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Credicorp : A Lesser-Known Undervalued Latam Finance Play

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Credicorp : A Lesser-Known Undervalued Latam Finance Play

Summary :

  • Credicorp’s full-year profitability was boosted by improved results at Universal Banking and Microfinance, a robust rebound on the insurance front, while assets under management decreased due to redemptions.
  • The company’s net interest income and loan portfolio grew due to its focus on digital transformation, which increased transaction volume 2.6 times this year.
  • The company’s stock is still underperforming and overvalued compared to its peers, which is a worry. Its recent quarterly results have made things even less clear about its future.

Credicorp (NYSE:BAP) has established a strong position in the Peruvian market through its diversified portfolio of banking, insurance, and wealth management businesses. The company’s recent quarterly results were solid with a decent growth in key areas, including net interest income and loan portfolio, which have been driven by its continued focus on digital transformation. The company’s strong liquidity position and risk management practices are evident from a rather robust balance sheet. The stock has underperformed recently but our evaluation indicates that Credicorp could prove an excellent investment for a horizon of one to three years.

What Does Credicorp Do?

Credicorp Ltd. provides a host of financial services in Peru, with a presence in Chile, Colombia, and Bolivia. It is a diversified company with four main business lines: universal banking (via Banco de Credito del Peru (BCP) and Banco de Credito de Bolivia), microfinance (through Mibanco in Peru and Colombia), insurance and pension funds (through Grupo Pacifico and Prima AFP), and investment banking and wealth management (through Credicorp Capital, wealth management at BCP, and Atlantic Security Bank).

Source : https://credicorp.gcs-web.com/static-files/2753362b-bdb1-471d-a3dd-49900fe68e8d

  • Universal Banking: offers deposits, current accounts, credit, and financial instruments to individuals and legal organisations.
  • Insurance and Pensions segment : covers losses in commercial property, transportation, marine vessels, autos, life, health, and pensions, and it manages private pension funds.
  • Microfinance Division: Manages small and microenterprises’ loans, credits, deposits, and operational Microfinance division : manages small and microenterprises’ loans, credits, deposits, and operational accounts.
  • Investment Banking and Wealth Management business : administers mutual funds, develops securitization processes for corporate customers, and executes and negotiates secondary market transactions.

Recent Results

Credicorp reported a top-line of $1.26 billion for the fourth quarter which was well above the average analyst estimate of $1.17 billion. However, its earnings were below par as it reported an earnings per share of $3.76, $0.23 below the Wall Street consensus estimate of $3.99. Despite the political situation in Peru, the country’s financial fundamentals remain strong, characterised by low levels of debt, high levels of international reserves, and an independent central bank. The company’s net income and ROE have respectively grown by 30% and 16.7% over the past year which is a positive sign. BCP leads the ROE contribution with 22%, followed by 19.2% from Mibanco, and 19.2% from Pacifico. While deposits shrank 3% in the fourth quarter, structural loans increased 0.8%, led by retail banking at BCP and Mibanco. With a 50.7% share at quarter’s end, low-cost deposits continue to make up a significant percentage of the financing base. Increases of 8.4% in the company’s core revenue and 12.2% in its net interest income have allowed BCP to continue to make a strong profit despite the challenging environment.

BCP’s income decreased due to the withdrawal of fees for transfers between locations in September 2022. Net income was affected by a 12.2% increase in structural loans evaluated in average daily balances and a 28.5% increase in net interest income. The PC and Life businesses helped Grupo Pacifico recover from a quarter-over-quarter decline in net income due to seasonal effects.

Credicorp continues to maintain a solid capital base and a diverse business portfolio, posting a 15.3% ROE for the quarter. The structural NPL ratio increased to 4.95% due to a growth in wholesale banking credit, particularly in the real estate and tourism sectors. The structural cost of risk increased by 85 basis points to 2.06%. The robust growth in net interest income of 30.9% was driven by a 10.4% increase in structural loans evaluated in average daily balances, ongoing repricing of our portfolio in light of higher rates, and a very competitive financing base. Fee income decreased last year as a result of a fall in investment banking and wealth management, and provision expenses increased significantly on an otherwise modest basis.

Drop in AUM : Is that a good sign?

