fixed income – Inversiones IMT||13,436||16,872||13,868|
|(1)||Fixed Income Peru: Bolsa de Valores de Lima’s information. It does not consider the information of Datatec platform.|
|(2)||Fixed Income Colombia: Banco de la República and Bolsa de Valores de Colombia’s information. It does not consider repo operations.|
|(3)||Equity Chile: Bolsa de Comercio de Santiago’s information. It does not consider repo operations.|
In recent years, several foreign companies have showed interest in entering the Peruvian market while financial companies already in Peru have taken steps to expand operations and develop new businesses.
Throughout 2016, the most relevant events in terms of new entrants or financial institutions that have been granted new licensees are among others:
|·||In April 2016, the SBS granted JP Morgan the authorization to operate as an Investment Bank in Peru. Over the last 20 years, JP Morgan has had a representative office in Peru and has given counseling to local businesses about the emission of shares in the United States. Now, as an Investment Bank it will be allowed to expand its business in Peru by getting involved in sales and trading of BCRP and Government instruments, as well as foreign exchange trading.|
|·||In December 2016, Bank of China opened a representative office in Peru in order to facilitate commerce between both countries and stimulate business development. This reflects the willingness of foreign-owned banks to take steps to begin operations in the Peruvian market. Due to the increasing flexibility provided by the SBS Regulation entering into effect starting February 2017, the presence of foreign banks is expected to grow in the coming years. Prior to February 2017, a majority shareholder could not own more than one financial entity and operate in Peru. This restriction has been modified, allowing more than one bank with the same majority shareholder to operate in the country, causing the Bank of China to announce its goals to open more representative offices in Peru and to launch new commercial banking products and services in the country. The new regulation will probably lead to more specialization, a greater supply of financial services in different currencies and more competition in Peru’s financial system.|
While new entries into the Peruvian banking system over the last three years have not been as pronounced as in previous years, there is evidence that foreign-owned banks are taking steps to begin operations in the Peruvian market. For example, Itaú Unibanco, Bladex, Morgan Stanley Bank, Bank of Tokyo Mitsubishi and Sumitomo Mitsui Banking opened representative offices in Peru.
6.1.2 Peruvian financial system
On December 31, 2016, the Peruvian financial system consisted of the following principal participants: the Peruvian Central Bank, the SBS, 57 financial institutions and four state-owned banks (not including the Peruvian Central Bank): Banco de la Nacion, COFIDE, Agrobanco and Fondo MiVivienda.
|As of December 31, 2016|
|entities||( Soles in million)|
|Municipal savings banks||12||21,440,568||16,749,528||17,176,096|
|Rural savings banks||6||1,369,071||623,730||1,064,152|
|Major Peruvian Banks||As % of Peruvian Financial System (1)||As % of Multiple Banking|
|as of December 31,|
|BBVA Banco Continental||20.0||%||20.9||%||19.5||%||22.1||%||23.2||%||22.1||%|
|Banco Interamericano de Finanzas||3.2||%||3.4||%||3.2||%||3.5||%||3.8||%||3.6||%|
|(1)||Excludes stated-owned banks.|
As of December 31, 2016, BCP Stand-alone ranked first among all Peruvian banks in terms of assets, deposits and loans.
In 2016, the Peruvian banking system reported a balance of loans of S/160,412 million in local currency and US$22,336 million in foreign currency. These figures represented an annual expansion of loan balances of 5.5% and 2.2%, respectively (37.8% and -21.2%, respectively, from December 31, 2014 to December 31, 2015). As a result, the dollarization of loans reached 31.8% at the end of 2016 (compared to 32.9% in 2015 and 42.9% in 2014). Nevertheless, as of December 31, 2016, the total amount of multiple banking deposits was S/210,201 million, which represented a dollarization rate of 47.6% (compared to 52.9% in 2015 and 47.04% in 2014).
As part of its plan to decrease the dollarization of loans, BRCP has set de-dollarization targets to be reached by the end of June 2015, the end of December 2015 and the end of December 2016 in two books: (i) the total FC portfolio with certain exceptions (excludes loans for foreign trade and loans issued for more than 3 years for amounts that exceed US$10 million); and (ii) the mortgage and car portfolios as a whole. In the case of FC total loans, the reduction target is calculated based on period-end balances (in Peru GAAP) as of September 2013. The reduction target for the joint portfolio of mortgage and car loans is calculated with period-end balances (in Peru GAAP) as of February 2013. However, compliance levels for both targets are calculated using average daily balances.
