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¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the fiscal year ended December 31, 2011
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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 Perú:
|Calle Centenario 156
|La Molina
|Lima 12, Perú
|(Address of principal executive offices)
|Alvaro Correa
|Chief Financial Officer
|Credicorp Ltd
|Banco de Crédito del Perú:
|Calle Centenario 156
|La Molina
|Lima 12, Perú
|Phone (+511) 313 2140
|Facsimile (+511) 313 2121
|(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
|Title of each class
|Name of each exchange on which registered
|Common Shares, par value $5.00 per share
|New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Common Shares, par value $5.00 per share 94,382,317
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically 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).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer x
|Accelerated filer ¨
|Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|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 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Unless otherwise specified or the context otherwise requires, references in this Form 20-F (also referred to as the Annual Report), to "$," "US$," "Dollars," "foreign currency" or "U.S. Dollars" are to United States Dollars, and references to "S/.", "Nuevo Sol" or "Nuevos Soles" are to Peruvian Nuevos Soles. Each Nuevo Sol is divided into 100 céntimos (cents).
Credicorp Ltd. is a Bermuda limited liability company (and is referred to in this Annual Report as Credicorp, the Company, 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 U.S. Dollars 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 United States Generally Accepted Accounting Principles (U.S. GAAP).
We operate primarily through our four operating segments: banking (including commercial and investment banking), insurance, pension funds, and brokerage and other. See information about operating segments in "Item 4.-Information on the Company: (A) History and Development of the Company, and (B) Business Overview".
Our four principal operating subsidiaries are: (i) Banco de Crédito del Perú (which, together with its consolidated subsidiaries, is referred to as BCP); (ii) Atlantic Security Bank, which we hold through Atlantic Security Holding Corporation (which, are referred to as ASB and ASHC, respectively); (iii) El Pacífico-Peruano Suiza Compañía de Seguros y Reaseguros (which together with its consolidated subsidiaries, is referred to as Grupo Pacífico); and (iv) Prima AFP. BCP's activities include wholesale banking, investment banking and retail banking. As of and for the year ended December 31, 2011, BCP accounted for 87.4% of our total assets, 75.2% of our net income and 69.3% of our net equity. Unless otherwise specified, the individual financial information for BCP, ASB, Grupo Pacífico and Prima AFP included in this Annual Report has been derived from the audited consolidated financial statements of each such entity. See "Item 3. Key Information—(A) Selected Financial Data" and "Item 4. Information on the Company—(A) History and Development of the Company." We refer to BCP, ASB, Grupo Pacífico and Prima AFP as our main operating subsidiaries, and we refer to Grupo Crédito and ASHC as our two main holding subsidiaries.
"Item 3. Key Information—(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, 2007, 2008, 2009, 2010 and 2011.
Our management's criteria on foreign currency translation, for the purpose of preparing the Credicorp Consolidated Financial Statements, is described in "Item 5. Operating and Financial Review and Prospects—(A) Operating Results—(1) Critical Accounting Policies—Foreign Currency Translation."
Some of our subsidiaries maintain their operations and balances in Nuevos Soles. As a result, this Annual Report contains certain Nuevo Sol amounts translated into U.S. Dollars which is solely for the convenience of the reader. You should not construe any of these translations as representations that the Nuevo Sol amounts actually represent such equivalent U.S. Dollar amounts or could be converted into U.S. Dollars at the rate indicated as of the dates mentioned herein, or at all. Unless otherwise indicated, these U.S. Dollar amounts have been translated from Nuevos Soles at an exchange rate of S/.2.696 = US$1.00, which is the December 31, 2011 exchange rate set by the Peruvian Superintendencia de Banca, Seguros y AFP (the Superintendency of Banks, Insurance and Pension Funds, or the SBS). The average of the bid and offered free market exchange rates published by the SBS for April 20, 2012 was S/.2.651 per US$1.00. Translating amounts expressed in Nuevos Soles on a specified date (at the prevailing exchange rate on that date) may result in the presentation of U.S. Dollar amounts that are different from the U.S. Dollar amounts that would have been obtained by translating Nuevos Soles on another specified date (at the prevailing exchange rate on that different specified date). See also "Item 3. Key Information—(A) Selected Financial Data—Exchange Rates" for information regarding the average rates of exchange between the Nuevo Sol and the U.S. Dollar for the periods specified therein. The Federal Reserve Bank of New York does not publish a noon buying rate for Nuevos Soles. Our Bolivian subsidiary operates in Bolivianos, a currency that has been maintained stable over recent years. Our Bolivian subsidiary´s financial statements are also presented in U.S. Dollars.
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). 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 Nuevo 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; and
|general competitive factors, in each case on a global, regional and/or national basis.
See "Item 3. Key Information—(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.
Not applicable
Not applicable.
|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 U.S. Dollars. 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 U.S. Dollars.
The summary of our consolidated financial data as of, and for the years ended, December 31, 2007, 2008, 2009, 2010 and 2011 is derived from the Consolidated Financial Statements audited by Medina, Zaldívar, Paredes & Asociados S.C.R.L, member of Ernst & Young Global, independent registered public accountants.
The report of Medina, Zaldívar, Paredes & Asociados S.C.R.L on the Consolidated Financial Statements as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 appears elsewhere in this Annual Report.
|Year ended December 31,
|(U.S. Dollars in thousands, except percentages, ratios,
|and per common share data)
|Interest income
|Interest expense
|Net Interest income
|Provision for loan losses (1)
|Net interest income after provision for loan losses
|Fees and commissions from banking services
|Net gains (loss) from sales of securities
|Net gains on foreign exchange transactions
|Net premiums earned
|Other income
|Claims on insurance activities
|Operating expenses
|Merger costs
|Income before translation result and income tax
|Translation result
|Income tax
|Net income
|Attributable to:
|Net income attributable to Credicorp's equity holders
|Minority interest
|Number of shares as adjusted to reflect changes in capital
|Net income per common share attributable to Credicorp's equity holders (2)
|Diluted net income per share
|Cash dividends declared per common share
|Total assets
|Total loans (3)
|Reserves for loan losses (1)
|Total deposits
|Equity attributable to Credicorp's equity holders
|Minority interest
|Net Equity
|Year ended December 31,
|(U.S. Dollars in thousands, except percentages, ratios,
and per common share data)
|Net interest margin (4)
|Return on average total assets (5)
|Return on average equity attributable to Credicorp's equity holders (6)
|Operating expenses as a percentage of net interest and non-interest income (7)
|Operating expenses as a percentage of average assets
|Equity attributable to Credicorp's equity holders as a percentage of period end total assets
|Regulatory capital as a percentage of risk weighted assets (8)
|Total past-due loan amounts as a percentage of total loans (9)
|Reserves for loan losses as a percentage of total loans
|Reserves for loan losses as a percentage of total loans and other contingent credits (10)
|Reserves for loan losses as a percentage of total past-due loans (11)
|Reserves for loan losses as a percentage of substandard loans (12)
(1) Provision for loan losses and reserve for loan losses include provisions and reserves with respect to total loans and contingent credits, net of write-off recoveries.
(2) We have 100 million authorized common shares. As of December 31, 2011, we had 94.4 million common shares issued and outstanding, of which 14.6 million were held by ASHC. The per common share data given considers net outstanding shares (common shares net of shares held by BCP, ASHC and PPS) of 79.7 million in 2002 to 2011. See Notes 16 and 25 to the Consolidated Financial Statements.
As of As of December 31, 2011, the Group had granted 549,529 shares of Credicorp as part of its stock awards compensation program, of which 333,294 shares were outstanding.
(3) Net of unearned interest, but prior to reserve for loan losses. In addition to loans outstanding, we had contingent loans of US$1,455.4 million, US$1,564.5 million, US$1,755.9 million, US$2,528.1 million, US$3,135.2 million and US$3,728.0 million, as of December 31, 2007, 2008, 2009, 2010 and 2011, respectively. See Note 19 to the Consolidated Financial Statements.
(4) 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.
(5) Net income as a percentage of average total assets, computed as the average of period-beginning and period-ending balances.
(6) Net income as a percentage of average equity attributable to our equity holders, computed as the average of period-beginning and period-ending balances, and calculated on a monthly basis.
(7) Sum of the salaries and employee's benefits, administrative expenses, depreciation and amortization, as a percentage of the sum of net interest income and non-interest income, less net gains from sales of securities and other income.
(8) Regulatory capital calculated in accordance with guidelines by the Basel Committee on Banking Regulations and Supervisory Practices of International Settlements (or the BIS I Accord) as adopted by the SBS. See "Item 5. Operating and Financial Review and Prospects—(B) Liquidity and Capital Resources—Regulatory Capital and Capital Adequacy Ratios."
(9) Depending on the type of loan, BCP considers loans past due for corporate, large business and medium business loans after 15 days; for small and micro business loans after 30 days; and for consumer, mortgage and leasing loans after 90 days. ASB considers past due all overdue loans except for consumer loans, which are considered past due when the scheduled principal and/or interest payments are overdue for more than 90 days. For IFRS 7 disclosure requirements on past-due loans, See Note 29.1 to the Consolidated Financial Statements. See "Item 4. Information on the Company—(B) Business Overview—(12) Selected Statistical Information—(iii) Loan Portfolio—Classification of the Loan Portfolio Based on the Borrower's Payment Performance."
(10) Other contingent credits primarily consist of guarantees, stand-by letters and letters of credit. See Note 19 to the Consolidated Financial Statements.
(11) Reserves for loan and contingent credit losses, as a percentage of all past-due loans, with no reduction for collateral securing such loans. Reserves for loan and contingent credit losses include reserves with respect to total loans and other credits.
(12) Reserves for loan and contingent credit losses as a percentage of loans classified in categories C, D or E. See "Item 4. Information on the Company—(B) Business Overview—(12) Selected Statistical Information—(iii) Loan Portfolio—Classification of Loan Portfolio."
Exchange Rates
The following table sets forth the high and low month-end rates and the average and end-of-period rates for the sale of Nuevos Soles for U.S. Dollars for the periods indicated.
|Year ended December 31,
|High (1)
|Low (1)
|Average (2)
|(Nominal Nuevos Soles per U.S. Dollar)
Source: Bloomberg
|Highest and lowest of the 12 month-end exchange rates for each year based on the offered rate.
|Average of month-end exchange rates based on the offered rate.
|End-of-period exchange rates based on the offered rate.
The following table sets forth the high and low rates for the sale of Nuevos Soles for U.S. Dollars for the indicated months.
|High (1)
|Low (1)
|(Nominal Nuevos Soles per U.S. Dollar)
|April (through April 20)
Source: Bloomberg
|Highest and lowest of the daily closing exchange rates for each month based on the offered rate.
The average of the bid and offered free market exchange rates published by the SBS for April 20, 2012 was S/.2.651 per US$1.00.
|Capitalization and Indebtedness
Not applicable.
|Reasons for the Offer and Use of Proceeds
Not applicable.
|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 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.
Our geographic location exposes us to risk related to Peruvian political, social and economic conditions.
Most of BCP's, Grupo Pacífico's and Prima AFP's operations and customers are located in Peru. In addition, although ASB is based outside Peru, most of its customers are located in Peru. Accordingly, our results of operations and financial condition are dependent on the level of economic activity in Peru. Changes in economic or other policies of the Peruvian government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector could affect our results of operations and financial condition. Similarly, other political, economic and social developments in Peru, including government-influenced effects on inflation, currency devaluation and economic growth could affect our operations and financial condition.
For several decades, Peru had a history of political instability that has included military coups and a succession of regimes with differing policies and programs. During the last 15 years, however, Peru has experienced a period of relative political and economic stability which has led to positive economic performance, including a GDP compounded annual growth rate of 5.8% for the last ten years (2002 to 2011). The government of Alberto Fujimori, who took office in July 1990, initiated a series of reforms aimed at: (i) stabilizing the economy, (ii) restructuring the national government (by reducing bureaucracy), (iii) privatizing state-owned companies, (iv) promoting private investment, (v) eradicating corruption and bribery in the judicial system, (vi) developing and strengthening free markets, (vii) institutionalizing democratic representation; and (viii) enacting programs designed to strengthen basic services related to education, health, housing and infrastructure. While serving his third term, President Fujimori was forced to call for general elections under extreme protest in July 2000when corruption in his government was exposed to the public. Fujimori later resigned in favor of a transitory government. In April of 2009, following a 15-month trial in Lima, Fujimori was sentenced to 25 years in prison for violations of human rights in connection with government-linked death squads. The two administrations that followed the Fujimori administration, after the transitional government led by Valentin Paniagua (2000-2001), were the Toledo administration (2001-2006) and the García administration (2006-2011). Both governments followed similar economic policies, which focused on achieving sustained economic growth; increasing exports of Peruvian goods; reducing unemployment, underemployment and poverty; reforming the tax system; fostering private investment and increasing public investment in education, public health and other social programs, while reducing overall public spending.
Peru's current president, Ollanta Humala from the Gana Perú political coalition, took office on July 28, 2011. As part of his economic policies, President Humala has named Harvard University trained economist Luis Miguel Castilla as economy minister, Oscar Valdes as prime minister, and Jorge Urquizo as production minister. President Humala has, since his inauguration, substantially maintained the moderate economic policies of former president Alan García, whose administration was characterized by business-friendly and open-market economic policies that sustained and fostered economic growth, while controlling the inflation rate at historically low levels. However, we cannot assure you that the current or any future administration will maintain business-friendly and open-market economic policies or policies that stimulate economic growth and social stability, in particular given President Humala's left-leaning political history and statements made during his presidential campaigns in 2006 and 2011. Any changes in the Peruvian economy or the Peruvian government's economic policies may have a negative effect on our business, financial condition and results of operations.
Peru also has a history of domestic terrorism and social unrest. The terrorist organizations that were particularly active in Peru during 1980s and the early 1990s were the Movimiento Revolucionario Tupac Amaru (MRTA) and the Sendero Luminoso (Shining Path). The leader of the Shining Path, Abimael Guzmán, was captured and imprisoned in 1992. In 2012, the most recent significant leader of this organization, Florindo Flores, commonly known as Artemio, was also captured. Nevertheless, terrorism, narcotrafficking and narco-terrorism remain key challenges for the Government. Remnants of the Shining Path rebel group have survived and the group is now split into two relatively independent factions; one in Peru's Upper Huallaga Valley and one in the Apurimac and Ene River Valley (VRAE). These regions constitute the largest areas of coca cultivation and the main centers of "narco-terrorism" in Peru. Any resumption in terrorist activity by the MRTA, the Shining Path or other organizations may adversely affect our operations and financial condition.
In recent years, Peru has experienced social unrest in geographic areas that contribute to the country's mining industry. Mining is an important sector of the Peruvian economy, representing approximately 60% of the country's exports and 20% of its tax revenues. However, while recent governments have concentrated on increasing the revenues and profitability of the mining industry, there has been less focus on improving the social and economic conditions of local communities affected by the industry, which has increased political tension. The most recent manifestation of this tension can be seen in social conflict around Conga, a gold-copper project located in northern Peru. The project, which included investments of between US$4.2 billion and US$4.8 billion, failed to launch because of social protests led by residents concerned about its potential impact on the local water supply. In December 2011, the Peruvian government declared a state of emergency in the area, which lasted for approximately 10 days, and afterwards requested a new environmental impact study from independent consultants. The results of the study were delivered on April 16, 2012, and the Peruvian government has established a series of new conditions to improve the project that the mining company would be required to accept to continue with the project. The final outcome will depend on the answer from the mining company. A possible cancellation of this project may have an impact on present and future foreign investment decisions and plans, which in turn could negatively affect Peru's GDP growth and, as a result, the expansion of Peruvian financial system.
Foreign exchange fluctuations and exchange controls may adversely affect our financial condition and results of operations.
Even though the functional currency of our financial statements is U.S. Dollars and our dividends are paid in U.S. Dollars, BCP, Grupo Pacífico and Prima AFP for local statutory purposes, prepare their financial statements and pay dividends in Nuevos Soles. The Peruvian government does not impose restrictions on a company's ability to transfer U.S. Dollars from Peru to other countries, to convert Peruvian currency into U.S. Dollars or to pay dividends abroad. 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—(D) Exchange Controls." In addition, depreciation of the Nuevo Sol against the U.S. Dollar would decrease the U.S. Dollar value of any dividends BCP, Grupo Pacífico and Prima AFP pay us, which would have a negative impact on our ability to pay dividends to shareholders.
Peru's foreign reserves currently compare favorably with those of many other Latin American countries. However, a reduction in the level of foreign reserves will 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 devaluation or a volatility of short-term capital inflows. We have taken steps to manage the gap between our foreign currency-denominated assets and liabilities in several ways, including closely matching the volumes and maturities of our Nuevo Sol-denominated assets against our Nuevo Sol-denominated liabilities. Nevertheless, a sudden and significant devaluation of the Nuevo 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—Foreign Exchange Risk."
Also, a significant group of BCP's borrowers and Grupo Pacífico's insureds generate Nuevo Sol revenues from their own clients. Devaluation of the Nuevo Sol against the U.S. Dollar could negatively impact BCP's and Grupo Pacífico's clients' ability to repay loans or make premium payments. Despite any devaluation, and absent any change in foreign exchange regulations, BCP and Grupo Pacífico would be expected to continue to repay U.S. Dollar-denominated deposits and U.S. Dollar-denominated insurance benefits in U.S. Dollars. Therefore, any significant devaluation of the Nuevo Sol against the U.S. Dollar could have a material adverse effect on our results of operations and financial condition.
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). All or most of our assets and those of our principals 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, Bermudan 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.
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, Grupo Pacífico, ASB and Prima AFP. 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, there are no restrictions on the ability of BCP, ASB, Grupo Pacífico or Prima AFP 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.
Changes to banking regulations may adversely affect our operating performance and financial condition.
Because we are subject to regulation and supervision in Peru, Bolivia, 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 consolidated supervision regulations, which regulate all of our subsidiaries and offices including those located outside Peru. The SBS and the Banco Central de Reserva, or the 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 Central Bank have general administrative responsibilities over BCP, including designation of capitalization and reserve requirements. In past years, the 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 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—(B) Business Overview—(11) Supervision and Regulation—(ii) BCP." Furthermore, changes in regulation related to consumer protection may also affect our business.
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 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, or CIMA, while in Bolivia, we are subject to the supervision of the Financial System Supervisory Authority (or FSSA or ASFI in Spanish) that has assumed all regulatory functions held previously be the Superintendency of Banks and Financial Entities and the Superintendency of Pensions, Securities and Insurance. In Panama, we are subject to the supervision of the Superintendency of Banks 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.
In mid-2011, politicians outside of Peru's governing coalition introduced a bill in Congress that, if enacted, would set a cap on interest rates charged by the country's financial institutions. However, the SBS recently indicated that such a cap should only be used as a last resort for lowering rates if the SBS doesn't succeed in getting Peru's banks to voluntarily reduce interest rates in the next two to four years, the period in which several foreign banks are likely to establish or expand operations in Peru. Congress may nevertheless impose a cap, and an interest rate ceiling may adversely affect our Net Interest Margin (NIM) and consequently our operating performance.