Credicorp’s assets under management decreased due to redemptions and upfront payments from third parties. Grupo Pacifico recovered from a quarter-over-quarter decline in net income due to seasonal effects, while Mibanco Colombia’s pricing strategies and rapid loan growth were put to the test by a dramatic rise in financing costs. Credicorp’s core income increased 5.6% from one quarter to the next due to an increase in net interest income and fee income. The net interest margin rose 42 basis points to 4.73%, while the risk-adjusted NIM dropped by 6 basis points. Because of wholesale and SME-Pyme, structural loan quality has improved, and provision levels are now appropriate. The structural coverage ratio was 112.2%. Credicorp’s full-year profitability was boosted by improved results at Universal Banking and Microfinance, a robust rebound on the insurance front, and lower results at the holding level due to a fall in net financial results and higher withholding tax expenditures. Although the company’s assets under management (AUM) have decreased, its business is still diversified across different verticals, as demonstrated by its profitability for the full year. Therefore, we believe that the company’s investment rationale is still strong.

New Digital Initiates with Yape

Source : https://credicorp.gcs-web.com/static-files/2753362b-bdb1-471d-a3dd-49900fe68e8d

As part of its digital strategy, the company has launched a number of initiatives across all of its subsidiaries, including the financial literacy online series from Yape and BCP. Yape, with 11 million members and 8.1 million active users, is one of the most important distribution platforms in Peru . With 19.5 monthly transactions per active user, Yape’s transaction volume climbed 2.6 times this year to reach PEN 66.2 billion in 2022. As provisions increased this quarter, Mibanco’s profits decreased. Net interest income increased by 15% in 2022 due to structural loans and disbursement rates. Provision costs rose 15% due to loan growth and a shift in risk appetite. Microloans and marketing offered by Yape provide additional income streams for Credicorp. By 2026, the company believes Yape will have 5 million affiliates to whom it will provide financial products.

Projected Income Statement

Key Metrics 2021 2022 2023E 2024E
Revenues 3,277 4,067 4,880 6,100
% Growth 60% 24% 20% 25%
Net Income 899 1,217 1,562 2,074
% of Revenues 30% 32% 34%
Total Assets 61,367 62,214 63,272 64,790
% Growth 1% 1.7% 2.4%
Loan Book (net) 34,576 36,984 40,683 45,564
% Growth 7% 10% 12%
Total Equity 6,777 7,772 9,327 11,658
% Growth 15% 20% 25%
Total Debt 12,153 10,224 8,997 7,828
% Change -16% -12% -13%

**Estimates based on calculations by Equisights.

The income statement forecasts presented here are based on reasonably conservative assumptions. As seen above, it is evident that the company is operating at healthy capitalization levels. This growth in equity is a positive sign, as it indicates that the company is investing in itself and creating value for its shareholders. While the growth in revenues and profitability has been impressive, it is also important to monitor the company’s assets and debt levels. While the company’s loan book is growing steadily, trend suggest the company has a strong focus on improving profitability and reducing debt. However, for a risk averse investor, it is important to monitor the company’s loan book and total debt levels to ensure that they remain at manageable levels.

Valuation: Price to Book, Price to Earnings Multiple Is Key

Particulars Credicorp Industry
Price to Earnings Ratio 8.46 9.34
Price to Book 1.35 1.44

Source : https://www.investing.com/equities/credicorp-ltd-ratios ; Estimates based on calculations by Equisights .

We believe Credicorp’s lower P/E & P/B ratios compared to the industry average indicate the stock is undervalued and make it an attractive investment opportunity for value investors who are looking for stocks that are trading at a discount to their peers.

Conclusion

Source: https://finance.yahoo.com/chart/BAP/

As we can see in the above chart, Credicorp has witnessed a strong correction over the last three months. The company’s price-to-book value is around 1.35, which is high as compared to its peers in the banking industry while still below the industry average. Based on management commentary regarding quarterly earnings and revenue estimates, we anticipate slight volatility in valuation multiples as the stock approaches industry peers in terms of earnings & book value per share. Our valuation indicates that the stock can march towards $115–$110 in the immediate fall. Currently, the stock is around $129, which implies that it is a good time to accumulate and generate 30–40% returns in 2024 as it reaches our desired target price. When we apply the industry median of price to earnings (9.34) to Credicorp, we get a 2024 target price of $160. This is based on our assumptions about revenue and profitability and the projected valuation multiples. 

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