To help decrease the dollarization of loans, BCRP has created expansion and substitution repurchase agreements (repos), which allow banks to increase the amount of local currency (LC) loans, and to replace foreign currency (FC) loans for Soles loans, respectively. BCRP increased the supply of these instruments during the second quarter of 2015 to maintain liquidity in LC and also improved their conditions, mainly in terms of duration. Initially, repos were short-term transactions (less than a year); now they are mid-term (between one and four years). However, in 2016 BCP has created fewer expansion and substitution repurchase agreements as compared to 2015.
Peru’s capital ratio (regulatory capital/risk-weighted assets) reached 15.01% as of December 31, 2016, which was above the 10% legal minimum that became effective in July 2011. This represented an increase of 98 basis points from the capital ratio reported at the end of December 2015 (14.17%). In 2015, the ratio increased 4 basis points from the ratio of 14.13% as of December 31, 2014.
Peru’s loan portfolio quality indicators deteriorated in 2016. As of December 31, 2016, internal overdue ratio reached 2.80%, 26 basis points more than the ratio reported as of December 31, 2015 (2.54%). At the end of 2015, the ratio increased 7 basis points compared to December 31, 2014 (2.47%). Also, the internal overdue, refinanced and re-structured loans over total loans ratio was 4.03% as of December 31, 2016, 43 basis points higher than the figure reported at year end 2015, 3.6% (3.5% in 2014). Similarly, the coverage ratio of Peru’s internal overdue loan portfolio was 160.60% as of December 31, 2016 (compared to 166.6% as of December 31, 2015 and 165.0% as of December 31, 2014).
Finally, the liquidity of the banking system remained at high and comfortable levels. The local currency liquidity ratio and foreign currency liquidity ratio closed 2016 at 27.4% and 43.9%, respectively (26.5% and 46.6% in 2015; and 24.4% and 54.7% in 2014, respectively). These ratio levels were well above the minimums required by SBS regulations (8% in local currency and 20% in foreign currency).
(ii) Other financial institutions
BCP faced strong competition from credit providers, primarily with respect to consumer loans and SME-Pyme loans.
SME-Pyme loan providers lent S/12.9 billion in 2016, compared to the S/11.4 billion in 2015 and S/17.2 billion in 2014. In 2016, overall SME-Pyme loans to customers of other financial institutions represented 19.0% of the total in the financial system (compared to 17.3% in 2015 and 55.0% in 2014).
Consumer loan providers lent S/8.9 billion in 2016, compared to the S/7.6 billion and S/6.9 billion in 2015 and 2014, respectively. In 2016, overall loans to consumers of other financial institutions represented 17.5% of total loans in the financial system (compared to 16.3% in 2015 and 17.1% in 2014).
6.2 Capital markets
In BCP’s Wholesale Banking Group, its corporate banking area has experienced increased competition and pressure on margins over the last few years. This is primarily the result of new entrants into the market, including foreign and privatized commercial banks, as well as local and foreign investment banks and non-bank credit providers, such as pension fund administrators (or AFPs) and mutual fund companies.
In addition, Peruvian companies have gained access to new sources of capital through local and international capital markets. In recent years, AFPs’ funds under management and mutual funds have increased at rates over those experienced by the banking system. The private pension fund system in Peru reached S/136.4 billion as of December 31, 2016 (representing 9.9% year-over-year increase) from S/124.1 billion in 2015 and S/114.5 billion in 2014. Total mutual funds reached S/25.3 billion as of year-end 2016, S/21.1 billion as of year-end 2015, and S/18.7 billion as of year-end 2014.
6.3 Investment banking
In 2016, Credicorp Capital consolidated its structure around its business units. Currently Credicorp Capital is organized around three main business units: Asset Management, Sales & Trading and Corporate Finance. In addition, we have organized a regional business support team, structured an integrated regional sales force and have a centrally managed Treasury.