On February 15, 2011, the Peruvian government enacted Law 29663. On July 21, 2011 Law 29663 was amended by Law 29757. This new Law partially modifies the country's income tax regime by subjecting to taxation in Peru capital gains derived from an indirect transfer of shares and expanding the type of income that will qualify as Peruvian-source income. Under the new law, any transfer of shares issued by 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:
a. 50% or more of the fair market value of the foreign shares –to be transferred—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.
b. The shares to be transferred represent at least 10% or more of the equity capital of the non-resident entity.
At the same time, two new obligations were imposed on Peruvian domiciled companies:
(1) Each Peruvian domiciled company is now required to report to the Peruvian Tax Administration (SUNAT) transfers of its own shares or transfers of the shares of the non-Peruvian domiciled company that is the owner of its shares; and
(2) 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.
The effectiveness of the obligations mentioned in (1) and (2) above is subject to additional regulations which have not been enacted yet by the Peruvian government. Until definitive regulations are enacted by the Peruvian government, which may clarify any obligation by Credicorp to withhold income tax for non-Peruvian domiciled transferors, we do not know what impact, if any, this new law will have on our company, subsidiaries or shareholders.
A deterioration in the quality of our loan portfolio may adversely affect our results of operations.
Given that a significant percentage of our revenues are related to banking activities, a deterioration of loan quality may have an adverse impact on our financial condition and results of operations. On the one hand, loan portfolio risk associated with lending to certain economic sectors or clients in certain market segments can be mitigated through adequate diversification policies. On the other hand, our pursuit of opportunities in which we can charge higher interest rates, thereby increasing revenues, may reduce diversification of our loan portfolio and expose us to greater credit risk. We believe that significant opportunities exist in middle market, consumer lending and microfinance in Peru. We also believe that we can, on average, charge higher interest rates on such loans as compared with interest charged on loans in our core corporate banking business, which primarily consists of clients that operate in industrial and commercial economic sectors.
Accordingly, our strategy includes a greater emphasis on middle market, consumer loans and microfinance, as well as continued growth of our loan portfolio in general. An increase in our portfolio's exposure to these areas could be accompanied by greater credit risk. Such a greater credit risk would not only be affected by the speed and magnitude of the increase, but also by the shift to lending to these sectors, which have higher risk profiles compared with loans to large corporate customers. Given the changing composition of our loan portfolio, historical loss experience may not be indicative of future loan loss experience.
Our banking operations in Bolivia expose us to risk related to Bolivian political and economic conditions.
Banco de Crédito de Bolivia, or BCP Bolivia, is BCP's commercial bank in Bolivia. Most of BCP Bolivia's operations and customers are located in Bolivia. Accordingly, our results of operations and financial conditions depend on the level of economic activity in Bolivia. Bolivia's macroeconomic indicators have been generally positive over the last several years, including steady growth rates and increasing international reserves. Inflation closed with a rate of 6.9% in 2011, indicating that inflationary pressures are easing due to decreases in international food prices and commodity prices. At the same time, Bolivia continues to experience a volatile political environment and a reduction in private investment activity. We expect to face some increased costs as a result of a government decree establishing wage increases indexed to the inflation rate, and also certain regulatory changes that could impact our earnings. Another important issue is the Bolivian government announcement that during the first quarter of 2012 they plan to approve a new law that applies a new tax burden on the financial system regulated by ASFI. Any institution with profits exceeding 13% of return on equity will be taxed an additional 12.5%. In this environment, our strategy will be to control costs and expenses, increase efficiency and maintain a prudent and proactive risk management. Any material negative effect on BCP Bolivia's operations or financial results could have a material adverse effect on Credicorp's own results of operations.
Changes to insurance regulations in Peru may impact the ability of our insurance subsidiary to underwrite and price risk effectively, and may adversely affect our operating performance and financial condition.
Our insurance business is carried out by Pacífico Seguros and Pacífico Vida which together with Pacíficosalud EPS S.A. are part of Grupo Pacífico. The insurance business is subject to regulation by the SBS. New legislation or regulations may adversely affect Grupo Pacífico's ability to underwrite and price risks accurately, which in turn would affect underwriting results and business profitability. Grupo Pacífico is unable to predict whether and to what extent new laws and regulations that would affect its business will be adopted in the future. Grupo Pacífico is also unable to predict the timing of any such adoption and the effects any new laws or regulations would have on its operations, profitability and financial condition.
The Group also assumes reinsurance risk in the normal course of business for non-life 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.
Our operating performance and financial condition depend on Grupo Pacífico's ability to underwrite and set premium rates accurately across a full spectrum of risks. Grupo Pacífico must generate sufficient premiums to offset losses, loss adjustment expenses and underwriting expenses in order to be profitable.
To price premium rates accurately, Grupo Pacífico must:
|collect and analyze a substantial volume of data;
|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 Pacífico fails to assess accurately 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 materially adverse effect on its operating results or financial condition. Moreover, there is inherent uncertainty in the process of establishing property and casualty loss reserves. Reserves are estimates based on actuarial and statistical projections at a given point in time of what Grupo Pacífico ultimately expects to pay out on claims and the cost of adjusting those claims, based on the facts and circumstances then known. Factors affecting these projections include, among others, changes in medical costs, repair costs and regulation. Any negative effect on Grupo Pacífico could have a material adverse effect on our results of operations and financial condition.
Regulatory changes to the private pension fund system in Peru could impact our earnings and adversely affect our operating performance.
Prima AFP manages our Pension Fund Administration business. In Peru, private pension fund managers are closely regulated by the SBS. Under the current regulatory framework, we collect commissions based on the salary of each subscriber to our pension funds. This commission-based system could be modified or eliminated by regulations. There are some options that are under analysis by a Commission such as fees based on the balance of funds under management by pension fund managers. Any regulations requiring us to use a different methodology to calculate fees could negatively impact our performance.
In October 2011, the Ministry of Finance named a Technical Committee to propose changes in regulation to increase private pension fund system coverage and promote competition. This Committee will present its findings to the Ministry, who will in turn propose regulatory changes that should be approved by Congress. These changes in regulation could negatively affect our performance, results of operating and financial condition.
Recent legislation regarding the financial services industry may subject us to significant and extensive regulation, which may have an impact on our operations.
Government measures to regulate the financial industry, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and the Foreign Account Tax Compliance Act (FATCA) of the United States, are likely to increase our regulatory compliance burden and related costs. These and other regulatory developments are likely to impact Credicorp, and may require us to change certain aspects of our business practices and impose additional costs on us ultimately having an impact on our operations.
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 presence 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 issues.
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 strong Peru's economic growth, which has outpaced growth by nearby countries, several banks have sought and obtained authorization to open representative offices in Peru. Itaú Unibanco, Banco Latinoamericano de Comercio Exterior (Bladex), Morgan Stanley Bank and Bank of Tokyo are among those banks receiving authorization. With the increased competition, more individuals will have access to credit, and the percentage of the population using baking services will likely climb. This will eventually put downward pressure on interest rates. Any negative impact on BCP could have a materially adverse effect on our results of operations and financial condition.
Fluctuation and volatility of capital markets and interest rates may decrease our net income.
We may suffer losses related to the investments by BCP, ASCH, Grupo Pacífico, Grupo Crédito (a wholly-owned subsidiary of Credicorp) and other subsidiaries in fixed income and equity securities, and to their respective positions in currency markets, because of changes in market prices, defaults, fluctuations in market interest rates or exchange rates or other reasons. A downturn in capital markets may result in a decline in the value of our positions and lead us to register net losses. In addition, a downturn in capital markets could also lead to volatile prices and negative net revenues from trading positions, even in the absence of a general economic downturn.
Fluctuations in market interest rates, or changes in the relative structure between short-term interest rates and long-term interest rates, could cause a decrease in interest rates charged on interest-earning assets, relative to interest rates paid on interest-bearing liabilities. Such an occurrence could adversely affect our financial condition by causing a decrease in net interest income.
|History and Development of the Company
We are a limited liability company that was incorporated in Bermuda on October 20, 1995 to act as a holding company, coordinate the policy and administration of our subsidiaries, and engage in investing activities. Our principal activity is to coordinate and manage the business plans of our subsidiaries in an effort to implement universal banking services and develop our insurance business, focusing on Peru and Bolivia along with limited investments in other countries of the region. Our registered address is Clarendon House, 2 Church Street, Bermuda. The management and administrative office (i.e., principal place of business) in Peru of our subsidiary, Banco de Crédito del Perú, is located at Calle Centenario 156, La Molina, Lima 12, Peru, and the phone number is 51-1-313-2000.
As of December 31, 2011, our total assets were US$30.7 billion and our net equity was US$3.5 billion. Our net income attributable to our equity holders in 2010 and 2011 was US$571.3 million and US$709.3 million, respectively. See "Item 3. Key Information—(A) Selected Financial Data" and "Item 5. Operating and Financial Review and Prospects."
We were formed in 1995 for the purpose of acquiring, through an exchange offer, the common shares of BCP, ASHC and PPS. We currently hold 97.7% of BCP, 97.7% of PPS and 100% of ASHC. See "Item 4. Information on the Company—(C) Organizational Structure."
In February 2005, we were authorized by Peruvian regulatory authorities to establish Prima AFP, of which Grupo Crédito is the main shareholder. Prima AFP started operations in August 2005.
In August 2006, Prima AFP acquired Unión Vida AFP, which is a pension fund operating in the Peruvian market. Prima AFP's acquisition of Unión Vida AFP, which was formerly held by Grupo Santander Perú S.A., was a strategic move toward consolidation as part of its efforts to gain a leading position in the pension fund market. As of the date of the acquisition, Prima AFP was the second largest pension fund company in terms of market share terms (defined as the amount of affiliates and assets under corporate management), with the second highest returns and the lowest commission for affiliates (who invest a portion of their salary each month). The merger between Prima AFP and Unión Vida AFP was consummated in December 2006.
In October 2009, BCP acquired from the Cooperative for Assistance and Relief Everywhere Inc. (CARE) – Perú, all the shares that this entity owned of Empresa Financiera Edyficar S.A. (Edyficar), representing 77.12% of Edyficar's capital stock. In accordance with Peruvian legal requirements in effect at the time, BCP made a public offering to Edyficar's minority shareholders to acquire the remaining 22.67% of the company's stock. The total purchase price for the acquisition was US$96.1 million, including related direct acquisition costs. As of December 31, 2011 BCP owned 99.79% of Edyficar.
In October 2010, the Credicorp group acquired American Life Insurance Company (ALICO)'s 20.1% and 38% stakes in PPS and Pacífico Vida, respectively. Pacífico Vida's shares were acquired through Credicorp Ltd. and its subsidiary, Grupo Credito, acquired PPS´s shares. Consequently, at the conclusion of this transaction, Credicorp and its subsidiary Grupo Credito held 97.68% of Pacífico Seguros, and jointly controlled 100% of Pacífico Vida. The total investment amounted to approximately US$174 million, making it the largest transaction ever completed in the Peruvian insurance market. We expect the acquisition to permit the Credicorp group 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 Pacífico to improve its value proposition to customers, who seek integral insurance solutions. On April 28, 2011, Credicorp transferred its 24% stake in Pacífico Vida to PPS. As a result of that transfer, PPS now directly owns 86% of the shares of Pacífico Vida and Credicorp owns the remaining 14%. This transfer did not affect Credicorp's consolidated financial statements.
In November 2010, Credicorp's Board of Directors approved the transfer of 84.9% of BCP's total shares to Grupo Crédito S.A. (its 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. Under the new structure, Credicorp directly holds 12.7% 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. Before this change in ownership structure, dividends to Credicorp from its Peruvian subsidiaries, such as BCP, were remitted abroad and had to be remitted back to Peru when capital for new investments in the country were required. With the new structure, Grupo Crédito, which acts as the local holding company for some of Credicorp's investments in Peru (Prima AFP, Grupo Pacífico and others), will manage Credicorp's future Peruvian investments, and directly transfer the dividends to Credicorp when it is required to do so under Credicorp's dividend policy. This modified organizational structure will 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.
In the second half of 2011, Pacíficosalud EPS invested approximately US$ 82.7 million to create the largest private medical services network in Peru by acquiring majority shares to directly manage: (i) the El Golf, San Borja and Oncocare clinics in Lima, (ii) the Galeno clinic in Arequipa, (iii) Laboratorios ML, a clinical laboratory, and (iv) Doctor+, which is a house call/ambulance service. We believe that these acquisitions enable Pacificosalud EPS to directly benefit from this sector's growth and to strategically defend against potential changes in the healthcare service supply chain, where vertical integration in the insurance business is becoming more frequent.
On November 30, 2011, Credicorp, through its subsidiary BCP, reached an agreement with the shareholders of Correval S.A. Sociedad Comisionista de Bolsa, a brokerage entity established in Bogota, Colombia, to acquire a 51 percent stake in such entity for approximately US$76.5 million. To date the acquisition was approved by the relevant regulatory authorities in Colombia and Peru and the precedent conditions were fulfilled. Hence the settlement of the transaction will take place in the upcoming days.
Also Credicorp, through its subsidiary BCP, on April 23, 2012 reached an agreement in principle with the shareholders of IMTrust S.A., a brokerage entity established in Santiago, Chile, to acquire 60.6 percent stake in such entity for an amount that represents approximately 3.5% of Credicorp's net equity and that will be finally defined subject to the completion of a due diligence process and approval from the supervisors in Chile and Peru, among other precedent conditions.
|Business Overview
|Introduction – Review of 2011
We are the largest financial services holding company in Peru. For management purposes, the Group 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 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: principally handling loans, credit facilities, deposits and current accounts, and providing investment banking services, including corporate finance, both for corporate and institutional customers. Banking also includes handling deposits, consumer loans and credit cards products for individual customers.
Insurance: including commercial property, transportation and marine hull, automobile, life, health and pension fund underwriting insurance. Private hospital services are also included under this operating segment.
Pension funds: providing private pension fund management services to customers.
Brokerage and other: including the structuring and placement of primary market securities issues and the execution and trading of secondary market transactions. This segment also includes offers of local securitization structuring to corporate entities, management of mutual funds and other services.
The following table provides certain financial information about our principal business segments as of and for the year ended December 31, 2011 (See Note 26 to the Consolidated Financial Statements):
|As of and for the Year ended December 31, 2011
|(U.S. Dollars in millions)
|Pension fund
|Brokerage and others
|Asset Under Management
We conduct our wholesale banking, treasury and retail banking activities primarily through BCP, the largest (in terms of total assets, loans, deposits, net equity and net income) full-service Peruvian commercial bank, and our ASB private banking and asset management firm. We conduct our pension fund business through Prima AFP and our insurance activities through Grupo Pacífico, which is the second largest Peruvian insurance company in terms of premiums, fees and net income. It should be noted that the term "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.
Primarily as a result of the strong microeconomic environment in Perú in 2011, we recorded net income after minority interests of US$709.3 million, which was 24.2% higher than our net income in 2010. This result reflected the strong performance of all our subsidiaries.
Our total assets grew to US$30.7 billion as of December 31, 2011, an 8.2% increase from the US$28.4 billion in assets we held as of December 31, 2010. Our increase in total assets was primarily a result of the continued growth of our loan portfolio, which grew by 21.3% in 2011 (compared to a growth of 24.2% in 2010, 9.9% in 2009 and 27.8% in 2008), in line with the expansion of the Peruvian economy, which had GDP growth rate of 6.9% in 2011. Our past-due and under legal collection loan ratio was 1.50% at the end of 2011 (compared to a ratio of 1.47% at the end of 2010 and 1.6% at the end of 2009). We had a coverage ratio of 200.6% (i.e., reserves for loans as a percentage of past-due loans), and our return on average net equity (ROAE) increased to 22.9% in 2011 (compared to 21.3% in 2010).
Banking segment
BCP's year-end 2011 net income totaled US$578.7 million, which resulted in a contribution to Credicorp of US$ 564 million. This earnings contribution was 21.5% higher than the 2010 contribution (US$464.4 million) and was mainly a product of our improved net interest income which was in turn attributable to an 18.1% increase in gross loans. As a result, BCP registered a ROAE of 27.6%.
The main drivers behind BCP's performance were:
• the 25.3% increase in net interest income, which was attributable to a 18.1% and a 22.0% growth in gross loans and average daily balances, respectively;
• the 2.5% increase in non-financial income due primarily to a 14.3% growth in fee income as well as a 33.1% increase in gains on foreign exchange transactions; and
• translation gains of US$ 34.5 million following a 4% appreciation in the Nuevo Sol against the U.S. Dollar, which exceeded the US$23.3 million gain reported in 2010.
Performance in these areas enabled BCP to offset the company's 22.6% increase in provisions and 11.7% increase in operating expenses. The increase in provisions did not indicate a deterioration of portfolio quality and instead reflected the determination of provisions requirements based on the upper limit of the range defined by IFRS compliant internal modeling of reserves.
The higher operating expenses were a result of BCP's greater administrative and general expenses and, to a lesser degree, higher salary expenses and employee benefits. These higher operating expenses were exacerbated by the 4% appreciation of the Nuevo Sol against the U.S. Dollar over the course of 2011, as a portion of BCP's operating expenses are denominated in local currency.
BCP's total assets reached US$26.8 billion at the end of 2011, representing an increase of 5.8% over the previous year (US$25.3 billion). This increase in total assets was a result of the 17.9% expansion of BCP's loans net of provisions, which totaled US$16.4 billion at the end of 2011. The loan portfolio constituted 61.2% of BCP's total assets at the end of 2011. BCP's total past-due loans reached US$258.3 million (23.5% higher than the US$209.1 million registered in 2010) while refinanced and restructured loans increased by 25.2%, from US$76.7 million in 2010 to US$96 million at the end of 2011. The composition of BCP's loan portfolio in 2011 changed significantly. As of December 2011, the average daily balances in our retail banking operations accounted for 46.6% (compared to 42% in December 2010) and wholesale banking operations accounted for 53.4% of BCP's total portfolio (compared to 58% in December 2010). This outcome is a result of BCP's strategic focus on increased market penetration in middle and lower segments, which are generally characterized by higher margins.
The average daily balances of BCP's wholesale banking loans grew by 11.8% in 2011 as a result of the financing provided for large investments, inventories and working capital to keep pace with Peru's dynamic economy. As a result, BCP continued to lead the Peruvian financial system with a market share of 44.3% for the corporate segment (46.5% in 2010) and 34.3% for the middle market (34.1% in 2010).
BCP's retail banking portfolio continued its upward trend and grew 35% in 2011. In terms of growth and yields, BCP's small and medium enterprise (SME) loans were its best performing product, growing by 40.1% (measured in average daily balances) to a total volume of US$3.1 billion, followed by credit cards which grew 39.5% to US$809 million, in each case as of December 31, 2011. Consumer loans grew 34.3% to US$1.3 billion, while mortgages expanded 28.2%, totaling US$2.5 billion.
On the liabilities side, BCP's deposits reached US$17.6 billion on December 31, 2011 (a 4.5% increase from the previous year). This increase in deposits not only continues to reinforce BCP's funding structure, as deposits account for 71.8% of all funding sources, but it also serves to maintain BCP's status as an industry leader with a market share of 31.6%. It is important to note that core deposits grew while time deposits fell 25.8%, a dynamic which favor cost of funds for BCP. Demand deposits were BCP's largest deposit type, totaling US$6.3 billion as of December 31, 2011. Savings deposits, BCP's second-largest deposit type, reached US$5.1 billion. Time deposits totaled US$4.2 billion while Severance Accounts, or CTS, totaled US$1.8 billion.