In the Asset Management business, Credicorp Capital continued its development of alternative funds, strengthening its position in the following funds: Fondo Infraestructura in Colombia, Fondo Inmobiliario in Peru, and Fondo de Inversión Credicorp Capital Renta Residencial I in Chile. As of December 31, 2016, Credicorp Capital Peru maintains its leadership in Mutual Funds with a market share of 42.2% of total market AuM and has been working to increase participation of institutional clients from the region.
In the Sales & Trading business, our broker in Peru reaffirmed its leadership, with 38.8% and 16.9% market share in equities and fixed income, respectively. Likewise, our brokerage firm in Colombia reached first place in fixed income and equities and in Chile, our broker remained in first place in fixed income market share, and reached second place in equities.
In the Corporate Finance business, our position was consolidated through the structuring of significant financing operations. Some of the main highlights are the business of Lending and Capital Markets in Peru, Capital Markets and M&A in Chile, while Credicorp Capital Colombia continues to build its practice among infrastructure projects.
The Peruvian insurance market is highly concentrated. As of December 31, 2016, four companies commanded 84.1% of the market share by premiums, and the leading two had a combined market share of 60.6%. Together, Pacifico Seguros Generales, Pacifico Vida and Pacifico EPS constituted the second largest insurance company in Peru with a 27.4% market share. Peruvian insurance companies compete principally on the basis of price, as well as on the basis of brand recognition, customer service and product features. Grupo Pacifico’s insurance businesses believe that their competitive pricing, strong and positive image, and quality of customer service are significant aspects of their overall competitiveness. While increased foreign entry into the Peruvian insurance market may put additional pressure on premium rates, particularly for commercial coverage, Grupo Pacifico believes that in the long-term foreign competition will increase the quality and strength of the industry. Grupo Pacifico believes that its size and its extensive experience in the Peruvian insurance market provide it with a competitive advantage over foreign competitors.
However, competition in the Peruvian insurance industry has increased substantially since the industry was deregulated in 1991, with particularly strong competition in the area of large commercial policies, for which rates and coverage typically are negotiated individually. A loss by Grupo Pacifico to competitors of even a small number of major customers or brokers could have a material impact on Grupo Pacifico’s premium levels and market share.
(7) Peruvian government and economy
While we are incorporated in Bermuda, most of BCP’s and Grupo Pacifico’s operations and customers are located in Peru. Although ASHC is based outside of Peru, a substantial number of its customers are also located in Peru. Therefore, the results of our operations and our financial health could be affected by changes in economic or other policies of the Peruvian government. We are also exposed to other types of changes in Peruvian economic conditions, such as the depreciation of the Sol relative to the U.S. Dollar or social unrest related to extractive industries such as mining. The level of economic activity in Peru is also very important for our financial results and the normal conduct of our business.
7.1 Peruvian government
During the past several decades, Peru has had a history of political instability that has included several military coups and multiple government changes. On many occasions, government changes have taken place in order to alter the nation’s economy, financial system, agricultural sector, etc. See “Item 3. Key Information - 3.D Risk Factors”. In 1987, President Alan Garcia attempted to nationalize the banking system, including BCP. At that time, the majority shareholders of BCP sold a controlling interest in BCP to its employees, which prevented the government from assuming control of BCP.
Starting in 1990, President Alberto Fujimori implemented a series of market-oriented reforms; since that time, they have for the most part remained in place. See “Item 3. Key Information — 3.D Risk Factors”. After President Fujimori resigned in November 2000 following a series of corruption scandals, a transitory government was arranged and elections were called in April 2001. Alejandro Toledo won elections and took office that year, maintaining most of the economic policies of the prior decade. In 2006, former president Alan Garcia was elected again and, unlike his first term in the 1980s, maintained the same market-oriented economic policies of prior governments.
In 2011, Ollanta Humala was elected president. While his initial proposals as a candidate were designed to radically change the existing market-oriented policies and move toward a more state-run economy, his first cabinet upon taking office reflected a change in approach, especially after he chose Luis Castilla, who had worked in the previous administration as Deputy Finance Minister, to serve as Minister of Finance. President Humala also decided to ratify the Central Bank’s president, Julio Velarde, which was perceived as an attempt to gain confidence from business leaders and financial markets. Both appointments contributed to a recovery in Peru’s investment climate, which had deteriorated during the presidential campaign. Economic growth in 2011 and 2012 reached 6.5% and 6.0%, respectively, and both rates were seen as being in line with the country’s potential output. In 2013, however, the economy’s growth rate decelerated to 5.9% amid concerns about metal prices (especially gold, which fell 28.3% that year), monetary policy in the United States and Chinese growth, which also affected the performance of other emerging markets. In 2014, supply-side shocks in the mining and fishing industries led to a 2.2% contraction in the primary sector, its worst performance since 1992. This added to the pressures of a difficult international environment and as a result the economy grew 2.4%. In 2015, GDP grew 3.3%, as economic activity was boosted by primary sector growth (6.9%). The partial reversal of the supply-side shocks experienced during 2014 and the increase of production capacity in the copper industry due to the result of operations of the mines in Toromocho and Constancia, and the ramp-up of Cerro Verde’s expansion, contributed to the GDP growth in 2015.
In 2016, new presidential elections were held, with a first round on April 10, 2016. A second round between candidates Ms. Keiko Fujimori and Mr. Pedro Pablo Kuczynski was necessary as none of the candidates obtained more than 50% of the valid votes. The second round was held on June 5, 2016, and Pedro Pablo Kuczynski was elected president for the 2016-2021 term with 50.12% of the vote. Kuczynski, a former Wall Street veteran and World Bank official, is expected to maintain the current economic model. This model includes: (i) maintaining the Constitution and respect for the already signed trade agreements, (ii) bolstering private investment, and (iii) decreasing the extent of the informal economy. Moreover, one of Kuczynski’s main objectives is for Peru to enter the OECD by 2021. However, Kuczynski faces a minority in Congress (17 of 130 seats) and political negotiation is a key factor in order to carry out his political agenda. To compound the difficulties that Kuczynski faces Congress granted, for a period of 90 days, legislative powers to the Executive Branch, which has enacted a total of 112 legislative decrees since October 2016, relating to (i) economic recovery and formalization, (ii) administrative simplification, (iii) water and sanitation, (iv) fight against corruption, and (v) citizen security.
7.2 Peruvian economy
The adoption of market-oriented macroeconomic policies since the early 1990s and a positive outlook for Peru’s economy among international investors has allowed Peru to grow at an average rate of 5.5% over the last decade (2007-2016). Peru’s economy even experienced a positive, albeit small, growth rate during the global financial crisis in 2009 (1.0%). In subsequent years, and as international financial conditions improved and growth resumed in most economies, Peru continued to outperform the global economy, growing 6.0% in 2012 and 5.9% in 2013. In 2014, the economy decelerated and grew 2.4% as a result of lower international prices for metals, supply-side shocks in the mining, fishing and coffee industries and a contraction of public investment at the subnational level. In 2015, the economy grew 3.3%, at a faster pace compared to 2014 due to the growth in the primary sector (6.9%). In 2016, the economy grew 3.9%, above growth rates for 2015 and 2014, mainly due to the expansion of the mining sector (21.2%) as operations from Las Bambas and Cerro Verde’s expansion reached peak capacity and copper production grew 40.1%.
Peruvian economic policy is based on three pillars: trade policy, fiscal policy and monetary policy.
Peru’s has maintained an open trade policy for more than two decades. In 2007, Peru signed a Free Trade Agreement (FTA) with the United States, which went into effect in 2009, and made permanent the special access to the U.S. market previously enjoyed under the Andean Trade Promotion and Drug Eradication Act (ATPDEA). Exports from Peru to the United States were US$6.2 billion in 2016 (16.8% of Peru’s total exports). With the available information, the FTA with United States has not been affected after the U.S. Presidential Election. In terms of bilateral trade, Peru remains as a net imported from the U.S. (2016: US$516 million net imports), and does not represent a major competitor for the U.S. industrial sector. Another trade agreement was signed with China in 2009 and went into effect in 2011. Exports from Peru to China reached US$8.5 billion in 2016 (23.0% of total exports). In addition, Peru has also signed trade agreements with the European Union, Japan, South Korea, Singapore and Thailand, among others. Within Latin America, Peru has trade agreements with Chile, Colombia and Mexico and is a founding member, along with these countries, of the Alliance of the Pacific. Furthermore, the country is part of the Trans-Pacific Partnership (TPP), a trade agreement involving twelve Pacific Rim countries. However, U.S. president outlined that United States would not ratify the agreement. Hence, the state of the TPP remains uncertain in execution.