BCP's issuance of bonds gained greater relevance within the funding structure. In March, 2011, BCP completed a second international issuance of benchmark sized corporate bonds for US$700 million. Additionally, in September 2011, we conducted BCP's largest subordinated bond issuance to date for US$350 million. This transaction was entered into in order to fully align BCP with the new capital requirements established by local regulators pursuant to Basel III, which go into effect in July 2012. As of December 31, 2011, the aggregate outstanding principal amount of BCP's bonds totaled US$3,122 million (59.3% higher than the level registered in 2010).
BCP maintains adequate provisioning and long-term risk management policies. Its coverage ratio increased from 198.5% in 2010 to 200.8% in 2011. Total cumulative provisions reached US$518.9 million as of December 31, 2011, which is 25.1% higher than provisions in the previous year.
In 2011, BCP continued to focus its strategy on strengthening its customer service, which is related to its goal of providing quality and widespread customer access to the financial system and thereby increasing the company's penetration into the market. In following its network expansion plan, BCP focused on cost-efficient channels, opening ATMs and Agentes BCP locations, which grew by 28.1% and 33%, respectively. By the end of 2011, BCP had a total of 1,485 ATMs and 4,674 Agentes BCP locations, which are BCP representatives located in retail establishments, such as grocery and drug stores. As a result of this strategy, BCP's average number of transactions in 2011 increased 21.3% compared to 2010 and its transactional business was therefore able to generate higher income from fees and commissions.
Overall, BCP's results met our expectations and remained profitable in line with the growth of Peruvian economy, which posted a 6.9% GDP growth in 2011 despite internal concerns about the presidential elections in the first half of 2011 and uncertainty concerning the global economy during the second half of the year.
BCP Bolivia
In 2011, BCP Bolivia had a net income of US$22.3 million, a 41% increase from its 2010 net income of US$15.8 million. This increase was primarily attributable to growth in interest income, growth in BCP Bolivia's loan portfolio and a 38% increase in gains on foreign exchange transactions.
In 2011, BCP Bolivia maintained its position as one of the leading banks in Bolivia. In each of the following categories, the bank either outperformed or equaled the industry average in the Bolivian banking system: return on average equity (22.3%), past-due loan ratio (1.2%) and coverage ratio (314%) (as compared to industry averages of 20.2%, 1.7% and 281.1%, respectively).
BCP Bolivia's loan portfolio expanded by 26% from 2010, totaling US$758 million in 2011. This expansion was mainly due to a 33% growth in wholesale banking.
Although BCP Bolivia made a positive contribution to our results in 2011, the country of Bolivia continues to experience a volatile political environment notwithstanding evidence of decreasing inflationary pressures through the last quarter of 2011.
Edyficar focuses on SME lending and, together with BCP, it held a 21.4% market share in terms of loans at the end of 2011 (compared to a market share of 15.0% held by its closest competitor). The consolidation of Edyficar's results into BCP's financial statements resulted in a total contribution of US$26.2 million in 2011. As of December 31, 2011, Edyficar registered total assets of US$591 million which consisted of US$479.1 million from the company's net loan portfolio, its main asset. Total liabilities increased to US$515.2 million, which included US$236 million from banking activities. Net shareholders' equity reached US$75.8 million at the end of 2011.
As of December 31, 2011, Edyficar's client base registered 356,000 clients, a base 24.5 % larger than in 2010. The average amount of an Edyficar loan in 2011 was S/. 3,837 (approximately US$ 1,423). Edyficar registered a Past-due loans (PDL) ratio of 4.0% at the end of 2011, a reflection if its portfolio quality. Edyficar reached a ROAE of 22.9% (including a goodwill of US$ 50.7 million and an efficiency ratio of 55.3 %.
The acquisition of Edyficar was part of BCP's strategy to capture a significant portion of the growth of the Peruvian SME segment, which is expected to expand significantly over the next several years. BCP intends to support Edyficar's growth and development by improving its funding cost and structure and providing necessary capital and technology.
2011 was characterized by slowed growth in many developed economies. ASB's net earnings for 2011 amounted to US$41.1 million, compared to US$48.9 million reported in 2010. Notwithstanding this 16% decrease, given the global economic situation we believe that these results reflect a sustainable trend over the past two years, which reflects a high quality risk portfolio and diversified investment strategies. Credicorp received a corresponding contribution of US$41.1 million from ASB.
Net income from interest in 2011 totaled US$31.9 million, which represented a decrease of 15% from the previous year. This decrease was primarily due to the company's investment strategies, which were affected by the slowdown in economies from the European Union (EU) and the United States. Despite the environment, ASB sustained a financial margin above US$31 million, which in turn was a result of the company's lower funding cost, considering the levels of LIBOR rates during the year, a favorable scenario for the bank given the short-term structure of its customers' deposits and their fast re-pricing, in contrast to assets engaged for middle and longer terms and at higher interest rates. Non-financial income reached US$18.4 million and included income from fees, the sale of securities and foreign exchange operations.
ASB's total assets were US$1,523.5 million as of December 31, 2011, an increase of 14% from 2010. This increase in total assets was mainly a result of its strategy to obtain funds by taking advantage of the economic growth of the Peruvian market.
At the end of 2011, ASB's assets under management totaled US$3,194 million, compared to US$3,177 million in 2010. This growth was primarily a result of increases in our customers' global positions and the market value of their portfolio, despite of the turbulence and heightened concerns about recovery in global financial markets.
Insurance segment
Grupo Pacífico
In 2011, Grupo Pacífico, which encompasses Pacífico Seguros, Pacífico Vida and Pacíficosalud EPS, reported net income, after deducting minority interests, of US$57.1 million (compared to US$55.4 million of net income in 2010). However, the contribution we received from Grupo Pacífico increased, from a gain of US$48.2 million in 2010 to a gain of US$65.6 million in 2011. This increase was primarily a result of Grupo Pacifico's acquisition of a greater ownership interest in Pacifico Vida, which in turn resulted the consolidation of 100% of Pacifico Vida's net income after the acquisition of ALICO's stake in October 2010.
Grupo Pacífico's underwriting result in 2011, which reflects the company's core business performance for the year, was US$100.4 million, which represented an increase of 9.1% compared to 2010's figure. This improvement was mainly due to a 16% increase in premiums from US$752 million in 2010 to US$872 million in 2011.
We believe that there is substantial growth potential in Peru's insurance market, given the industry's weak market penetration. Efficiency and risk management will continue to be key indicators in measuring Grupo Pacífico's performance. Efficiently utilizing the BCP network is an essential component of Grupo Pacífico's growth strategy 2011, as we believe that capitalizing on synergies between the insurance business and the distribution channels of the banking business will lead Grupo Pacífico to greater penetration in the insurance market.
Pension fund segment
Prima AFP
During 2011, the growth of the Peruvian economy resulted in positive results for the Private Pension System (SPP), achieving growth in new affiliates, number of contributors and collections during the year. However, the international financial crisis present throughout the year affected the value of assets under management. These economic conditions and the increased uncertainty in financial markets, led to a decrease in the value of funds under management by the SPP as a whole, which reached US$30.4 billion as of December 31, 2011 and represented a 2.3% year-over-year decrease compared to December 31, 2010.
Prima AFP was able to strengthen its position in the market by adjusting its processes and organization to provide high-quality services and timely and transparent information to its clients. As a result, the contribution we received from Prima AFP in 2011 reached US$32.4 million, as compared to US$25.5 million in 2010.
Funds under management at Prima AFP decreased 2.9% from US$9.8 billion in 2010 to US$9.5 billion as of December 2011. By year-end 2011, Prima AFP's market share of total funds under management was 31.2%, representing a slight year-over-year decrease. Prima AFP is the largest pension fund management company in Peru by funds under management.
Prima AFP's revenues from commissions in 2011 reached US$104.4 million, a 22.6% increase from 2010. This improvement was a result of a stable and superior portfolio of contributing members. Revenues in 2011, as was the case in 2010, included 12 contribution periods, as a result of the Peruvian government extending until 2014 the exemption from deductions on additional salaries paid in July and December under Peruvian labor law.
To improve its operating results, Prima AFP will continue to focus on increasing efficiency and reducing costs. Emphasis will also be placed on improving Prima AFP's long-term stability through improved risk management, which is one of the company's highest priorities.
Brokerage and other
The majority of our brokerage activities are conducted through BCP, ASB, Credicorp Securities Inc., which is a U.S. registered broker-dealer with its offices in Miami, and 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). BCP offers clients a wide range of brokerage products and services, including mutual funds and custody services through its branch network in Lima and, on a more limited basis, throughout the rest of Peru. In addition, we also offer a wide range of brokerage products and services through ASB.
In 2011, our brokerage activities represented 2.2% of total consolidated income and 1.3% of total consolidated assets.
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:
|(U.S. Dollars in millions, except percentages)
|Grupo Pacífico
|PRIMA AFP and others (2)
(1) Includes Banco de Crédito de Bolivia, which contributed US$22.3 million in 2011, US$15.8 million in 2010 and US$30.3 million in 2009; and Edyficar, which contributed US$26.2 million in 2011, US$21.5 million in 2010 and US$1.1 million in 2009 (BCP acquired Edyficar in October 2009).
(2) Includes Prima AFP (which recorded a net income of US$32.4 million in 2011, US$25.5 million in 2010 and US$20.8 million in 2009), Credicorp Securities, 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 Pacífico)) and others.
Credicorp was established to create a financial group that would benefit from synergies among the group's companies and would become a leader within each business market in which the companies operate. In moving steadily toward achieving these strategic goals, we have become a leading financial group. However, we do not operate in a static environment, and the last three years have demonstrated how quickly and dramatically the world can change. Peru's economic growth slowed significantly in 2009 as a result of the international financial crisis. In response to this, we took steps toward improving our long-term sustainability and worked to position our companies for growth as the Peruvian market continues to evolve. In 2010 Peru's economy returned to the dynamism it showed in the pre-crisis period, and we continued, and completed in many cases, the implementation of various initiatives that were designed to ensure the sustainability of Credicorp's business segments.
The Peruvian market offers one of the strongest growth opportunities in South America. In the banking, insurance and pension fund industries, market penetration by service providers remains low. Accordingly, our business plans incorporate strategies that will enable us to reach underserved segments of the Peruvian population and achieve higher returns on our capital. As our businesses expand, it becomes increasingly important for us to maximize efficiencies and control risk. Our strength in these areas is the cornerstone of our strategy to achieve healthy, sustained and profitable growth.
The growth strategies we have adopted for each of our companies include a focus on retail markets. Our strategy provides a launching pad for two points of financial inclusion: our Agente BCP covers the liabilities' side by promoting banking penetration and the subsequent point for access to credit, which gives low income sectors the opportunity to improve standards of living and become part of the country's economic model for growth. Using our collective resources, we are developing information systems that can collect commercial sales information and provide us with the data we need to process scoring models by segment. This will enhance our ability to assess and control risk, as well as cross-selling our products between our business segments.
Another strategic focus for Credicorp involves the regionalization of Latin American market, which has picked recently increased in relevance due to problem in developed markets. This has been reflected in the creation of the MILA (Integrated Latin American Market), which we believe provides strong possibilities for growth. The integration of equity trading in Chile, Colombia and Peru has created the largest exchange in Latin America by number of issuers and the second-largest exchange in Latin America by market capitalization after the Brazilian BM&F Bovespa. Credicorp has seized this opportunity by:
|reaching an agreement with the shareholders of Correval S.A. Sociedad Comisionista de Bolsa, one of Colombia's most important brokerage firms (achieving nearly 12% of market share during the last four years for all of its products), to acquire 51 percent stake, a transaction that to date was approved by the relevant regulatory authorities in Colombia and Peru and the precedent conditions were fulfilled, hence the settlement of the transaction will take place in the upcoming days; and
|reaching an agreement in principle with the shareholders of IMTrust S.A., a brokerage entity established in Santiago, Chile, to acquire 60.6 percent stake in such entity, subject to the completion of a due diligence process, and approval from the supervisors in Chile and Peru, among other precedent conditions.
This acquisitions reflect our commitment to concretize our regional presence in the investment banking and capital markets sectors.
We also continue to make strides toward greater integration of our companies by more extensively sharing our talents and experience.
Outlook for 2012
We expect that the favorable economic conditions in Peru that characterized 2011 will continue in 2012. Throughout the year, we will continue to take a development-oriented approach, preparing for changes in the Peruvian market, which is expected to have high growth rates in the upcoming years. Given the low levels of penetration in Peru's banking and insurance markets, we believe that our subsidiaries will be well positioned to expand. Our high equity levels, technical and professional expertise and strong relationships built on the trust of our customers are all indicative of a positive outlook for the Company.
|Credicorp Operating Segments
The majority of our banking business is carried out through BCP, which is our largest subsidiary and the oldest bank in Peru. A portion of our banking business is also carried out by ASB, which principally serves Peruvian private banking customers through offices in Panama. We conduct banking activities in Bolivia through BCP Bolivia, a full service commercial bank which maintained an 11.3% market share of current loans and 11.3% of total deposits, which situates it in third place in terms of loans and fifth with regard to deposits in the banking system.
Our banking business is organized into wholesale banking activities, which are carried out by BCP's Wholesale Banking Group (which includes the corporate banking operations of ASB), and retail banking activities, which are carried out by BCP's retail banking group. To increase our visibility and raise our market share in the retail banking industry, BCP bought Edyficar, which is a scaled, high-growth and highly profitable microfinance business. Edyficar has a solid risk management strategy and a proven track record in both loan portfolio growth and social impact. Edyficar provides financial services for low-income micro-entrepreneurs and unbanked communities.
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 general manager 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 "(11) Supervision and Regulation—(ii) BCP") and the guidelines set forth by our Board of Directors.
Our deposit-taking operations are principally managed by BCP's retail banking group and ASB's private banking group. See "(12) Selected Statistical Information—(iv) Deposits."
We conduct our insurance operations exclusively through Grupo Pacífico and its subsidiaries, which provide a broad range of insurance products. Grupo Pacífico focuses on three business areas, property and casualty insurance through Pacífico Seguros, life and pension insurance through Pacífico Vida, and health care insurance through Pacíficosalud EPS. Grupo Pacífico, like other major Peruvian insurance companies, sells its products both directly and through independent brokers and agents. Directly written policies tend to be for large commercial clients, as well as for life and health insurance lines.
Pension funds
Credicorp conducts all of its pension fund activities through its private pension fund administrator Prima AFP. During 2011, Credicorp through its subsidiary Prima AFP, focused mainly on obtaining new affiliates (approximately 86,000 new affiliates, topping previous year figure by 55%) and building stronger relations with its client base, by providing permanent information and diverse channels of communication.
In terms of funds under management, the year 2011 was marked by uncertainty in the financial markets due to global economic outlook and European fiscal crisis, resulting in negative impact on our funds under management. Despite this scenario, the Peruvian economic indicators have remained solid and outlook remains favorable. Funds under management by Prima AFP at the end of December 2011 reached US$ 9,486 million, which falls below 2010's value (US$9,765 million) due to impact of market yields. On the other hand, monthly affiliate remuneration reached US$535 million in 2011 topping the figure in 2010 by 23.6% (US$ 433 million).
Brokerage and other
The majority of our trading and brokerage activities are conducted through BCP, ASB and Credicorp Securities Inc. (also referred to as Credicorp Securities), which is one of our wholly-owned subsidiaries. Credicorp Securities is a U.S. registered broker-dealer with its offices in Miami. Our asset management business is carried out by BCP in Peru, through its subsidiary Credifondo, and by ASB.
We offer brokerage and other services through BCP and ASB. BCP offers clients a wide range of such products and services, such as brokerage, mutual funds and custody services through its branch network in Lima and, on a more limited basis, throughout the rest of Peru. In addition, ASB also offers brokerage and other services.
In the last few years, we have consolidated an important line of business, asset management, for our customers. As of December 31, 2011 our assets under management totaled US$ 4.1 billion (without including private pension funds under management), a decrease of 31.1% from 2010, which was mainly due to the transfer of an important portfolio of shares and mutual funds from Credicorp Securities to another broker-dealer custodian.
Mutual funds represent another important contributor to our asset management business, carried out through BCP's mutual funds subsidiary, Credifondo Sociedad Administradora de Fondos Mutuos (or Credifondo). Credifondo leads the Peruvian market with a share of 42% of the total assets currently under management. Creditítulos is an asset securitization entity 100% owned by BCP. Finally, Atlantic Security Bank offers the international mutual funds and financial advisory services to private banking customers.
We established a corporate supervision project entitled "Asset Management" due to the size of these businesses, the importance of the commissions they generate and, above all, the fiduciary responsibility they entail. The main objective is to establish homogeneous risk control and investment policies based on best international practices. The Asset Management business has four main components:
|Portfolio Management: We seek to consolidate the good performance of our portfolios and funds through strict risk control and an appropriate level of diversification. To achieve this, we focus on improving three key aspects: investment policies, investment processes and management metrics.
|Financial Management: We focus on providing quality financial advisory services, building customer loyalty, and encouraging customers to invest in a diverse combination of securities according to their risk profile. Our objective is to improve the standards of the advisory services that our commercial bank offers and to distinguish between the levels of advisory services provided to different sectors.
|Brokerage: We attempt to provide a timely and high quality service, offering competitive execution costs, channeling a greater proportion of the assets traded by our companies to profitable investments and identifying opportunities for joint action (resulting in better prices), in addition to improving controls aimed at avoiding possible conflicts of interest.
|Risk Analysis: We seek to identify, quantify, regulate and, ultimately, minimize the risks associated with operations, credit, market, liquidity, legal contingencies, conflict of interests and other risks. Another objective of our risk analysis is setting corporate investment limits, creating a portfolio investments risk manual, and ensuring strict compliance with risk control rules.
|BCP and Subsidiaries
BCP's activities include wholesale banking, asset management, treasury and retail banking. As of December 31, 2011, the consolidated operations of BCP ranked first among Peruvian banks in terms of total assets (US$26.8 billion), total loans (US$16.4 billion), deposits (US$17.5 billion) and net equity (US$2.4 billion). At the end of 2011, BCP's loans, on an unconsolidated basis, represented approximately 33% of the total Peruvian banking system (lower than the 33.6% registered at the end of 2010) and BCP's deposits represented approximately 34% of the total Peruvian banking system (below the 36.3% reported at the end of 2010).
As of December 31, 2011, BCP had the largest branch network of any commercial bank in Peru with 342 branches. BCP also operates an agency in Miami and a branch in Panama. In addition, as of December 31, 2011, BCP Bolivia and Edyficar had 42 and 123 offices, respectively, through which they serve their clients.
As of and for the year ended December 31, 2011, BCP accounted for 87.4% of our total assets, 75.2% of our net income and 69.3% of our net equity. BCP's operations are supervised and regulated by the SBS and the Central Bank.