In 2016, exports increased 7.6%,as compared to 2015, to US$36.8 billion. Imports amounted to US$35.1 billion, falling 6.1% year-over-year. As as result, the 2016 trade surplus was US$1.7 billion, the highest it has been since 2013. This improvement of the trade balance narrowed the current account’s results, which closed the year with a deficit equivalent to 2.8% of GDP from 4.9% of GDP in 2015.
Peruvian policymakers have also maintained an orthodox approach with regards to fiscal policy and government spending. The debt-to-GDP ratio has fallen from 51.1% in 1999 to 23.8% in 2016 as the government cut its spending and privatized some state-run enterprises. The fiscal position has also benefited from the accumulation of surpluses over the major part of the last decade. In 1999, Congress approved the Law of Fiscal Responsibility and Transparency, which includes the following rules: (i) the fiscal deficit cannot exceed 1% of GDP; (ii) spending corresponding to government consumption cannot grow above 4% in real terms; and (iii) in years in which general elections take place, government spending in the first seven months of the year shall not exceed 60% of the budget for such year. In 2013, these measures were further refined, following the best international practices, with the approval of the Law Strengthening Fiscal Responsibility and Transparency, which introduced a structural-guidance approach based on the evolution of structural commodity prices and potential GDP and established that the structural fiscal deficit cannot exceed 1% of GDP. While the 1999 framework helped the country to reduce its debt, the changes introduced in 2013 allow for the implementation of counter-cyclical policy (when a negative output gap of more than 2% of potential GDP exists, the spending limit can be adjusted by, at most, 0.5% of GDP, and corrective measures should be employed once the output gap falls below 2%) and delineates the responsibilities of national, regional and local governments (the latter two can only borrow for investment projects and debt cannot exceed the four-year moving average of annual revenues). In March 2016, Congress approved the bill that establishes the gradual convergence of the structural deficit for 2017 (1.5%, previously 2.5%) and 2018 (1.0%, previously 2.0%). These rules, together with low debt levels and fiscal savings of about 15% of GDP have allowed Peru to not only retain its investment grade status but also to improve its credit rating, standing at BBB+ for Standard & Poor’s as well as Fitch Ratings and A3 for Moody’s.
The new government introduced changes to the fiscal rules amid the legislative powers granted by Congress to the Executive Branch. The following changes are among the most notable: (i) the migration from a structural framework to a conventional deficit rule, with an expected trajectory of 2.5% of GDP in 2017, 2.3% in 2018, 2.0% in 2019, 1.5% in 2020 and 1.0% in 2021; (ii) the legal limit to public debt of the non-financial public sector is kept at 30% of GDP, but, exceptionally, a deviation of up to 4pp in cases of financial volatility (and if other fiscal rules are fulfilled) is allowed; (iii) a limit is established for the real growth of non-financial public spending from the General Government. The limit is the upper bound of a 20-year average GDP growth +/- 1pp (the 20-year average includes: the 15 previous years, the estimate for the current year, and forecast for the 4 years ahead); (iv) a limit to the real growth of current spending from the General Government, excluding maintenance expenditure, which is the lower bound of the range referred to in item (iii) above; and (v) simplification of fiscal rules of subnational governments. In 2016, the non-financial public sector reported a deficit equivalent to 2.6% of GDP, compared to a deficit of 2.1% of GDP in 2015, and better than the government’s fiscal deficit target of 3.0% of GDP. Fiscal revenues decreased 4.1% in real terms in 2016, the second consecutive year of contraction, due to a fall in VAT revenues (-1.6%) and an increase in tax refunds (+35.2%). Hence, fiscal revenues as a percentage of GDP stood at 18.5% in 2016, the lowest percentage in 12 years. Non-financial expenditure of the General Government fell 2.4% in real terms. While current expenditure expanded 0.3%, public investment of the General Government fell 3.6% (third consecutive year of contraction). It should be noted that the Ministry of Finance established a limit to spending for the National Governments during the last quarter of 2016. The limit aimed to lower the annualized fiscal deficit, which, by August 2016, stood at 3.4% of GDP and, by December, 2016, 3.0% of GDP. Peru ended 2016 as the only MILA country with an investment grade that holds a stable outlook from the three main Credit Rating Agencies.