BCP groups its client base according to the following criteria:
|Client Segmentation
|Income/Sales (US$MM)
|Wholesale Banking
|Higher than 50
|From 6.7 to 50
|At least 0.02 in outstanding loans or 0.04
|balance in deposits with BCP
|Focus on medium-low income individuals
|Retail Banking
|who receive their payroll through BCP
|Small Business
|From 0.5 to 6.6 or total debt of 1.0
|Up to 0.5 or total debt of 0.2
The grouping was a result of an analysis which addressed factors beyond the simple size and volume of activity for each client, such as clients' affiliation with other companies or groups, the degree of follow-up required, and their credit ratings.
BCP's corporate structure consists of a group of local subsidiaries offering specialized financial services, which complement BCP's commercial banking activities. In addition to its local subsidiaries, BCP has an agency in Miami, a branch in Panama and a subsidiary in Bolivia.
BCP and its principal subsidiaries as of December 31, 2011 are as follows:
|Banco de Crédito de Bolivia, or BCP Bolivia, is BCP's commercial bank in Bolivia. BCP owns 95.92% of BCP Bolivia and we hold the remaining interest. BCP Bolivia maintained an 11.3% market share of current loans and 11.3% of total deposits, and has a network of 42 offices located throughout Bolivia. BCP Bolivia owns one of Bolivia's largest brokerage houses, Credibolsa S.A. Agente de Bolsa, and this subsidiary owns Credifondo SAFI Bolivia, a mutual fund administrator company. BCP targets middle- and small-sized clients and offers a broad range of corporate, personal banking and leasing products. BCP Bolivia's results are consolidated in BCP's financial statements.
|Empresa Financiera Edyficar S.A. was acquired in October 2009 and is 99.79 % owned by BCP. It is engaged in micro finance in Peru.
|Credibolsa Sociedad Agente de Bolsa, or Credibolsa, was established in June 1991 and is 100% owned by BCP. It is engaged in portfolio advisory and brokerage activities in the Lima Stock Exchange.
|Credifondo Sociedad Administradora de Fondos Mutuos, or Credifondo, is a mutual fund management company that was established in 1994. Credifondo is 100% owned by BCP.
|Creditítulos S.A., or Creditítulos was established in 1997 and is 100% owned by BCP. Creditítulos serves as an asset securitization entity.
|Inmobiliaria BCP is the real estate subsidiary of BCP. It manages the sale of real estate that has been foreclosed or received in payment by BCP. Inmobiliaria BCP is 100% owned by BCP.
|Solución Empresa Administradora Hipotecaria S.A. was established in 1979 under the name Solución Financiera de Crédito del Perú S.A. and is 100% owned by BCP. Its business included mortgage lending, consumer lending and SME financing. In the company's shareholders meeting on November 19, 2009, Solución Financiera de Crédito del Perú S.A.'s shareholders decided to change the company from a finance company to a mortgage administrator company and to change the company's name to Solución Empresa Administradora Hipotecaria S.A. These changes were necessary because, according to Peruvian Law, no person is allowed to be the owner of two financial institutions of the same type. As a result, the company will primarily engage in the administration of mortgage portfolios. These changes were approved by the SBS through resolution SBS 47-2010 on May 21, 2010.
Business Lines
|Wholesale Banking Group
BCP's wholesale banking group (Wholesale Banking Group), which competes with local and foreign banks, has traditionally represented the majority of BCP's loans. BCP's traditional long term relationships with medium and corporate companies provide its Wholesale Banking Group with a competitive advantage.
BCP's Wholesale Banking Group maintained its positive trend in loan placements, posting average portfolio levels of US$8,391 million in 2011 (20% higher than in 2010). It also maintained its leadership in the wholesale banking market with a 40.1% market share in direct loans and a 55.0% stake in debt placements in the Peruvian capital markets, BCP has the largest capital base among Peruvian banks, which provides it with more resources to meet the financing needs of its corporate clients. BCP has established longstanding client relationships with virtually all of the major industrial and commercial groups in Peru. The Wholesale Banking Group 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 Wholesale Banking Group is divided into the following areas:
|Corporate Banking, which provides loans and other credit and financial services to companies with annual revenues in excess of US$50 million;
|Middle-Market Banking, which serves mid-sized companies;
|Institutional Banking, which focuses principally on serving profit and non-profit organizations, state-owned companies and other major institutions;
|International Banking and leasing, which manages BCP's relationship with financial institutions locally and abroad, trade products, international operations services and financial leasing products;
|Corporate Finance, which provides underwriting and financial advisory services to corporate and middle-market clients; and
|Cash management and transactional services, which develop products and services to support clients' daily activities of cash management, collections, payments, and investments, among others.
Net income from the wholesale banking sector reached US$210 million in 2011 (compared to US$138 million in 2010). The 2011 result reflected increases in net interest income (loans and deposits) of 29% and in fee income of 17%.
Corporate Banking
BCP continues to meet the needs of its corporate clients, assisting them with financial services, cash management solutions and short and medium-term financing. As a result, BCP's corporate banking direct credits grew from US$5,155 million to US$5,477 million from 2010 to 2011, and income from financial services increased by 21%, from US$68 million to US$83 million. These increases, coupled with a very low default ratio (less than 0.1%), enabled the Corporate Banking Area to meet its financial targets with a net income of US$110 million, an increase of 57% over the US$70 million of net income achieved in 2010.
Client Profile: The Corporate Banking Area is focused on serving large-sized companies that have an annual turnover of over US$50 million, audited financial statements and dominant market positions in their particular brands or product areas. Even if they do not meet the above criteria, BCP may classify other firms in this category if they belong to very large economic groups from industries that are important to Peruvian economy.
The Corporate Banking Area offers a broad range of products and tailors its product offerings to meet each client's unique requirements. In general, this area is expected to offer high-value-added products and services, particularly cash management services, at competitive prices.
The majority of the Corporate Banking Area's financing is provided to fund capital expenditures and investments, sales, international trade and inventories. The Area also offers term financing (in almost all cases backed by real guarantees), financial leasing, factoring, and domestic collections and nationwide fund transfers.
Additionally, Corporate Banking clients can obtain investment banking, advisory and financing services through the Corporate Finance Area, which operates as part of the Wholesale Banking Group and also serves significant middle-market banking clients.
Guarantees received by this area consist of (i) receivables in the case of sales financing, (ii) warrants or pledges over inventory, in the case of inventory financing and (iii) real guarantees, in the case of financing for fixed asset acquisitions and improvements to their infrastructure.
We believe that prospects for growth in this business are limited, due to high market penetration (45.9%) and increasing competition against direct loans resulting from increased capital markets activity.
Middle-Market Banking
BCP's Middle Market Banking Area 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 three major types of products are:
|Revolving credit lines to finance working capital needs, international trade financing;
|Stand-by letters of credit and bond guarantees; and
|Structured financing for long-term and medium term requirements, through direct loans or financial leasing.
BCP has identified several opportunities to engage middle market companies, particularly in Peru's manufacturing, wholesale, retail, fishing and construction industries. BCP has created dedicated areas which focus on attending to the needs of these specific economic groups. BCP has a middle market client portfolio of approximately 7,000 companies, including 1,173 economic groups. Generally, these clients are not listed on any stock exchange; however in certain cases they have accessed the capital market either for bonds or commercial paper. These companies are typically family-controlled but professionally managed; their financial information is audited.
Since 2009, the Middle-Market Banking Area has revised its customer segmentation policies. The Area includes mature companies that will eventually become part of our corporate segment, traditional mid-size companies and a group of growing small cap companies. In selecting which small companies are best suited for service by our Middle-Market Banking Area, we consider a mix of different characteristics, such as annual revenues, financial leverage, overall debt and product penetration and complexity. BCP's middle-market clients' annual revenues generally vary from US$6.7 million to US$50 million, and are serviced nationwide by 13 BCP regional managers.
The Middle-Market Banking Area made has continued to make significant 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; and
|Introducing a new commercial planning model that employs an efficient and standardized methodology.
According to internal reports, in 2011 net income from the Middle-Market Banking Area increased to US$87 million. This was the result of an increase in net interest income (loans and deposits) of 33% and in fee income of 13%. The Middle-Market Banking Area's annual average loan portfolio had a market share of 34.5%, (US$2,930 million), making BCP the leading bank in its segment.
We believe that middle market companies have benefited significantly 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
BCP's Institutional Banking Area serves 900 clients in Lima and 300 clients throughout the rest of the country. In Lima, a specialized team in wholesale banking serves governmental entities, educational institutions, religious organizations, international bodies, non-governmental organizations, and microfinance institutions. In other provinces, a specialized remote wholesale banking team partners with BCP's retail banking area to serve clients.
The annual average deposit amount in BCP's Institutional Banking Area (Lima and provinces) reached US$2.6 billion in 2011. The Institutional Banking Area is strategically important because of the potential its clients present for generating income from fees and cross-selling opportunities. BCP's strategy in this Area is focused on building customer loyalty by offering customized services at competitive rates and providing outstanding service quality. Our institutional banking typically requires remote office banking, collections and automated payroll payment services.
International Banking
The International Banking Area focuses on providing short-term credit for international trade, which is usually funded with customer deposits or with credit lines from foreign banks and institutions. 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 guarantees issued by international banks and other fees as a result of the international payment 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.
Since September 2008 the International Banking Unit has also been supervising our trade back-office unit (International Operations). BCP maintains business relationship with correspondent banks, development banks, multilateral and export credit agencies in countries around the world. At present, BCP manages credit lines for foreign trade transactions, working capital and medium- and long-term investment projects.
In 2011 (based on BCP's internal report), BCP's export volumes increased by 19.3% reaching US$19.8 billion (compared to US$16.6 billion in 2010), which represented 43.3% of total Peruvian exports.
Total Peruvian imports were US$ 37.9 billion in 2011, increasing by 26.8% from US$ 29.9 billion in 2010, which was primarily due to higher demand for raw materials and capital goods. BCP's import letters of credit, collections and transfers amounted to US$12.4 billion in 2011, increasing by 31.9% from US$9.4 billion in 2010, which represented 32.7% of total Peruvian imports.
BCP has a direct presence abroad through its agency in Miami and its branch in Panama. It has access to a wide network of foreign correspondent banks and can offer several internationally competitive products to its customers.
BCP has correspondent banking relationships and uncommitted credit lines with more than 80 banks for foreign trade operations, financing of working capital and medium- and long-term investment projects. At the same time, BCP has been approaching the banking market to fund medium-term needs through the usage of syndicate loans structured by different international banks.
During 2011, Peru had a very active leasing market. Leasing as a way of financing became a more important tool for Peruvian companies over the course of the last year, growing from US$6.4 billion as of December 31, 2010 to US$7.7 billion as of December 31, 2011. BCP has consolidated the leasing activities developed by the bank over several years. BCP ended 2010 with US$2.4 billion outstanding in this product, which represented a 38.8% of the market share in Peru. By the end of 2011, BCP registered a slightly smaller market share, 37.5%, reaching US$2.9 billion in outstanding balances.
Corporate Finance
BCP´s Corporate Finance Area is a leading advisor to corporate, middle market and institutional clients in Peru. Our Corporate Finance team is composed of over 25 executives based in Peru and is the largest team of its kind in the Peruvian marketplace. BCP´s Corporate Finance Area provides a wide range of investment banking and corporate finance advisory services, including structured financings, capital raisings, initial public offerings, mergers and acquisitions and corporate restructurings. In 2011, the Corporate Finance Area participated in over US$2,400 million in principal amount of structured transactions, which involved financing through both the local capital market and the banking system. BCP's Corporate Finance team is ranked first in the 2011 local debt capital market league tables having placed over US$780 million in principal amount of debt instruments, which accounts for 55% of the local debt capital markets primary offers. The main projects in 2011 included:
|Syndicated term loan of US$160 million (BCP participated with US$100 million) for Consorcio Transmantaro to finance the construction of Zapallal-Trujillo transmission line.
|Reserva Fría leasings: (i) a leasing arrangement of US$110 million for Empresa Eléctrica de Piura - EEPSA to finance the construction of the Reserva Fría project located in Talara, Piura; and (ii) a subordinated leasing of US$100 million for EnerSur to finance machinery and equipment of the Reserva Fría project located in Ilo, Moquegua.
|Leasing arrangement of US$100 million for Corporación Aceros Arequipa to finance the expansion of its plant in Pisco.
|Medium Term loan of US$150 million for Dia Bras Perú to finance the acquisition of 92.12% of the shares of Sociedad Minera Corona S.A.
|Arrangement and placement of Edyficar and Pacífico subordinated bonds for S/.70 million and US$60 million respectively to strengthen both companies'capital position.
|Medium Term loan arrangements of US$50 million for Abengoa to finance the construction of a private transmission line for the Xstrata Tintaya mining project of Las Bambas.
During 2011, the Corporate Finance Area generated income in excess of US$21.5 million from structuring, advisory and issuance fees.
Cash management and transactional services
Our Cash management and transactional services unit is in charge of developing transactional services that handle the exchange of information among and money transfers to 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, as well as reducing costs using electronic channels and increasing fee income. Services managed by this unit include collections (automated trade bill collection), automated payments (direct credits 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.
During 2011, transactional services continued to be an important contributor to our earnings. The monthly average of the number of current accounts increased 4% and fee revenue increased 7% compared to 2010 which not includes the small business as a segment. Fee income from collection services also increased with letters and companies' collections commissions increasing by 8% and 27%, respectively, with regard to 2010 due to our strong performance in the corporate and midsize market. Our strategic decision to offer value to our clients through the implementation of a more efficient service mechanism explained part of this improvement. In addition, the higher demand by clients for the remote banking service "Telecredito" generated, in terms of number of transactions, a growth of 20% compared to 2010. Tax collections also grew 12%. Likewise, the transaction volume generated by reverse factoring increased 16% in 2011.
|Retail Banking Group
According to BCP's internal reports, by the end of 2011, retail banking-related loans represented 42% of BCP's total loans, while retail banking-related deposits accounted for 50% of BCP's total deposits. Net income from retail lending constituted 37.3% of BCP's net income, while income from retail related fees constituted 62.6% of BCP's total fee income.
In 2010, the Retail Banking Group's loan volumes grew by 22.3% as compared to volumes in 2009, reaching US$5,322 million. In 2011, loan balances reached US$7,108 million, which represented a 33.6% increase over 2010's figure. This growth was a result of strong consumer lending, which includes installment loans and credit cards, home mortgages and small and micro business loans. With respect to deposits, BCP's retail banking-related deposits have also shown consistent growth. Deposits grew by 15.9% in 2010 reaching US$ 9,062 million (US$ 7,820 million at the end of 2009), and by 15.2% in 2011, reaching a total of US$10,443 million by the end of the year.
With the segmentation of its retail client base, BCP is able to focus on cross-selling its products and improving per-client profitability. The Retail Banking Group has undertaken several projects to improve one-on-one marketing techniques and tools for the sale of its products to all market segments. BCP's management expects the retail banking business to continue being one of the principal growth areas for BCP's lending activities.
BCP's retail banking serves individuals and small-sized companies with annual sales levels of up to US$6.7 million. BCP's objective is to establish profitable long-term relationships with its broad client base, using segmentation strategies that satisfy the specific needs of each type of client. BCP's retail distribution strategy changed at the beginning of 2007, when BCP started using the branch network as the center for all transactional and commercial activities. BCP now has a commercial division, in charge of most direct sales forces and branches, which in turn are organized on a geographic level. Each branch is responsible for servicing and selling products to three customers groups: affluent, small business and consumer. In addition, each branch manager is responsible for overseeing the different channels offered within the branch, such as account managers, customer service representatives and tellers. Telemarketing, mid size business banking and real estate developer financing are not managed directly by local branches because of the specialty level and high growth potential associated with these products.
During 2008, BCP saw an unprecedented investment in infrastructure and human resources to support its "banking the unbanked" market penetration strategy in Peru. As a result, between 2008 and 2011, BCP experienced substantial growth in its various channels, including 3,433 new customer contact locations (12 branches, 598 ATMs and 2,823 Agentes BCP). Demonstrating its leadership in attracting new customers, BCP now services over four million customers with its network of 342 branch offices, 1,485 ATMs and 4,674 Agentes BCP (these figures do not include the customer contact locations under Edyficar's management, which we account for separately).
Affluent Banking
Affluent customers are crucial to BCP because of their high loan and deposit volume and their attractive profitability. They receive a differentiated value plan which includes: (i) access to innovative products, (ii) dedicated customer services channels such as specialized account managers and/or expert phone banking, (iii) preferential service by tellers at the branches and (iv) special interest rates on loans. BCP's affluent customers, who total approximately 181,000, must have a positive credit record and at least US$20,000 in outstanding loans with BCP or a minimum US$40,000 balance in deposits with BCP. Approximately 120,000 of the most profitable 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. Account managers are also responsible for new customer acquisition, particularly through mortgage loans. The affluent banking segment is very profitable, generating 33% of the retail banking group's revenue while managing 4% of the total customer base, 40% of the retail group's loan volume and 33% of its deposit volume.
Small Business Banking
BCP's Small Business Banking Area accounts for 460,000 clients. Customers are divided into two groups with different business models, services levels, and product access. The first group is top-end small business banking, which serves approximately 12,000 clients with debts between US$0.2 million and US$1.2 million and/or annual sales between US$0.5 and US$6.7 million. The next group of 448,000 small business clients has debts up to $0.2 million and/or annual sales up to US$0.5 million.
According to BCP's internal reports, the Small Business Banking loan portfolio grew from US$1,546 million to US$1,984 million in 2010, and by the end of 2011 the loan portfolio was US$2,744 million. In terms of deposits, this group increased deposits from US$1,637 million in 2009 to US$1,860 million in 2010 and then to US$1,885 million by the end of 2011.
Edyficar also serves the microfinance segment, and as of December 31, 2011, it registered 356,099 clients with a total loan portfolio equivalent to US$507 million, which represented an increase of 42% compared to the level registered at the end of 2010. As of December 31, 2011, Edyficar had a client market share of 11.2%, making it second in terms of market share within the microfinance segment. The aggregate market share of Edyficar and BCP in the microfinance segment totaled 21.4% at the end of 2011, and combined, they have the highest market share in the microfinance segment (Micro-Finance is part of Small Business Segment).
Consumer Banking
Our Consumer Banking Area 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 3.9 million medium to low income individuals. Consumer Banking focuses on customers who receive their payroll through BCP (which represent slightly more than 1 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. BCP has continued to excel in expanding its debit card as a form of payment, maintaining more than half of the Peruvian market share in withdrawals and payments with debit cards, which is a year-to-year increase of more than 674,000 cards. BCP concluded 2011 with more than 3.9 million cards.
Mortgage Lending
As of December 31, 2011, BCP was the largest mortgage lender in Peru with a market share of 34.01% of total mortgage loans in the Peruvian banking system. This was largely the result of BCP's extensive marketing campaigns and its improvements in the quality of 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
|the current economic outlook for controlled inflation and economic growth in Peru.
BCP had US$2,452 million in outstanding mortgage loans as of December 31, 2011 (as compared to US$1,905 million at year-end 2010 and US$1,571 million at year-end 2009).
All of our mortgage-financing programs are available to customers with minimum monthly income of US$400. The MiVivienda program, a program supported by government resources, placed a limit of US$60,000 on the value of the house to be purchased. BCP will finance up to 90% of the appraised value of a property where monthly mortgage payments do not exceed 30% of the client's stable net income. The maximum maturity of the mortgage loans BCP offers is 25 years, in either U.S. Dollars or in local currency. Within the mortgage lending business, in 2011 BCP stopped offering variable and LIBOR-based interest rates and offered fixed interest rates on home mortgage loans denominated in both U.S. Dollars and Nuevos Soles. BCP's mortgage portfolio is predominantly fixed rate and U.S. Dollar-denominated.
In May 2006, the original MiVivienda program was terminated. However, local banks (with governmental approval) launched a similar project, known as MiVivienda2, to which proprietary funds contribute. In addition, in March 2007, BCP created a new program financed by the government called Mi Hogar, which targeted people with a lower income profile. The conditions of the new program are almost identical to those of the first MiVivienda program, except that financing is in local currency. In June 2009, the MiVivienda administration decided to re-launch its new MiVivienda program with the objective of financing mortgages between US$17,000 and US$60,000 using government funds (the government offers guarantees to the lending bank or financial institution through Corporación Financiera de Desarrollo S.A. COFIDE). Simultaneously, they re-launched their product, Techo Propio, to finance mortgages between US$7,000 and US$17,000. In both cases, the programs are intended to develop social housing in the country. In 2011, nearly 8,876 MiVivienda loans were sold, 31% of which were sold through BCP. BCP's main objective is to establish long-term profitable relationships with its clients, by tailoring its products and services to satisfy the specific needs of each segment.
As of December 31, 2011, mortgages loans in the Peruvian banking systems totaled approximately US$ 7,140 million, which represented 14.9% of total loans of the banking system and only 4.04% as a percentage of Peruvian GDP. In the case of Credicorp, mortgages loans accounted for 14.06% of its total loan portfolio, and an average LTV (loan to value) of 61% and past-due-loan ratio of 1.3%.The Company, through its subsidiary BCP, has increased lending to lower socio-economic segments in Peru through programs sponsored by the government (Mi Vivienda and Mi Hogar). Mortgage loans to this sector represent approximately 11.6% of Credicorp's total mortgage loans and 1.82% of total loans. The Company's total portfolio also includes mortgage loans granted in Bolivia, which represent 1% of its total loans with LTV of 57.9%.
The real estate markets in Peru and Bolivia have grown in recent years as a result of the shortage of housing in both countries and, as a result, mortgage loans have had a positive impact on Credicorp's results of operations because of the increase in volume of loans granted per year, the cross-selling that the product allows, and the low expected losses considering the high LTV of the products.
Consumer Lending (Credit Cards and Installment Loans)
Consumer lending, credit cards and installment loans have grown significantly as improving economic conditions have led to increased consumer spending. BCP expects the strong demand for these products to continue. In addition to interest income, BCP derives fee income from customer application and maintenance, retailer transactions, and merchant processing, finance and penalty charges on credit cards.
Peru's economic growth has had a major impact on the consumer credit market, which grew by a total of 30% during 2008, 7% during 2009, 15% in 2010 and 36% in 2011. The Peruvian national outstanding consumer credit monthly average balance is US$2,073 million, consisting of US$748 million in credit card loans and US$1,269 million in installment loans. BCP's market share in consumer lending has consistently increased since 2007 growing from 17.9% to 18.7%. This growth in consumer lending was achieved while maintaining a ratio of accounts delinquent (for over 30 days) of below 4%.
Between 2007 and 2008, installment loans experienced an unprecedented growth of US$211 million in outstanding balances, a 43% increase. During 2009 and 2010 installment loans grew another 16% and 17%, respectively. In 2011, these loans grew by another 35%. This result was due, in part, to a strategic change by BCP, which was designed to broaden its customer base. In 2007, customers with a monthly gross income of less than US$600 represented less than 5% of installment loan sales (by number of credits), while in 2011 they represented 50% of all new installment loans sales (by number of credits), which represented 20% of the volume sold.
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 LAN and with Primax, a chain of gas stations. These programs, coupled with BCP's own travel program, enabled it to reach record levels, both in point generation and point usage (exchanges). To attract customers in the lower income segment, BCP worked on streamlining its risk assessment, card delivery process and generating partnerships with other retailers.
In 2011 Retail Banking launched a new product called Movistar BCP MasterCard Credit Card, in partnership with Movistar, a global leader in the telecom business, with the intention of strengthening BCP's position in the lower income segment and issuing for the first time MasterCard credit cards. This complements our AMEX and VISA offer.
BCP has been continuously improving its credit monitoring systems and optimizing its scoring models, which include, among others, behavior, payments and income forecasting. As a result, BCP has achieved a US$58 million increase in outstanding balances in 2008 and US$97 million in 2009. According to BCP's internal records, the number of active credit cards has constantly increased from 325,000 in 2006 to 387,000 in 2007 to 430,000 in 2008, to 446,000 in 2009, to 580,000 in 2010 and to 750,000 in 2011. In addition, annual purchases have increased from US$592 million in 2006 to US$868 million in 2007, to US$1,131 million in 2008, US$1,203 million in 2009, US$1,525 million in 2010 and US$2,100 million in 2011.
BCP is also the largest shareholder of VISANET in Peru, holding approximately 35.22% of its total shares. The number of VISANET electronic payment terminals grew to approximately 70,000 in 2011, as compared to 2,816 in 2006.
|Asset Management Group
In addition to BCP's Wholesale and Retail Banking operations, BCP operates an Asset Management Group, which currently is the largest capital markets and brokerage distribution system in Peru. The principal activities of the Asset Management Group include, investment advisory, brokerage, mutual funds, custody, trust and research.
BCP's products are distributed through its subsidiaries and branches. BCP's close relationship and coordination with its subsidiaries has established BCP as the market leader in the capital markets business in Peru.
Credibolsa is BCP's brokerage subsidiary through which BCP offers a wide variety of equity and fixed-income products and services as well as research. Credibolsa's activities include the structuring and placement of primary market issues and the execution and trading of secondary market transactions.
Credifondo S.A, Sociedad Administradora de Fondos, or Credifondo is BCP's mutual fund subsidiary, which offers a variety of investment products and services. Mutual funds offered by Credifondo include short/long term, U.S. Dollar and local currency fixed income funds, equity funds and mixed funds (fixed income plus equity according to different risk profiles). It is the largest mutual fund manager in Peru, according to data published by the Superintendencia de Mercado de Valores (SMV formerly CONASEV). As of December 31, 2011, Credifondo's assets under management (AuMs) totaled US$2,131 million and represented 42.11% Peruvian market share. Credifondo manages ten separate funds, with a total of 81,694 participants, compared to 92,626 in 2010. Funds are segmented according to risk profile and invest primarily in Peruvian equities, U.S. Dollar-denominated bonds, Nuevo Sol-denominated bonds and U.S. Dollar-denominated short-term securities. The decrease in the number of participants was due to the political uncertainty that Peru experienced as a result of the 2011 presidential election. Credifondo's management expects to increase its product offering during 2012 by launching new funds that will invest in securities considered under the MILA Agreement (Mercado Integrado Latinoamericano) in order to deliver a more competitive value proposition to its clients.
Creditítulos is BCP's asset securitization subsidiary, through which BCP offers local securitization structuring to corporate entities.
BCP held US$31.8 billion in securities, as of December 31, 2011. BCP provides custody services that include physical and electronic custody of securities and the payment of dividends and interest. Our most important clients are Peruvian institutions that invest in domestic and foreign markets, as well as international investors that have chosen our custody services for their domestic investments.
Trading and Brokerage Services
In 2011, the Peruvian capital markets recovered strongly after the international financial crisis. The Lima Stock Exchange General Index (IGBVL) experienced a decrease of 16.69% in 2011.
Credibolsa maintained its leadership position in the Lima Stock Exchange with a 28.2% market share as a result of a trading volume that reached US$4,392 million in 2011. Credibolsa was also the number one stock broker for initial offerings (in terms of transaction principal volume) issuing a total of S/. 789 million and US$494 million in fixed income securities and attaining a market share of 54.9%.
BCP's management believes that Credibolsa will continue expanding its business based on its ability to provide strategic advice to clients while offering various products that meet their needs. Furthermore, BCP's wholesale banking marketing represents an important strength that allows Credibolsa reach leading companies in the local market, while BCP's branch network helps to expand Credibolsa's business in the retail segment.
Treasury, Foreign Exchange, Derivatives and Proprietary Trading
BCP's Treasury and Foreign Exchange Groups are active participants in money market and foreign exchange trading. These groups manage BCP's foreign exchange positions and reserves and are also involved in analyzing liquidity and other asset/liability matters. The trading desk plays an important role in short-term money markets in Nuevos Soles and in foreign currencies. It has also been active in the auctions of certificates of deposit by Peru's central bank as well as in financings through certificates of deposit, interbank transactions and guaranteed negotiable notes, among other instruments.
BCP's derivative group serves companies ranging from SME to large corporations in their needs to hedge market risks. This group offers forwards, FX options, interest rate swaps, cross currency swaps as well as tailor-made derivatives for its clients. BCP's strong balance sheet and experienced professionals allow the derivative group to provide not only innovative hedging solutions but also competitive pricing to its clients. BCP's derivative business is closely supervised by the treasury risk unit which includes professionals trained in best risk practices in the international markets.
Since 2007, BCP has adhered to international best practices in terms of cash management. BCP created the Assets and Liabilities Management Service (or ALM) which is responsible for managing its balance sheet under the Asset and Liabilities Committee (or ALCO) oversight. ALM is responsible for managing BCP's balance sheet and for accepting reasonable interest rate and liquidity risks through management of the short- and long-term transfer rates.
BCP's proprietary trading consists of trading and short-term investments in securities, which includes instruments from various countries. These short-term investments are primarily made to facilitate its treasury management and corporate finance efforts. This has become an increasingly important part of BCP's business, as BCP seeks returns on excess liquidity pending improved lending conditions.
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 division. The adoption of a risk appetite framework represents the Bank´s guiding commitment to align 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 Peruvian financial sector laws and SBS regulations. (See "—(11) Supervision and Regulation—(ii) BCP," and the guidelines set forth by our board of directors.)
BCP's credit approval process is based primarily on the 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 collateral to be provided.
For the evaluation of BCP's corporate borrowers, credit officers analyze the 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 taking into account client's capacity for repayment, a documented set of policies (including, among other issues, client's financial track record), and, in most cases, credit scores, which assign loan-loss probabilities related to the expected return of each market segment. In BCP, about 80% of credit card and consumer loan application decisions are made by automatic means. The complement, mortgage and small business loan applications decisions, are made by credit officers who use credit scores and profitability models as an input for their evaluations and report to a centralized unit.
Success in small business and personal lending areas depends largely on BCP's ability to obtain reliable credit information about prospective borrowers. The SBS has an extensive credit bureau which has expanded its credit exposure database service to cover businesses or individuals with any amount borrowed from Peruvian financial institutions. This database includes information on the loan risk category in which the borrowers are classified: "Normal," "Potential Problem," "Substandard," "Doubtful" and "Loss."
BCP has a strictly enforced policy with respect to 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, whose officers have been granted lending limits. To ensure that loan officers and credit analysis officers are complying with lending policies, the credit department and BCP's internal auditors regularly examine credit approvals, in addition to the controls built into the loan approval workflow systems.
The following table briefly summarizes BCP's policy on lending limits for loan officers and credit risk analysis officers. Requests for credit facilities in excess of the limits set forth below are reviewed by BCP's general manager, executive committee or, if the amount of the proposed facility is sufficiently large, board of directors.
|Risk without collateral or with
|only personal collateral or
|Risk with preferred
|In US$ thousands
|guarantees (1)
|Board of Directors
|Regulatory limit
|Regulatory limit
|Executive Committee
|General Manager
|Risk Division Manager/ Credit Division Manager
|Credit Risk Manager
|Credit Risk Chiefs
|Retail Credit Risk Manager
(1) Preferred guarantees include deposits in cash, stand-by letters, securities and other liquid assets with market price, mortgages, non-real estate property guarantees and assets generated by leasing operations. The limit for the Executive Committee is 10% of the Regulatory Capital of BCP as of December 2011.
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 or business administration from competitive local or foreign universities. In addition, the training program consists of a six-month rotation through all of the business-related areas of BCP and the credit risk analysis area. After the training period is over, trainees are assigned as assistants to loan officers for a period of at least one year before they can be promoted to loan officers. Loan officers also receive additional training throughout their careers at BCP. Laterally-hired officers are generally required to have previously held positions as loan officers.
BCP operates in substantial part as a secured lender. As of December 31, 2011, approximately US$9.4 billion of our loan portfolio and contingent credits were secured by collateral, which represents 48.9% of the total loan portfolio based upon our unconsolidated figures, as compared to 45.4% in 2010 and 47.9% in 2009.
Liquid collateral is a small portion of the 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 facilities granted. The appraisal of illiquid collateral, in particular real estate assets, machinery and equipment, is performed by independent experts when required for specific reasons.
The existence of collateral does not affect the loan classification process according to regulations in effect as of December 1998. Pursuant to Peruvian banking law, secured loans, or the portion thereof covered by collateral, classified in Class "B," "C," or "D" risk categories have a lower loan loss provision requirement for Peruvian accounting purposes. If a borrower is classified as substandard or below, then BCP's entire credit exposure to that borrower is so classified.
BCP conducts unannounced internal audits on borrowers' financial statements, consistent with local banking regulation of the different jurisdictions in which it operates.
Deposits are principally managed by BCP's retail banking group. The main objective of BCP's Retail Banking Group operations has historically been to develop a diversified and stable deposit base in order to provide a low-cost source of funding. This deposit base has traditionally been one of BCP's greatest strengths. BCP has historically relied on the more traditional, stable, low cost deposit sources, which it considers to be its core deposits: time, demand deposits, savings and CTS deposits. CTS deposits, or Severance Indemnity Deposits, are funded by companies in the name of their employees. CTS deposits amount to one month's salary per year and may be withdrawn by the employee only upon termination of employment or upon transfer to another bank, subject to certain exceptions. Exceptions include disposing of 40% of the CTS deposit made in May 2010 and 30% of CTS deposit made in November 2010. Since the year 2011, employees may dispose 70% of the excess of six gross monthly remunerations.
As of December 31, 2011, deposits represented 71.8% of BCP's total source funding. BCP's extensive branch network facilitates access to this type of stable and low-cost funding. BCP's corporate clients are also an important source of funding for BCP.
Support Areas
BCP's commercial banking operations are supported by its Risk Area, which evaluates and helps administer credit relationships, establishes credit policies and monitors credit risk. See "—(4) BCP and Subsidiaries—(v) Lending Policies and Procedures."
BCP's Planning and Finance Area is in charge of planning, accounting and investor relations functions and is also responsible for analyzing the economic, business and competitive environment in order to provide the information necessary to support senior management's decision-making.
In addition to the above, BCP's Administration Group is generally responsible for information technology, quality control, institutional and public relations, human resources, the legal department, security, maintenance and supplies.
Information Technology
BCP considers its technology platform to be one of its main competitive strengths and has continued to invest in this area to maintain its competitive position in the banking sector. BCP's IT investments and expenses to upgrade and maintain its technological systems totaled US$151.8 million in 2011, US$136.2 million in 2010 and US$120.7 million in 2009. In 2011, IT investments represented 49.5% of the total IT investments (US$75.1 million), in 2010 they represented 38.1% of the total (US$51.9 million) and in 2009 the participation was 42.2% (US$50.9 million). Of the total investment in 2011, US$ 35.7 million was related to large development projects, US$ 16.2 million related to small development projects, and US$ 23.1 million related to IT infrastructure projects. Among the large projects it is important to highlight Commercial Management (Huascarán – Retail Banking), Commercial Planning (Sipán – Wholesale Banking), Treasury (Derivatives Module), Financial Data Model, Teller, SAP Accounting Phase 2, among others. Small development projects were related to improvements of BCP's existing software or extend distribution channels. On the other hand, IT infrastructure projects corresponded to extensions and renewal of existing IT infrastructure and hardware.
As part of BCP's "Excellence in Continuous Operations" Program, or ECO Program, BCP completed the construction of a new data center in Chorrillos during the second quarter of 2011. The La Molina and Chorrillos data centers will operate in an "active-active" mode, with each system supporting the other. In addition, at the end of 2011 a new decentralized contact center in Trujillo was completed. We invested a total of US$99.7 million in the Chorrillos and the Trujillo data centers. Both centers are scheduled to start operations in the first quarter of 2012.
BCP continually works to protect and strengthen the BCP brand. BCP has a proactive attitude towards competition and is focused on change and innovation. The company promotes its products and services by constantly improving them. In this manner, BCP aims to grow and be a leader in every retail market by offering the highest possible value for its clients and shareholders. In 2011, BCP continued its strategy which was based on generating value.
BCP continued to develop strategies to approach different retail customer groups, by increasing use of Customer Relationship Management (CRM) tools across all segments. This 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.
Another key element for BCP in creating value is innovation. BCP has launched several innovative products, including new service products for wealthy customers and new benefits for customers whose wages are paid directly into their BCP accounts. BCP is also constantly evaluating and improving its internal systems and means of operation and organization in order to achieve leaner and more efficient processes which help enhanced the experience for our customers. Since 2009 we have continued to implement leaner processes by making adjustments to branch layouts, tellers, ATM cash management and mortgage lending practices. We have also implemented more standardized and sustainable commercial practices.
Quality service is a permanent goal for BCP and the company aims to proactively meet or exceed regulations promulgated under the Consumer Protection Law. BPC has made significant investments in improving service and keeping customers informed about its products and services, with a special focus on reducing the sources of claims.
Anti-Money Laundering Policies
Credicorp has an enterprise wide compliance program in place that meets both our local and international regulatory demands. This same program is followed both at our head office and in all the countries in which we operate. We have in place policies and procedures, controls, and a risk based approaches that allow us to properly execute our program.
Credicorp's Corporate Compliance Officer is responsible for ensuring compliance with all the companies of the Group and therefore has oversight of the activities of the Compliance Officers of each of the foreign branches (BCP Panama and BCP Miami), foreign affiliates (Atlantic Security Bank and Credicorp Securities) and foreign subsidiary (BCP Bolivia). These institutions must comply with all regulations in the countries where they operate, in addition to corporate policies and procedures.
Training is an important aspect of our program, therefore compliance awareness is done through virtual courses offered to all employees as well as on-site training sessions for higher risk functions. Another aspect of our program that demonstrates our commitment towards achieving a high level of compliance is our employee disciplinary action process that ensures employees follow our policies and procedures and maintain the highest standards of ethical behavior.
Recently, we have added additional resources to our regulatory Compliance function to strengthen our efforts towards a series of initiatives that continue to build on our existing program. These initiatives include reinforcing the anti-corruption, code of ethics, and conflicts of interest programs across the organization. The chief Compliance Officer is responsible for reporting compliance matters to the Board of Directors as well as the Corporate Governance committee.
Our compliance area has a team of qualified professionals who are certified and have the experience to meet the regulatory challenges ahead both locally and in the markets we serve. We are committed to maintaining our solid reputation with our regulators, investors and stakeholders.