In 2014, a fiscal stimulus package was announced by the previous administration in order to boost expectations and private investment. The package of measures included: (i) reducing taxes, (ii) increases in expenditure that were not contemplated in the Budget Bill, and (iii) continuity and maintenance of investments. The main tax measures included modifications to corporate income tax to encourage earnings reinvestment and investment: corporate income tax rate would be gradually reduced from 30% to 26% by 2019 (in 2015, it fell to 28%) while the dividend rate would increase from 4.1% to 9.3% in 2019 (in 2015 it increased to 6.8%). Individual income tax rates also fell in the low income segment from 15% to 8%. Additionally, steps have been taken to simplify the system for value added tax (“VAT”) withholding to free up resources in the private sector for the equivalent of 0.4% of GDP. In 2016, and amid legislative powers granted by Congress, the Executive branch established changes on tax measures. Some of the most important decrees in tax measures were: (i) the VAT will be cut from 18% to 17% from Jul-17 onwards provided that government revenues from VAT excluding tax refunds reach 7.2% of GDP by May-17; (ii) the corporate income tax was increased from 28% to 29.5%, the dividend tax was cut from 6.8% to 5% (this reverted the changes established by the previous administration in which the corporate income tax would be cut gradually and reach 26% by 2019), while additional deductions to the individual income tax were established in Health, Housing Spending, and others; and (iii) tax amnesty was implemented to achieve capital repatriation of non-declared income, with a 10% rate for income that is declared and 7% for capital that is repatriated and invested, among other measures.
The BCRP, which is officially autonomous and presides over a system of reserve banking, is responsible for monetary policy. In 2002, BCRP set an inflation target of 2.5% (+/-1 %), which it later reduced to 2.0% (+/-1%) in 2007. The 2.0% target is the lowest in Latin America and reflects the Central Bank’s commitment to price stability. BCRP also has considerable foreign reserves, equivalent to approximately 32% of GDP as of year end 2016 and other mechanisms to provide liquidity to Peru’s domestic financial system. The Central Bank also sets regulations for the financial system, including pension funds, in coordination with the SBS. Finally, the currency regime in Peru does not have currency controls or barriers to capital inflows but has the Central Bank as an important player in the market, selling or buying foreign currency in order to soften volatility.
During 2016, in response to growing inflation and inflation expectations a year ahead above the upper bound of the target range (2.0% +/- 1pp.) for various months, the BCRP made two hikes to its reference rate, from 3.75% to 4.00% in January, and from 4.00% to 4.25% in February. The reference rate remained at 4.25% throughout 2016. Moreover the Central Bank increased the minimum for current account deposits in local currency subject to reserve requirements, from 0.75% at the close of 2015 to 1.00% by March 2016. Also, in December 2016, it lowered its reserve requirements in local currency (from 6.5% at the close of 2015 to 6.0% starting January 2017) and foreign currency (from 70% at the close of 2015 to 48% starting January 2017).
Inflation in 2016 was 3.2% above the BCRP’s target (2.0% +/- 1pp) for the third consecutive year. As a result, Peru recorded an inflation rate lower than that observed in other countries in the region such as Brazil (6.3%) and Colombia (5.8%). Also, at the end of 2016, the exchange rate was at S/3.357 (Sol / U.S. Dollar), which represents an annual appreciation of 1.7%. However, currency appreciation in 2016 was lower than that seen in Peru’s regional peers: Brazil (17.8%), Colombia (5.4%) and Chile (5.4%). On the other hand, Mexico (20.5%) was the only regional peer that registered a currency depreciation. The factors that drove these appreciation pressures at the regional level included: (i) a Federal Reserve System that increased its reference rate only one time in December 2016, contrary to what was initially expected in December 2015, which was 4 hikes during 2016); and (ii) a recovery in the prices of the main export commodities in 2016 (copper: +17.4%), which improved the current account deficit in the region. Also, in 2016, the Central Bank lowered its outstanding FX swaps (sales) from a maximum of S/34.4 billion in February 2016 to S/0.5 billion at the close of 2016 (in January 2017, the outstanding FX swaps (sales) were null). Moreover, in 2016 the trade balance registered a surplus of US$1.7 billion, the best result since 2013, due to a US$2.0 billion increase in copper exports, amounting to an increase of 42.3% in volume of exports, and a US$0.7 billion increase in gold exports, with the average export price of gold increasing by 7.9%.