As of December 31, 2011, BCP had 18,616 employees (including 2,359 employees from Edyficar) compared to 16,148 employees as of December 31, 2010 and 16,748 employees as of December 31, 2009.
|Atlantic Security Bank
Atlantic Security Bank (ASB), is a Cayman Islands licensed bank that engages in private banking, asset management and proprietary investment. ASB, a wholly-owned subsidiary of Atlantic Security Holding Corporation, was incorporated in September 1984, in the Cayman Islands and principally serves Peruvian-based customers. ASB had an international licensee branch in Panama, through which conducts all commercial business.
As of December 31, 2011, ASB had total assets of US$1,523.5 million and shareholders' equity of US$189.2 million (compared with US$1,337.8 million and US$182.6 million, respectively, as of December 31, 2010). ASB reported a net income of US$41.1 million in 2011, compared with US$48.9 million in 2010.
ASB's clients have traditionally provided a stable funding source, as many are long-time clients who roll-over deposits on a permanent basis. As of December 31, 2011, ASB had approximately 4,000 clients, 95% of whom are Peruvian. ASB deposits at year-end 2011 reached US$1,320.6 million, up 18% from US$1,117.7 million as of December 31, 2010.
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 represent a distant second in terms of portfolio allocation, while equity and hedge-fund positions, though present, are even less relevant. As of December 31, 2011, ASB had US$811.6 million at fair value, compared to US$751.6 million in 2010.
Third-party asset management is an important activity for ASB. Total AuM (assets under management) reached US$3,193.6 million as of December 31, 2011, compared to US$3,177.7 million as of December 31, 2010. These assets cover the range from direct unsolicited securities to ASB managed mutual funds.
ASB also maintains a sizable loan portfolio. Total loans outstanding were US$606.1 million and US$468.1 million at year-end 2011 and 2010, respectively. Between 96% and 98% of these loans were guaranteed by the client's deposits or investments. At the year-end 2011, for example, only US$8.2 million of this total were unsecured loans. This high level of securitization is reflected in ASB's low level of non-performing loans, which is consistently much less than 1% of total loan portfolio. The overwhelming majority of ASB's loans are granted to Peruvian individuals and companies, while those that are not are otherwise directed exclusively to Latin American borrowers.
ASB's overall investment strategy, general profile of its investment portfolio and specific investment decisions are reviewed on a weekly 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 the Board of Directors.
|Grupo Pacífico
We conduct our insurance activities through Pacífico Seguros and its subsidiaries, Pacífico Vida and Pacificosalud EPS S.A. which are collectively called as Grupo Pacifico. We provide a broad range of insurance products (including property and casualty, life and health). In 2011, the eight most significant business lines collectively generated 80.3% of total premiums written by Grupo Pacífico. These business lines consisted of automobile, health, medical assistance, life (individual life, credit life, group life, and disability and survivorship insurance), pension fund underwriting and commercial property damage (fire).
Grupo Pacífico is the second leading Peruvian insurance company, including private health companies, with a market share of 29.6% based on direct premiums earned in 2011. This market share calculation includes premiums from Pacifico Seguros, Pacifico Vida and Pacificosalud EPS S.A and represents our total market share in the insurance market and healthcare sector.
Pacífico Seguros premiums increased 13.5% to US$378.6 million during 2011 from US$333.5 million in 2010 and net premiums earned, net of reinsured premiums and of technical reserves (as defined below in "―(ii) Claims and Reserves"), were US$228.9 million in 2011, increasing 13.5% compared to 2010.
In 2011 the ratios for losses and acquisition costs were affected by an increase in competition, particularly in the traditional brokers' channel. This has exerted downward pressure on fees and generated an increase in commissions for insurance sales. In comparison to 2010, the loss ratio increased 4% while the commissions over net earned premiums ratio grew 1.1%.
Although our administrative expenses over net earned premiums ratio continues to be more efficient than that of our competitors, it experienced a decline in 2011 due to the investments that we are making to diversify our distribution channels and bolster Pacífico Seguros' presence in the provinces. Accordingly, general expenses grew 22% on an annual basis and thus contributed to the drop in net income from US$28.2 million in 2010 to US$14.2 million in 2011.
Grupo Pacífico's businesses in property and casualty and private health are highly concentrated, with a client base of over 34,000 companies and over 800,000 individuals in the property and casualty and health insurance programs, including individuals affiliated with group health insurance programs through the companies by which they are employed. As of December 2011, revenues from policies written for Grupo Pacífico three largest and 20 largest customers represented 8.7% and 25.5% of total premiums in its property and casualty and health insurance businesses, respectively. Grupo Pacífico property insurance lines are sold through agents, brokers and its own sales force, while life insurance is sold by its own sales force. The 10 largest brokers in the property and casualty as well as in the private health segment accounted for approximately 42.7% of total premiums as of December 31, 2011 (compared to 43.9% as of December 31, 2010).
El Pacífico Vida (Pacífico Vida) is Grupo Pacífico's life insurance subsidiary. In 2011, Pacífico Vida recorded total premiums of US$324 million, a 17.4% increase from total premiums of US$276 million in 2010.
This increase is primarily a result of higher premiums reported in Credit Life (33.5%), Obligatory Insurance for disability y survivorship (25.2%), and Individual Life (15.3%) lines. Pacífico Vida performance in these areas was consistent with the improved performance of the Peruvian life insurance market overall.
Pacífico Vida reported a 25.9% market share based on direct premiums earned in 2011.
Credit Life which also involves credit cards and mortgage loans (through the obligatory credit life insurance associated to this type of credits according to risk policies of banking products), increased its premiums by 33.5% from the end of 2010 to the end of 2011. The strong performance of Credit Life is in substantial part a result of its partnership with Banco de Crédito (BCP), which allows Pacífico Vida to access the largest bancassurance channels in Peru.
Disability and survivorship premiums increased by 25.2% in 2011 compared to 2010. This increase was the result of (i) higher insurance rates in January 2011 (1.09%) and in July 2011 (1.15%) as compared to 2010 (1.06%); and (ii) an increase in monthly insurable income. We currently have the second highest market share for monthly income insurance in Peru, with 26.8%.
Individual Life premiums increased by 15.3% in 2011 compared to the prior year, in line with market growth. This result was mainly due to the sale of Seguro de Vida Inversion Oro and Seguro de Vida Inversión, our improved quality of sales service and the steady development of our distribution channels, which includes our main channel, the agencies, and our Bancassurance, brokers, sponsors and part time channels. As a result, we had 38.9% market share, leading the segment.
In our Group Life business, premiums closed 13.6% above 2010, mainly in our Complementary Work Risk Insurance (SCTR, +26.6% above 2010) and Vida Ley (+25.2% above 2010) lines. This growth was primarily the result of microeconomic gains experienced across the country, the higher number of formal businesses and the strong development of the mining and construction industries.
The Individual Annuity line increased by 7.8% compared to 2010, exceeding the market growth rate of -5.95%. Our outstanding result was mainly due to our decision to increase our direct sales force in Lima and in other provinces throughout Peru.
Pacífico Vida generated earnings of US$50 million in 2011.
Pacífico Salud EPS S.A reported total revenue of US$171.5 million and a net gain of US$2.8 million in 2011, which was mainly due to the acquisition of certain medical subsidiaries, as described further below. These acquisitions generated an extraordinary expense of approximately US$2 million. One of our main strategies is to benefit from the fact that demand for health services in Peru has been growing in line with higher income per capita during recent years; while existing health service providers have been largely unable to keep pace as a result of the limitations implicit in their corporate and organizational structures. Through this strategy, we also seek to benefit in the long term from inflationary trends in the health services sector, which have been constant over the past few years and have led to an 8% increase in average service costs.
To accomplish this, we invested approximately US$82.7 million in the second half of 2011 to create the largest private medical services network in the country by acquiring majority shares to directly manage: (i) El Golf, San Borja and Oncocare clinics in Lima; (ii) the Galeno clinics in Arequipa; (iii) Laboratorios ML, a clinical laboratory; and (iv) Doctor+, which is a house call/ambulance service.
Furthermore, another important step in this strategy was our decision to sign an agreement with Johns Hopkins Medicine International, which is widely recognized as one of the world's finest medical institutions. We believe that this alliance will allow us to import health services and medical care of the highest international standards to Peru.
|Underwriting, Clients and Reinsurance
Underwriting decisions for substantially all of Pacífico Seguros insurance (property and casualty) risks are made through its central underwriting office. Pacífico Seguros own risk management staff inspects most medium and medium-to-large commercial risks prior to their underwriting, whereas third party surveyors are employed to inspect smaller risks. Underwriting standards are approved by the Board of Directors on a yearly basis.
Pacífico Seguros transfers risks to reinsurers in order to limit its maximum aggregate potential losses and minimize exposure on large risks. Reinsurance is placed with reinsurance companies based on the evaluation of the financial capacity of the reinsurer, terms of coverage and price. Pacífico Seguros principal reinsurers in 2011 were, among others, Lloyd's, Munich Re, Swiss Re, Hannover Re, Everest Re, Mapfre Global Risks, BRIT Ins, New Hampshire Ins, Scor, Insurance Company State of Pennsylvania, General Re, Chartis Insurance U.K, General Re, Berkshire Hathway International Insurance Ltd, W.R. Berkley Insurance (Europe) Ltd. Premiums passed on to reinsurers represented 16.3% in 2011. Pacífico Seguros acts as a reinsurer on a very limited basis, providing its excess reinsurance capacity to other Peruvian insurers that are unable to satisfy their reinsurance requirements.
Although Pacífico Seguros historically has obtained reinsurance for a substantial portion of its earthquake-related risks through excess loss contracts, there can be no assurance that a major catastrophe would not have a material adverse impact on its results of operations or financial condition. See "—(ii) Claims and Reserves."
|Claims and Reserves
Net claims paid by Grupo Pacífico as a percentage of net premiums written (i.e., the net loss ratio) reached 63.9% in 2011, a slight increase compared to 63.6% in 2010.
The net loss ratio, in the property and casualty segment, which represented 14.3% of Grupo Pacífico´s premiums in 2011 (13.5% in 2010), increased from 50.5% in 2010 to 54.4% in 2011, mainly due to a higher level of competition on the broker channel that exerted a downward pressure in fees. The net loss ratio from the automobile line, which represented 5% of Grupo Pacífico´s premiums in 2011 (4% in 2010) increased from 40.3% in 2010 to 48.8% in 2011. The net loss ratio from the inland transport line, which represented 0.8% of Grupo Pacífico´s premiums in 2011 (0.5% in 2010) increased from 37.9% in 2010 to 58.5% in 2011. The net loss ratio of the private health line, which was 5.9% of Grupo Pacífico´s premiums in 2011 (5.8% in 2010) increased from 70.7% in 2009 to 74.1% in 2010.
The net loss ratio in the life insurance lines decreased from 66.6% in 2010 to 61.4% in 2011.
The net loss ratio in the health businesses increased from 78.8% in 2010 to 80.4% in 2011 and represented 15.7% of Grupo Pacífico´s premiums in 2011 (15.3% in 2010).
Grupo Pacífico is required to establish (i) claims reserves in respect of pending claims in its property-casualty business, (ii) reserves for future benefit obligations under its in-force life and accident insurance policies, and (iii) unearned premium reserves in respect of that portion of premiums written that is allocable to the unexpired portion of the related policy periods (collectively, "Technical Reserves"). Grupo Pacífico establishes claims reserves with respect to claims when reported, as well as for incurred but not reported (IBNR) claims. Such reserves are reflected as liabilities in Grupo Pacífico financial statements.
Grupo Pacífico records as liabilities in its financial statements actuarially determined reserves calculated to meet its obligations under its life and accident policies and its pension fund underwriting business. These reserves are determined using mortality tables, morbidity assumptions, interest rates and methods of calculation in accordance with international practices.
Pursuant to SBS regulations, Grupo Pacífico establishes pre-event reserves for catastrophic risks with respect to earthquake coverage. See "—(11) Supervision and Regulation—(v) Grupo Pacífico—Reserve Requirements." In accordance with IFRS principles, the pre-event reserves and income charges for catastrophic reserves are not considered in Credicorp's consolidated financial statements.
Even though Grupo Pacífico maintains reserves to reduce its exposure, there is always some risk that claims might exceed Grupo Pacífico's reserves.
|Investment Portfolio
Grupo Pacífico's investments are made primarily to meet its solvency equity ratio and to provide reserves for its claims. Grupo Pacífico manages its investments under three distinct portfolios, designed to contain sufficient assets to match the liabilities of the company's property and casualty (Pacífico Seguros), life and annuities lines (Pacífico Vida), and health care lines (Pacífico Salud). Each portfolio is managed under the authority of its own committee, which reviews portfolio strategy on a monthly basis. Grupo Pacífico's invests in local and international markets, emphasizing investments in Perú, U.S. and Latin America. Grupo Pacífico's has adopted strict policies related to investment decisions. The company´s investment strategies and policies are reviewed and approved by Grupo Pacífico's Board of Directors. Senior management also takes a leading role in devising investment strategies.
Grupo Pacífico's investment strategy also considers an appropriate match of currencies related to its assets and liabilities. A significant portion of Grupo Pacífico's premiums is denominated in U.S. Dollars and most of the company's assets are also invested in this currency. (In 2011, 77.3% of the gross premiums received by Pacífico Seguros were denominated in U.S. Dollars, compared to 78.4% in 2010).
As part of its improvement process, Grupo Pacífico's has been adjusting its investment policy in order to apply the best international risk management practices and tools. Grupo Pacífico's also incorporated the recommendations of Solvencia II and Basel II, with a view to developing a better match of terms and currencies with the company's liabilities, especially in connection with obligations vis-à-vis Grupo Pacífico's insured customers.
As of December 31, 2011, the market value of Grupo Pacífico's portfolio (which includes Pacífico Seguros, Pacífico Vida and Pacífico Salud) was US$1,429.3 million, which included US$103.9 million in equity securities, and US$1,325.3 million in fixed income instruments. The company´s real estate investments' gross book value reached US$33.4 million. The portfolio is well diversified and it follows an asset-liability management general strategy which is based on the assets (portfolio) regarding liabilities (reserves): (i) cash flow and duration matching (ii) currency matching and (iii) improve the capital structure of the company.
Grupo Pacífico's reported a consolidated financial income in 2011 of US$100.3 million, an increase of 7.9% compared to US$92.9 million in 2010. This increase is mainly done to the growth of Pacífico Vida's business lines (especially the life insurance business) and Pacífico Seguros property and casualty businesses.
Pacífico Seguros had a market value portfolio of US$162.3 million at year-end 2011 which included equity investments and fixed income instruments. Pacífico Vida's market value at year-end 2011 was US$1,256.5 million and mainly consisted of high grade long-term debt instruments. Furthermore, Pacificosalud EPS S.A had a small portfolio with a market value of US$10.5 million.
Pacífico Seguros' 2011 financial income grew to US$27.1 million, an increase of 10.3% compared to 2010. This improved performance was mainly due to US$9.4 million in capital gains earned on investments in equity and fixed income markets, which reflected our strategy of maximizing capital appreciation. Financial income from its fixed income portfolio increased by 7.5% and income from real estate rental fees increased by 24% in each case compared to 2010.
Pacífico Vida's 2011 financial income grew to US$71.8 million, an increase of 7.3% compared to 2010. This increase was mainly due to growth in the annuities business line and the fact that the Peruvian consumer price index growth in 2011, which had a positive effect of US$4.5 million on inflation adjusted bonds.
|Prima AFP
In 2011, the pension fund market was stable, with less competition for transfers and increased focus on new affiliations. Prima AFP maintained its leading market position due to a strong value proposal aimed at providing quality information and service to its members.
Strong productivity by Prima AFP's sales management helped Prima AFP preserve a high quality portfolio and increase its monthly insurable remuneration (or RAM), which is the basis of its revenues. Strong productivity also contributed to Prima AFP's robust market share. With regard to the collection of contributions, Prima AFP has the largest market share in Peru, at 32.9% as of December 2011.
In the commercial field, Prima AFP focused on recruiting new affiliates and maintaining its existing affiliate portfolio. Pursuant to in-house estimates based on revenues, and taking into account the 1.75% administration fee that Prima AFP charges, Prima AFP's basis remuneration for revenues increased in 2011. This increase allowed Prima AFP once again to achieve the highest monthly insurable remuneration (RAM) market share, at 32.2%.
In 2011, Prima AFP's pension fund investment portfolio decreased as a result of lower confidence in a global recovery, although at the local level indicators of the Peruvian economy remained solid. The negative performance of international and local financial markets was reflected in the value of funds under management, which decreased from US$9.8 billion as of December 2010 to US$9.5 billion as of December 2011. Given that pension funds are long-term investments, it is best to observe their returns over a long period. Over the last 60 months, Prima AFP's annual return was 6.48%, 8.11% and 8.09% for funds 1, 2 and 3. In 2011, Prima AFP registered total revenues of US$104.4 million and profits of US$32.4 million (under IFRS), a 27.0% year-over-year increase. This was accomplished by expanding Prima AFP's revenue base and controlling its operating expenses.
In recent years, several foreign companies have showed interest in entering the Peruvian market while financial companies already in Peru have have taken steps to expand operations and develop new business. In 2006, the Canadian bank with the largest international presence formed Scotiabank Peru pursuant to a merger between Banco Wiese Sudameris and Banco Sudamericano. In addition, in 2006, one of the largest financial organizations worldwide entered the Peruvian market for the first time by forming HSBC Bank Peru.
In 2007, a financial corporation with ten years of operating history received authorization to convert into a bank. That same year, Banco Santander re-joined the Peruvian banking segment and started operations in October. In 2008, two foreign-owned banks initiated operations in Peru: Banco Azteca and Deutsche Bank (Peru), a subsidiary of the German bank of the same name. In 2009, Banco del Trabajo, a subsidiary of Scotiabank, started operations as a finance corporation (Crediscotia Financiera). Finally, in 2010 and 2011 no major commercial banks entered the Peruvian financial system.
While new entries into the Peruvian banking system over the last two years have not been as pronounced as entries in previous years, there is evidence that foreign-owned banks are taking steps to begin operations in the Peruvian market. For example, Itaú Unibanco, Banco Latinoamericano de Comercio Exterior (Bladex), Morgan Stanley Bank and Bank of Tokyo Mitsubishi have received authorization to open representative offices in Peru.
Peruvian Financial System Evolution (2011)
According to the SBS, as of December 31, 2011, were 61 institutions participating in the Peruvian financial system: 15 commercial banks (10 of which have over 80% of foreign shareholders' participation), 10 finance corporations, 34 non-banking micro-finance institutions and two financial leasing companies. From 2010 to 2011, the number of institutions remained virtually unchanged, with only one new institution, a new rural savings and loan institution (CRAC).
|Major Peruvian Banks as of December 31, 2011
|BBVA Banco Continental
|Scotiabank Perú
|Banco Interamericano de Finanzas
Source: SBS
As of December 31, 2011, BCP ranked first among all Peruvian banks in terms of assets, deposits and loans with a market share of 35.6% of assets, 34% of deposits and 33% of loans.