(8) The Peruvian financial system
As our activities are conducted primarily through banking and insurance subsidiaries operating in Peru, a summary of the Peruvian financial system is set forth below.
Peruvian Law No. 26702 (“Peruvian Banking Law” or “Law No. 26702”) regulates Peruvian financial and insurance companies. In general, it provides for loan loss reserve standards, brings asset risk weighting in line with Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (or the Basel Accord) guidelines, broadens supervision of financial institutions by the SBS to include holding companies, and includes specific treatment of a series of recently developed products in the capital markets and derivatives areas.
8.2 The Peruvian central bank
The Peruvian Central Bank was established in 1922. Pursuant to the Peruvian Constitution, its primary role is to ensure the stability of the Peruvian monetary system. The Peruvian Central Bank regulates Peru’s money supply, administers international reserves, issues currency, determines Peru’s balance of payments and other monetary accounts, and furnishes information regarding the country’s financial situation. It also represents the government of Peru at the IMF and the Latin American Reserve Fund (a financial institution whose purpose is to provide balance of payments assistance to its member countries by granting credits or guaranteeing loans to third parties).
The highest decision-making authority within the Peruvian Central Bank is its seven-member board of directors. Each director serves a five-year term. Of the seven directors, four are selected by the executive branch and three are selected by the Congress. The Chairman of the Peruvian Central Bank is one of the executive branch nominees but must be approved by Peru’s Congress.
The Peruvian Central Bank’s board of directors develops and oversees monetary policy, establishes reserve requirements for entities within the financial system, and approves guidelines for the management of international reserves. All entities within the financial system are required to comply with the decisions of the Peruvian Central Bank.
8.3 The Superintendency of banks, insurance and pension funds (SBS)
The SBS, whose authority and activities are discussed in “—(9) Supervision and Regulation” is the regulatory authority in charge of implementing and enforcing Law No. 26702 and, more generally, supervising and regulating all financial, insurance and pension fund institutions in Peru.
In June 2008, Legislative Decree 1028 and 1052 were approved modifying Law No. 26702 with the following objectives: (i) to strengthen and to increase competitiveness, (ii) to implement Basel II and (iii) to adapt Peru’s existing regulatory framework to the FTA signed between Peru and the United States.
The main amendments defined in Law No. 1028 were designed to promote the development of Peruvian capital markets by extending the range of financial services that could be offered by microfinance institutions (i.e., non-banks) without requiring SBS authorization. Law No. 1028 also modified the framework in which the Peruvian financial system is to be harmonized with the international standards established by the Basel II Accord (which aims to minimize the issues regarding regulatory arbitrage). Since July 2009, Peruvian financial institutions generally have applied a standardized method to calculate their capital requirement related to credit, market and operational risk. As an alternative to the standardized method, financial institutions may request authorization from the SBS to use different models for calculating the reserve amount associated with any of these three risks. In July 2009, the SBS started receiving applications to use alternative models, referred to as Internal Models Methods. If the amount of an institution’s reserve requirements would be higher using the standard model than it would be using the approved Internal Models Method, then the institution will have to maintain between 80% and 95% of the standard amount during a phase in period. Even after the phase in period, institutions using an Internal Models Method will be subject to regulatory capital floors.
Law No. 1052 aims to include and synchronize Law No. 26702 and the FTA’s framework, particularly regarding insurance services. The amendments allow companies to offer cross-border services and have simplified the process for international institutions to enter into the Peruvian market by establishing subsidiaries.
8.4 Financial system institutions
Under Peruvian law, financial institutions are classified as banks, financing companies, other non-banking institutions, specialized companies and investment banks. BCP is classified as a bank.
A bank is defined by Law No. 26702 as an enterprise whose principal business consists of (i) receiving money from the public, whether by deposits or by any other form of contract, and (ii) using such money (together with the bank’s own capital and funds obtained from other sources) to grant loans or discount documents, or in operations that are subject to market risks.
Banks are permitted to carry out various types of financial operations, including the following: (i) receiving demand deposits, time deposits, savings deposits and deposits in trust; (ii) granting direct loans; (iii) discounting or advancing funds against bills of exchange, promissory notes and other credit instruments; (iv) granting mortgage loans and accepting bills of exchange in connection with the mortgage loans; (v) granting conditional and unconditional guaranties; (vi) issuing, confirming, receiving and discounting letters of credit; (vii) acquiring and discounting certificates of deposit, warehouse receipts, bills of exchange and invoices of commercial transactions; (viii) performing credit operations with local and foreign banks, as well as making deposits in those institutions; (ix) issuing and placing local currency and foreign currency bonds, as well as promissory notes and negotiable certificates of deposits; (x) issuing certificates in foreign currency and entering into foreign exchange transactions; (xi) purchasing banks and non-Peruvian institutions which conduct financial intermediation or securities exchange transactions in order to maintain an international presence; (xii) purchasing, holding and selling gold and silver as well as stocks and bonds listed on one of the Peruvian stock exchanges and issued by companies incorporated in Peru; (xiii) acting as financial agent for investments in Peru for external parties; (xiv) purchasing, holding and selling instruments evidencing public debt, whether internal or external, as well as obligations of the Peruvian Central Bank; (xv) making collections, payments and transfers of funds; (xvi) receiving securities and other assets in trust and leasing safety deposit boxes; and (xvii) issuing and administering credit cards and accepting and performing trust functions.
In addition, banks may carry out financial leasing operations by forming separate departments or subsidiaries. Banks may also promote and direct operations in foreign commerce, underwrite initial public offerings, and provide financial advisory services apart from the administration of their clients’ investment portfolios. By forming a separate department within the bank, a bank may also act as a trustee for trust agreements.
Law No. 26702 authorizes banks to operate, through their subsidiaries, warehouse companies and securities brokerage companies. Banks may also establish and administer mutual funds.
Peruvian branches of foreign banks enjoy the same rights and are subject to the same obligations as Peruvian banks. Multinational banks, with operations in various countries, may perform the same activities as Peruvian banks, although their foreign activities are not subject to Peruvian regulations. To carry out banking operations in local Peruvian markets, multinational banks must maintain a certain portion of their capital in Peru, in at least the minimum amount that is required for Peruvian banks.
8.4.2 Finance companies
Under Law No. 26702, finance companies are authorized to carry out the same operations as banks, with the exception of (i) issuing loans as overdrafts in checking accounts and (ii) participating in derivative operations. These operations can be carried out by finance companies only if they fulfill the requirements stated by the SBS.
8.4.3 Other financial institutions
The Peruvian financial system has a number of less significant entities which may provide credit, accept deposits or otherwise act as financial intermediaries on a limited basis. Leasing companies specialize in financial leasing operations where goods are leased over the term of the contract and in which one party has the option of purchasing the goods at a predetermined price. Savings and loans associations or cooperatives may accept certain types of savings deposits and provide other similar financial services.
Peru also has numerous mutual housing associations, municipal savings and credit associations, savings and credit cooperatives and municipal credit bureaus. Over the past five years the entry of new participants, including foreign banks and non-bank financial institutions, has increased the level of competition in Peru.
8.4.4 Insurance companies
Since the Peruvian insurance industry was deregulated in 1991, insurance companies have been authorized to conduct all types of operations and to enter into all forms of agreements that are needed to offer risk coverage to customers. Insurance companies may also invest in financial and non-financial assets, although they are subject to the regulations on investments and reserves established in Law No. 26702 and the regulations issued by the SBS.
Law No. 26702 is the principal law governing insurance companies in Peru. The SBS is charged with the supervision and regulation of all insurance companies. The formation of an insurance company requires prior authorization of the SBS. The insurance industry was comprised of 21 companies as of December 31, 2016.
(9) Supervision and regulation
Currently, there are no applicable regulations under Bermuda Law that are likely to materially impact our operations as they are currently structured. Under Bermuda law, there is no regulation applicable to us as a holding company that would require that we separate the operations of our subsidiaries incorporated and existing outside Bermuda. Since our activities are conducted primarily through our subsidiaries in Peru, the Cayman Islands, Bolivia, Chile, Colombia and Panama, a summary of the main regulations governing our businesses is set forth below.
Our common shares are listed on the New York Stock Exchange (NYSE). We are therefore subject to regulation by the NYSE and the SEC as a “foreign private issuer”. We also must comply with the Sarbanes-Oxley Act of