The Peruvian banking system reported an outstanding balance of direct loans of S/.62,896 million and US$24,288 million. These figures represented an annual expansion of 20.3% and 18.8%, respectively. As a result, the dollarization of loans reached 51.0% at the end of 2011. Nevertheless, as of December 31, 2011, the total amount of deposits was S/.126,071 million, which represented a dollarization rate of 47.3%.
The capital ratio (Regulatory capital/Risk-weighted assets) reached 13.38% as of December 2011 (above legal minimum = 10% since July, 2011). This represented a 0.25% decline from the capital ratio reported at the end of December 2010.
Peru's loan portfolio quality indicators continued improving in 2011. The delinquency ratio reached 1.47%, 2 basis points lower than the ratio reported as of December 31, 2010. Also, the past-due refinanced and re-structured loans over total loans was 1%, 9 basis points lower than the figure reported as of December 31, 2010. Similarly, coverage ratio of the past-due loan portfolio was 251.14% as of December 31, 2011.
Finally, the liquidity of the banking system remained at high and comfortable levels. The local currency liquidity ratio and foreign currency liquidity ratio closed 2011 at 39.2% and 45%, respectively. These ratio levels were well above the minimums required by regulations adopted by SBS (8% in local currency and 20% in foreign currency).
|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 the local and international capital markets. In recent years, AFPs' funds under management and mutual fund assets have increased at rates over those experienced by the banking system. The private pension fund reached US$30.4 billion as of December 31, 2011, decreasing by 2.3% since December 31, 2010 (when funds totaled US$31.1 billion). Total mutual funds reached US$5.1 billion in 2011, a 10.4% decrease from US$5.6 billion in 2010 due to the outflow of funds that occurred in the first half of 2011 and the uncertainty surrounding Peru's 2011 presidential elections.
|Other Financial Institutions
Other institutions in the Peruvian financial system tend to specialize in a given market sector. These institutions include finance companies, municipal and rural savings and credit associations, municipal public credit associations and savings and credit cooperatives. They mainly issue retail loans to small and micro-businesses and consumer and mortgage loans to individuals. These markets have shown substantial increases in recent years. BCP is facing strong competition from these credit providers, primarily with respect to (i) micro-business loans, where such providers lent US$4.7 billion as of December 31, 2011 (27.2% higher than the US$3.7 billion lent in 2010), representing 48.3% of the total in the financial system (compared to 48% in 2010); and (ii) consumer loans, where such providers lent US$1.8 billion in 2011 (28.6% higher than US$1.4 billion in 2010), representing 17.3% of the total in the financial system (compared to 17.4% in 2010).
BCP also faces strong competition in its credit card operations from credit cards issued by retail stores.
The Peruvian insurance market is highly concentrated. As of December 2011, four companies commanded 83% of the market share in premiums, and the leading two have a combined market share of 60%. Pacífico Seguros and Pacífico Vida together are the second largest insurance company in Peru with a 27% 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 Pacífico'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 Pacífico believes that in the long-term foreign competition will increase the quality and strength of the industry. Grupo Pacífico 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. The loss by Grupo Pacífico to competitors of even a small number of major customers or brokers could have a material impact on Grupo Pacífico's premium levels and market share.
|Peruvian Government and Economy
While we are incorporated in Bermuda, substantially all of BCP's and Grupo Pacífico'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. Accordingly, our results of operations and financial condition could be affected by changes in economic or other policies of the Peruvian government, which has exercised and continues to exercise a substantial influence over many aspects of the private sector. Also, our results of operations and financial condition may be affected by other political or economic developments in Peru, such as a devaluation of the Nuevo Sol relative to the U.S. Dollar or the imposition of exchange controls by the Peruvian government. See "Item 10. Additional Information—(D) Exchange Controls." Our results of operations and financial condition are dependent on the level of economic activity in Peru.
|Peruvian Government
During the past several decades, Peru has had a history of political instability that has included military coups d'état and different governmental regimes, which in the past have frequently intervened in the nation's economy and social structure. See "Item 3. Key Information—(D) Risk Factors.". In 1987, the administration of President Alan García attempted to nationalize the banking system. Facing an attempt by the state to control BCP, the majority shareholders of BCP at that time sold a controlling interest in BCP to its employees, which prevented the government from gaining control of BCP. See "—(C) Organizational Structure."
Between 1990 and 2000, President Fujimori implemented a broad-based reform of Peru's political system, economy and social conditions. See "Item 3. Key Information—(D) Risk Factors." President Fujimori resigned in 2000 in favor of a transitory government due to an outbreak of corruption scandals. President Toledo then assumed the presidency in 2001 after a period of political turmoil, facing high unemployment and underemployment, an economic recession and social need. In 2006, Alan García was elected for a five year-term, during which remained the main outlines of the economic model, promoting private investment to stimulate the economy.
Presidential elections were initially held in Peru on April 10, 2011 and a second round of elections was held on June 5, 2011. The winner of the elections was Ollanta Humala, who defeated Keiko Fujimori. While President Humala's initial proposals as a candidate were designed to radically change the economic model that was already in effect, his signing of a "road map", which promised to be moderate, was important for his electoral victory. Among his first acts as president-elect were the ratification of the Central Bank's president and the appointment of Luis Castilla, who served as Deputy Minister under the previous government, as Minister of Finance. Both of these appointees contributed to recover the investment climate that deteriorated during presidential campaigns period. However, the recovery has been affected by perceived risks abroad, where the Eurozone is under pressure. Despite the uncertainty generated during the first half of 2011 (due to the radical changes proposed by Humala) and the global economic slowdown in the second half of 2011, the Peruvian economy managed to close the year with an economic growth of 6.9%, focused mainly on non-primary sectors highly linked with domestic demand.
Despite the economic strides achieved since 1990 and the high rate at which Peruvian economy has expanded in the last decade, poverty remains a persistent problem, with almost 40% of the population living below the poverty line, which the World Bank defines as monthly income of less than US$60 per capita, adjusted to reflect differences in purchasing power. A significant number of Peruvians live on an income of less than US$30 per capita per month.
|Peruvian Economy
During his second term (2006-2011), President Alan Garcia continued the market-oriented policies that started in the 1990s with President Fujimori's structural reforms. Nevertheless, some interventionist measures were passed due to surge of populist initiatives from Congress and social pressures from unions and regional movements. In 2011, presidential elections outcome (Ollanta Humala's victory) anticipated a shift in government political orientation, which had a negative impact on business confidence and growth perspectives. Although initial concerns on Humala's government have been mitigated in part by cabinet appointments and political arrangements aimed to reassure investor's confidence and reaffirm economy's direction, political risks have not disappeared entirely.
In addition to political changes and the application of sound macroeconomic policies, the positive external outlook allowed Peru to grow at an average of 5.7% in the last decade, reaching a positive growth rate even during the global financial crisis in 2009. In that year, within a global comparison, Peru was among the countries with the highest GDP-growth rates: 0.9% in a year when global production decreased 1.1%. In the following years of recovery Peru continued outperforming global economy and even developed regions, growing 8.8% in 2010 and 6.9% in 2011.
Peruvian economy went through moderation in 2011, because of global turmoil arising from debt crisis in the Eurozone, weaker growth in developed countries, and local factors like political uncertainty associated to presidential elections. The combined effect of these events resulted in slowdown in private investment growth rates (11.0% after 22.1% in 2010). Nevertheless, consumption showed resilience, maintaining its dynamism (6.0% after 6.5% in 2010), as negative contribution of foreign sector reflected stronger growth in imports (7.0%) than exports (4.6%).
During 2007, the Free Trade Agreement (FTA) with the United States was signed and the trade deal was put into effect on February 1, 2009, concluding a long process of trade negotiations and goodwill. The FTA made permanent the special access to the U.S. market enjoyed under the Andean Trade Promotion and Drug Eradication Act. The current trade between these countries is around US$13 billion annually (15.7% of total trade). The FTA is expected to encourage higher export growth and diversification, as well as accelerate reforms that will further enhance the investment climate in Peru, which is already benefiting from high flows of foreign direct investment. Progress was made toward reaching more trade agreements with Peru's most important trade partners like China (the FTA started in march 2010), which currently stands as the first destiny of Peruvian exports, mainly commodities and primary goods. In 2011, trade between both countries reached US$13.2 billion (16.1% of total trade). Also, Peru concluded trade agreement negotiations with European Union, Japan and Mexico, and all of them are supposed to start in the first half of 2012. It is expected that after solving the uncertainty about global economy, these agreements will help boost growth in the export sector, which since 2008 is relatively flat compared to the buoyancy registered in domestic demand.
Peru's trade surplus in 2011 was US$9.3 billion, surpassing the 2010 surplus of US$6.7 billion. This trade surplus was the result of a sizeable increase in exports, which reached approximately US$46.3 billion, a historic record, though imports also grew as the domestic economy expanded at a more moderate pace. Exports in 2011 increased 30.1%, based mostly on higher commodity prices, while imports increased 28.3%, due to growth in domestic demand.
Peru has had a history of high and persistent current account deficits. Nevertheless, a process of gradual correction of external imbalances started in recent years. Between 2007 and 2011, Peru's current account balance reached an average deficit of US$2.1 billion, which is equivalent to 1.3% of GDP. After a brief interruption in 2008, when the deficit again reached high levels (US$5.3 billion, or 4.2% of GDP), and a small surplus in 2009 (0.2 % of GDP) due to a decrease in imports and in investment income (in a context of global slowdown), the correction process took place again. In 2011, Peru again recorded a deficit, this time in the amount of US$4.7 billion (2.5% of GDP) due to a trade deficit that was financed by long-term capital inflows.
Peru's financial account had an average surplus of US$8.1 billion between 2007 and 2011, reflecting higher foreign direct investment and long-term loans, which reflects the improvement on investor's perception of Peru's economic perspective. The exception was the decrease of surplus in 2009 (US$1.5 billion), due to lower capital inflows in a context of global uncertainty, mainly in the first half of the year, but it was enough to reverse the current account deficit. In 2010 and 2011, recovery in capital inflows gradually restored high financial account surpluses, when investors adjusted their risk appetite and reassessed risks in emerging countries, which proved to have solid foundations during the crisis. Nevertheless, stress episodes associated with the Eurozone fiscal crisis, including the bailouts of Ireland and Portugal in 2010 and 2011, respectively, and Greece's recent debt restructuring negotiations during the second half of 2011, continue to have negative effects on investment inflows into Peru.
Inflation in Peru, as measured by the Lima consumer price index, was 3.5% on average over the past five years. After reducing the Peruvian Central Bank's target of 2.5% to 2.0%, with a +/-1% range, inflation was above the target range in 2007 and 2008, registering 3.93% and 6.65% respectively influenced by higher international commodity prices. As of December 31, 2010 the inflation rate was 2.1%, compared to a 0.25% inflation rate at the end of 2009. Inflation in 2011 was 4.7%, significantly above the Central Bank's inflation range, driven by external supply shocks (higher commodity prices) as well as local supply shocks (less local food supply).
The exchange rate for Nuevos Soles in Peru has appreciated 15.6% over the past five years, from S /. 3.20 per US$1.00 on December 31, 2006 to S /. 2.696 per US$ 1.00 on December 31, 2011. In the past two years, the Nuevo Sol has posted gains of 2.8% in 2010 and 3.9% in 2011. The appreciation of the Nuevo Sol was substantially due to capital inflows to emerging economies in a volatile market environment due to economic and debt problems in the EU. In 2011, the Nuevo Sol strengthened overall, but underwent periods of depreciation following the political uncertainty associated with the presidential elections and uncertainty in international markets.
The sound policy framework put in place in recent years and the increase in international reserves have contributed to significantly reduce Peru's economic vulnerabilities and poverty (even though poverty still affects to over 30% of the population) and enhance its business environment. Peru's strong fiscal surpluses in recent years, the recent moderate deficit due to countercyclical policies notwithstanding, have also supported a significant reduction in public debt and improved maturity structure. In the current uncertain global outlook, these are important fiscal buffers. A sound monetary policy, well-established in a framework that targets inflation, has also been instrumental in helping to maintain macroeconomic stability and reduce dollarization. Structural reforms have reduced Peru's fiscal and financial vulnerabilities. Free trade agreements and the search of new markets to open new trade destinations, lower informality, and improvement in the business climate have helped improve Peru's long-term growth prospects, which are reflected in a higher investment and a higher potential growth.
These achievements are believed to have placed Peru in a strong position to face any future deterioration in external conditions, should that be the case. Building on Peru's strong fundamentals, including a resilient financial system, several measures have been implemented by the authorities that will help to limit spillovers, preserve adequate liquidity conditions in the domestic markets, and bolster domestic confidence. The Peruvian financial system has proven to be strong, despite the impact of the global financial crisis. Credit, which averaged a 31.8% growth in 2007 and 2008, lost momentum, closing 2009 with only a 9.5% growth. The economic recovery in Peru has increased demand for banking credit, which, in 2010, grew by 18.1% and 22.9% in 2011.
Peruvian authorities have been implementing reforms to strengthen the financial system and improve the country's international liquidity position compared with that observed during the crisis. Under an adverse scenario, the Peruvian Central Bank could use its high availability of foreign reserves, which have risen from 25.8% of GDP in December 2007 to approximately 28.6% in December 2011 and other mechanisms to provide necessary liquidity to the domestic financial system. Also, the increase in the capital ratio of the financial system from 11.7% in December, 2007 to 13.4% in September, 2011 reflects that solvency has improved.
The near term domestic economic outlook continues to appear to be favorable, despite lingering uncertainty about the global economy. The pace of economic growth is expected to be around 5.5% in 2012, reflecting a weaker global economic growth and a moderation in domestic demand. Inflation is expected to remain around the 2% (+/- 1%) target range.
The main risks to the Peruvian economy appear to be external and largely related to the results of the continued economic recovery in developed countries. Peru's current fiscal position, including the 2011 surplus, the amount of funds accumulated by the public sector (US.$ 5.6 billion as of December 31, 2011), and the fact that the country is now rated investment grade (BBB according to S&P and Fitch, Baa3 according to Moody's but with a positive outlook) is considered to to have strengthened Peru's ability to withstand future crises Peru's medium-term prospects are considered to be favorable provided that the country continues to follow prudent macroeconomic policies and deal with longstanding structural challenges.
|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.
On December 31, 2011, the Peruvian financial system consisted of the following principal participants: the Central Bank, the SBS, 15 banking institutions (not including Banco de la Nación, a Peruvian state-owned bank), 10 finance companies, and 2 leasing companies. In addition, Peru has various mutual mortgage associations, municipal and rural savings and credit associations, municipal public credit associations and savings and credit cooperatives, which totaled 34 entities as of December 31, 2011.
Law 26702 regulates Peruvian financial and insurance companies. In general, it provides for tighter 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.
|Central Bank
The Central Reserve Bank (or the 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 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 before 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 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 Central Bank is one of the executive branch nominees but must be approved by Peru's Congress.
The 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 Central Bank.
|SBS (The Superintendency of Banks, Insurance and Pension Funds)
The SBS, whose authority and activities are discussed in "—(11) Supervision and Regulation," is the regulatory authority in charge of implementing and enforcing Law 26702 and, more generally, supervising and regulating all financial, insurance and pension fund institutions in Peru.
In June 2008, Law 1028 and 1052 were approved modifying Law 26702 with the following objectives: (i) to strengthen and to increase competitiveness, (ii) to implement Basel II and (iii) to adapt the current regulatory framework to the Agreement of Commercial Promotion, APC, signed between Peru and the United States.
The main amendments defined in Law 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 1028 also modified the framework in which the Peruvian financial system is to be harmonized with the new international standards established by the Basel II Accord (which aims to minimize the issues regarding regulatory arbitrage). Since July 2009, Peruvian financial institutions apply the standardized method to calculate their capital requirement related to credit, market and operational risk. Also, from July 2009, the SBS started receiving applications to use Internal Models Methods for any of these three risks. Meanwhile, if an institution requires lower capital using its internal models than by using the current approach, it will have to maintain between 80% and 95% of the higher amount during the first years.
Law 1052 aims to include and synchronize Law 26702 and the APC's framework, particularly regarding insurance services. The amendments allow offering cross-border services and have simplified the process for international institutions to enter into the Peruvian market by establishing subsidiaries.
|Financial System Institutions
Under Peruvian law, financial system 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 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 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, banks may also act as trustees in trust agreements.
Law 26702 authorizes banks to operate, through their subsidiaries, warehouse companies, securities brokerage companies, and to establish and administer mutual funds.
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 the local market, multinational banks must maintain a certain portion of their capital in Peru, in at least the minimum amount that is required for Peruvian banks.
Finance Companies
Under Law 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.
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.
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 26702 and the regulations issued by the SBS.
Law 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 has experienced consolidation in recent years with the number of companies decreasing from 19 in 1991 to 14 in 2011.
|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 and Bolivia, a summary of Peruvian banking and insurance regulations and Cayman Islands banking regulations 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 Securities and Exchange Commission (SEC) as a "foreign private issuer." We also must comply with the Sarbanes-Oxley Act of 2002.
We are, along with BCP, subject to certain requirements set forth in Peruvian Law 26702 ("Peruvian Banking Law" or "Law 26702") as well as certain banking statutes issued by the Peruvian banking regulator, SBS, including SBS Resolution No. 11823-2010, enacted in September 2010 and which approved the "Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates." These regulations affect BCP and us primarily in the areas of reporting, risk control guidelines, limitations, ratios and capital requirements.
Since our common shares are listed on the Lima Stock Exchange in addition to the New York Stock Exchange, we are subject to certain reporting requirements to Superintendencia del Mercado de Valores , the Peruvian securities market regulator, and the Lima Stock Exchange. See "Item 9. The Offer and Listing—(C) Markets—The Lima Stock Exchange—(ii) Market Regulation."
BCP's operations are regulated by Peruvian law. The regulations for the operation of the Peruvian financial sector are stated in Law 26702. The SBS periodically issues resolutions that cause Law 26702 to be developed. See "—(10) The Peruvian Financial System." The SBS supervises and regulates entities that Law 26702 classifies as financial institutions. These entities include commercial banks, finance companies, small business finance companies, savings and loan corporations, financial services companies such as trust companies and investment banks, and insurance companies. Financial institutions must seek the SBS's authorization before beginning operations.
BCP's operations are supervised and regulated by the SBS and the Central Bank. Those who violate Law 26702 and its underlying regulations are subject to administrative sanctions and criminal penalties. Additionally, the SBS and the Central Bank have the authority to issue fines to financial institutions and their directors and officers if they violate the laws or regulations of Peru, or their own institutions' bye-laws.
The Superintendencia del Mercado de Valores (SMV), formerly known as CONASEV, is the Peruvian government institution in charge of (i) promoting the securities market, (ii) making sure fair competition takes place in the securities markets, (iii) supervising the management of businesses that trade in the securities markets and (iv) regulating their activities and accounting practices. BCP must inform SMV of significant events that affect its business and is required to provide financial statements to it and the Lima Stock Exchange each quarter. BCP is also regulated by SMV through Credibolsa, which is BCP's wholly-owned brokerage house, and Credifondo, which is BCP's wholly-owned mutual fund administration company. SMV examines Credibolsa and Credifondo on a regular basis.
Under Peruvian law, banks may conduct brokerage operations and administer mutual funds but must do so through subsidiaries. However, bank employees may market the financial products of the bank's brokerage and mutual fund subsidiaries. Banks are prohibited from issuing insurance policies, but are not prohibited from distributing insurance policies issued by insurance companies.
Authority of the SBS
Peru's Constitution and Law 26702 (which contains the statutory charter of the SBS) grant the SBS the authority to oversee and control banks and financial institutions (with the exception of brokerage firms, which are regulated by SMV – Superintendencia del Mercado de Valores), insurance and reinsurance companies, companies that receive deposits from the general public, pension funds private administrators ("AFPs") and other similar entities as defined by the law. The SBS is also responsible for supervising the Central Bank to ensure that it abides by its statutory charter and bye-laws.
The SBS has administrative, financial and operating autonomy. Its objectives include protecting the public interest, ensuring the financial stability of the institutions over which it has authority and punishing violators of its regulations. Its responsibilities include: (i) reviewing and approving, with the assistance of the Central Bank, the establishment and organization of subsidiaries of the institutions it regulates; (ii) overseeing mergers, dissolutions and reorganization of banks, financial institutions and insurance companies; (iii) supervising financial, insurance and related companies from which information on an individual or consolidated basis is required, through changes in ownership and management control (this supervision also applies to non-bank holding companies, such as us); (iv) reviewing the bye-laws and amendments of bye-laws of these companies; (v) issuing criteria governing the transfer of bank shares, when permitted by law, for valuation of assets and liabilities and for minimum capital requirements; and (vi) controlling the Central de Riesgos (Bank Risk Assessment Center), to which all banks are legally required to provide information regarding all businesses and individuals with whom they deal without regard to the amount of credit risk (the information provided is made available to all banks to allow them to monitor individual borrowers' overall exposure to Peru's banks). In addition to them, the SBS is also responsible for stating the criteria relating to the existence of financial or mixed conglomerates in Peru and their supervision. As a result of it, despite its supervision of BCP, the SBS also supervises Credicorp Ltd. on the basis that we are a financial conglomerate conducting the majority of our operations in Peru.
Management of Operational Risk
SBS Resolutions No. 006-2002 and 37-2008 established guidelines for operational risk management, which includes a broad range of risks and defines operational risks as those resulting from the possibility of suffering financial losses due to inadequate or failed internal processes, people and systems, or from adverse external events. It also establishes responsibilities for developing policies and procedures to identify, measure, control and report such risks. Banks are required to adequately manage risks involved in the performance and continuity of their operations and services in order to minimize possible financial losses and reputation damage due to inadequate or non-existent policies or procedures.
Credicorp, following these SBS guidelines, as well as the guidelines issued by the Basel Committee on Banking Supervision, and the advice of international consultants, has appointed a specialized team responsible for operational risk management across our organization. This team reports regularly to our risk committee, top managers and Board of Directors.
In evaluating operational risks and potential consequences, we mainly assess risks related to critical processes, new products, critical suppliers, critical information assets and technological components. To support the operational risk management process we have developed a business continuity management (BCM) discipline, which involves the implementation of continuity plans for critical business processes, incident management, and training and testing. In addition, we have developed procedures to register, collect, analyze and report operational risk losses, looking forward to the implementation of advanced models for operational risk capital allocation. Lastly, we have a monitoring and reporting team, whose main objective is to follow up action plans and monitor Key Risk Indicators (KRI) and other performance metrics.
We intend to be guided by the risk control standards of international financial institutions that are noted for their leadership in this field. Our overall objective is to implement an efficient and permanent monitoring system to control operational risks, while the actual management of risk control procedures is conducted by the areas that carry out critical activities.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to make certain certifications regarding our internal controls over financial reporting as of December 31, 2011. We have developed internal methods to identify and evaluate risk and controls over our critical processes to determinate how effective internal controls are over financial reporting.
Capital Adequacy Requirements
Capital adequacy requirements applicable to us are set forth in the Peruvian Banking Law (Law 26702), as amended, and monitored and regulated by the SBS. Law 26702 was enacted in December 1996 and amended in June 2008 through Legislative Decree 1028. The amendment became effective in July 2009 and was aimed at adapting the Peruvian Banking Law to the capital guidelines and standards established by the second Basel Accord (Basel II).
Basel II standards modified the methodology to measure credit, market and operational risks to allow the use of standardized and internal model-based methods. Basel II standards also allow Peruvian financial institutions to request authorization from the SBS to implement an internal ratings-based ("IRB") methodology.
Financial institutions that receive approval from the SBS to use the IRB methodology are subject to regulatory capital floors. The amount of capital required may not be less than the percentage of capital required under an alternative methodology.
|First Year
|Second Year
|Third Year
|Basic IRB and Internal Models of Credit Risk
|Advanced Models of Credit Risk and/or Operational Risk
Prior to June 2009, the capital requirements were based upon the guidelines established by the first Basel Accord (Basel I). Financial institutions were required to limit risk-weighted assets to 11 times their regulatory capital ("patrimonio efectivo"), which is equivalent to a minimum capital ratio of 9.09% of risk-weighted assets. Risk-weighted assets were calculated based upon five risk categories depending on the perceived risk of each asset class.
Pursuant to the Basel II guidelines, financial institutions are required to hold regulatory capital ("patrimonio efectivo") that is greater than or equal to the sum of (i) 10% of credit risk-weighted assets, and (ii) 10 times the amount required to cover market and operational risks. The new minimum capital requirements were implemented as follows.
|Regulatory capital
(% of total weighted
|Total risk-weighted assets
|July 1st, 2009
10.5 times the regulatory capital needed to cover market risks;
10.5 times regulatory capital needed to cover operational risks;
Total amount of credit risk-weighted assets.
|July 1st, 2010
10.2 times the regulatory capital needed to cover market risks;
10.2 times the regulatory capital needed to cover operational risks;
Total amount of credit risk-weighted assets.
|July 1st, 2011
10 times the regulatory capital needed to cover market risks;
10 times the regulatory capital needed to cover operational risks;
Total amount of credit risk-weighted assets.
On November 2010, the SBS released a consultative document, which established the proposed methodologies for calculating additional capital requirements consistent with Pilar 2 of Basel II and certain aspects of Basel III. Comments on this document were due February 18, 2011. On July 20, 2011, the SBS issued SBS Resolution 8425-2011, establishing the final methodologies and the implementation schedule of the aforementioned additional capital requirements. The new capital requirements, which are aimed at covering risks not contemplated in Pilar I of Basel II, include requirements to cover concentration, interest rate and systemic risk. Additionally, pro-cyclical capital requirements were also established. These new requirements will be implemented over a period of five years starting in July 2012.
Article 184 of Law 26702, as amended by Legislative Decree 1028, provides that regulatory capital may be used to cover credit risk, market risk and operational risk. Regulatory capital is comprised of the sum of basic capital and supplementary capital, and is calculated as follows:
|Basic Capital: Basic Capital or Tier 1 capital is comprised of: (i) paid-in-capital (which includes common stock and perpetual non-cumulative preferred stock), legal reserves, supplementary capital premiums, voluntary reserves distributable only with prior SBS approval, and retained earnings with capitalization agreements (earnings that the shareholders or the Board of Directors, as the case may be, have committed to capitalize as common stock); (ii) other elements that have characteristics of permanence and loss absorption that are in compliance with regulations enacted by the SBS, such as hybrid securities; and (iii) unrealized gains and retained earnings in Subsidiaries. Items deducted from Tier 1 capital include: (i) current and past years' unrealized losses; (ii) deficits of loan loss provisions; (iii) goodwill resulting from corporate reorganizations or acquisitions; and (iv) half of the amount referred to in "Deductions" below. Absent any Tier 2 capital, 100% of the amount referred to in "Deductions" below must be deducted from Tier 1 capital. The elements referred to in item (ii) above should not exceed 17.65% of the amount resulting from adding components (i) and (iii) of Tier 1 capital net of the deductions in (i), (ii) and (iii) in this paragraph.
|Supplementary Capital: Supplementary capital is comprised of the sum of Tier 2 and Tier 3 capital. Tier 2 capital elements include: (i) voluntary reserves that may be reduced without prior consent from the SBS; (ii) the eligible portion of redeemable subordinated debt and of any other components that have characteristics of debt and equity as provided by the SBS; (iii) for banks using the Standardized Approach Method (SAM), the generic loan loss provision up to 1.25% of credit risk-weighted assets; or, alternatively, for banks using the Internal Ratings-Based Method (IRB), the generic loan loss provision up to 0.6% of total credit risk-weighted assets (pursuant to article 189 of the Law); and (iv) half of the amount referred to in "Deductions" below. Tier 3 capital is comprised of redeemable subordinated debt that is incurred with the exclusive purpose of covering market risk, as referred to in Article 233 of the Law.
|Deductions: The following elements are deducted from Tier 1 and Tier 2 capital: (i) all investments in shares and subordinated debt issued by other local or foreign financial institutions and insurance companies; (ii) all investments in shares and subordinated debt issued by an affiliate with which the bank consolidates its financial statements, including its holding company and such subsidiaries referred to in Articles 34 and 224 of the Law; (iii) the amount in which an investment in shares issued by a company with which the bank does not consolidate its financial statements and which is not part of the bank's negotiable portfolio, exceeds 15% of the bank's regulatory capital; (iv) the aggregate amount of all investments in shares issued by companies with which the bank does not consolidate its financial statements and which are not part of the bank's negotiable portfolio, exceeds 60% of the regulatory capital; (v) when applicable, the amount resulting from the formula prescribed in Article 189 of the Law. For the purposes herein, "regulatory capital" excludes the amounts referred to in (iii), (iv) and (iv) of this paragraph.
Article 185 of the Law 26702 also provides that the following limits apply when calculating regulatory capital: (i) the aggregate amount of supplementary capital must not exceed the aggregate amount of basic capital; (ii) the amount of redeemable Tier 2 subordinated instruments must be limited to 50% of the amount resulting from the sum of Tier 1 elements net of the deductions in (i), (ii), and (iii) in "Basic Capital" above; (iii) the amount of Tier 3 capital must be limited to 250% of the amount resulting from the sum of Tier 1 elements net of the deductions (i), (ii), and (iii) in "Basic Capital" above in the amounts assigned to cover market risk.
As of December 31, 2011, BCP's regulatory capital was 14.53% of unconsolidated risk-weighted assets, which is equivalent to having risk-weighted assets that are 6.88 times the amount of regulatory capital.
Legal Reserve Requirements
In accordance with Peruvian regulation - article 67 of Law 26702-, a reserve of up to at least 35 percent of paid-in capital of the Group's subsidiaries operating in Peru is required to be established through annual transfers of at least 10 percent of their net income. In accordance with Bolivian regulation, a reserve of up to at least 50 percent of paid-in capital of the Group's subsidiaries operating in Bolivia is required to be established through annual transfers of at least 10 percent of their net income. As of December 31, 2011, 2010 and 2009, these reserves amounted to approximately US$387.3 million, US$369.3 million and US$242.9 million, respectively.
Provisions for Loan Losses
The SBS has authority to establish loan reserves and issue guidelines for the provision of loan losses of Peruvian credit institutions, including commercial banks. SBS Resolution No. 41-2005, enacted in January 2005, requires additional provisions for loans subject to foreign exchange risk, which are recorded for local purposes. Since July 2010, SBS Resolution No. 11356-2008 has required commercial banks to implement a new framework for the assessment and classification of debtors. The resolution also required the establishment of pro-cyclical provisions starting December 2008. In September 2009, the SBS cancelled the requirement of "procyclical" provisions, but in September 2010 a new SBS resolution reinstated this kind of provisions. We estimate and record our allowance for loan losses according to the criteria set out in IAS 39, adjusting the local provisions as necessary. See Notes 3(f)(ii) and 3(i) to the Consolidated Financial Statements.
Provisions for Country Risk
SBS Resolution No. 505-2002 requires the establishment of provisions for exposure to country risk, which includes sovereign risk, transfer risk and expropriation or nationalization risk that may affect operations with companies or individuals in foreign countries. The SBS has also established guidelines for the procedures and responsibilities for management of country risk.
Central Bank Reserve Requirements
Under Law 26702, banks and financial institutions are required to maintain legal reserve requirements for certain obligations. The changes in the reserve requirement regulations were made in the second half of 2010 in accordance with the monetary policy adopted by the Central Bank.
The Central Bank requires financial instructions to maintain marginal reserve requirements for obligations for local and foreign currency obligations. The exact level and method of calculation of the reserve requirement is established by the Central Bank. The reserve requirements in Peru apply to obligations such as demand and time deposits, savings accounts, securities, certain bonds and funds administered by the bank. Additionally, the Central Bank requires reserves on amounts due to foreign banks and other foreign financial institutions. Furthermore, as of January 2011, obligations of foreign subsidiaries and affiliates are also subject to the reserve requirement. Funding from the public sector directed to the microfinance sector and foreign credits with periods of 2 years or more are not subject to the regulation, among other exemptions.
In 2011, the Central Bank, as a part of its monetary policy to restrict internal demand and the risk of inflation, maintained the minimum level of reserves for banks at 9%. Bank obligations are subject to a marginal reserve ratio of 55% in foreign currency and 25% in local currency. The reserve funds can be constituted by cash and deposits, with a minimum of 3% held in deposits in current accounts in the Central Bank. Additionally, the marginal reserve requirement on foreign credits with a tenor of less than 2 years has remained at 60% since January 2011.
The Central Bank establishes a remuneration rate on the marginal reserves, those that exceed the minimum legal requirement of 9%, only if such reserves are deposited in the Central Bank's current account. Foreign currency cannot be used to comply with reserve requirements for liabilities in domestic currency, and vice versa. The Central Bank oversees compliance with the reserve requirements.
The reference interest rate is periodically revised by the Central Bank in accordance with its monetary policy objectives. Once a month the board of directors of the Central Bank approves and announces the Monetary Program through a press release. The reference interest rate increased in 2008 reaching a maximum level of 6.5%. During 2009 the Central Bank started to loosen its monetary policy stance as a response to the deceleration of private spending and the deterioration of the economy. The Central Bank reduced the reference interest rate from 6.50% to 1.25% during that year. In May 2010, the Central Bank changed the direction of its monetary policy to a more restrictive position in line with the rapid growth of domestic demand and the potential for dangerous levels of inflation. Since then, there have been consecutive increases in the reference interest rate, which was raised most recently in May 2011 from 4.00% to 4.25%. As of December 2011, the reference interest rate remained at that level.
In recent years, the Central Bank has on numerous occasions changed the reserve requirement applicable to Peruvian financial institutions as part of its monetary policy. The regulations that were put in place during 2011 have increased the amount of reserves required by S/.2,032 million and US$1,795 million in local and foreign currency respectively. This new environment has led to an increase in the funding cost of the bank. Changes in the reserve requirement regulation may adversely affect the bank´s business, financial condition and results of operations. Even though the marginal required rates have been stable since April 2011, the average rate increased to 14.04% from 13.24% in Nuevos Soles and to 38.7% from 38.0% in foreign currency. In December 2011, the reserve position of commercial banks was S/.9,402 million and US$8,991 million in local and foreign currency, respectively.
Lending Activities
Law 26702 sets the maximum amount of credit that a financial institution may extend to a single borrower. A single borrower includes an individual or an economic group. An economic group constituting a single or common risk includes a person, such person's close relatives and the companies in which such person or close relatives have significant share ownership or decision-making capability. Significant decision-making capability is deemed to be present when, among other factors, a person or group can exercise material and continuous influence upon the decisions of a company, when a person or company holds seats on the board of directors or has principal officers in another company, or when it can be assumed that one company or person is the beneficial recipient of credit facilities granted to another company.
The limit on credit that may be extended to one borrower vary according to the type of borrower and the collateral received. The limit applicable to credit for any Peruvian borrower is 10% of the bank's regulatory capital, applied to both unconsolidated and consolidated records, which may be increased to up to 30% if the loan is collateralized in a manner acceptable under Law 26702. If a financial institution exceeds these limits, the SBS may impose a fine on the institution. As of December 31, 2011, the 10.0% credit limit per borrower of BCP, unconsolidated, was US$267.1 million for unsecured loans, and the 30.0% limit was US$801.3 million for secured loans.
Pursuant to Article 52 of the organic law of the Central Bank, in certain circumstances, the Central Bank has the authority to establish limits on interest rates charged by commercial banks and other financial institutions. No such limits are currently in place; however, there can be no assurance that the Central Bank will not establish such limits on interest rates in the future.
Related Party Transactions
Law 26702 regulates transactions with related parties and affiliates of financial institutions. SBS and SMV have also enacted regulations that define indirect ownership, related parties and economic groups, which serve to limit transactions with related parties and affiliates. These regulations also provide standards for the supervision of financial and mixed conglomerates formed by financial institutions.
The total amount of loans to directors, employees or close relatives of any such persons may not exceed 7% of a bank's regulatory capital (i.e., 5% of the overall 7% limit). All loans made to any single director or employee borrower, considering his/her close relatives may not exceed 0.35% of such a regulatory capital.
Pursuant to Law 26702, as amended by Law 27102, the aggregate amount of loans to related party borrowers considered to be part of an economic group (as defined above) may not exceed 30% (previously 75%) of a bank's regulatory capital. For purposes of this test, related party borrowers include (i) any person holding, directly or indirectly, 4% or more of a bank's shares, (ii) directors, (iii) certain principal executive officers of a bank or (iv) persons affiliated with the administrators of the bank. Loans to individual related party borrowers are also subject to the limits on lending to a single borrower described under "—Lending Activities" above. All loans to related parties must be made on terms no more favorable than the best terms that BCP offers to the public.
Ownership Restrictions
Law 26702 establishes certain restrictions on the ownership of a bank's shares. Banks must have at least two shareholders at all times. Restrictions are placed on the ownership of shares by persons that have committed certain crimes, as well as by public officials who have supervisory powers over banks or who are majority shareholders of an enterprise of a similar nature. All transfers of shares in a bank must be reported by the bank to the SBS after the transfer. Transfers involving the acquisition by any individual or corporation, whether directly or indirectly, of more than 10% of a bank's capital stock require prior authorization from the SBS. The SBS may deny authorization to such transfer of shares if the purchasers (or their shareholders in the case of juridical persons) are legally disabled, have engaged in illegal activity in the area of banking, finance, insurance or reinsurance, or if objections are raised on the basis of the purchaser's moral fitness or economic solvency. The decision of the SBS is final, and cannot be overturned by the courts. If a transfer is made without obtaining the prior approval of the SBS, the purchaser may be fined an amount equivalent to the value of the securities transferred. In addition, the purchaser is required to sell the securities within 30 days, or the fine will double, and the purchaser is disqualified from exercising its voting rights at shareholders' meetings. Foreign investors receive the same treatment as Peruvian nationals and are subject to the limitations described above.
Finally, under Peruvian law, individuals or corporations that acquire more than 3% of a bank's shares or 1% in a period of 12 months are required to provide information to the SBS upon request.
Finally, under Peruvian law, individuals or corporations that acquire, directly or indirectly, 1% of the capital stock of a bank in a period of 12 months or if with such purchases acquire a 3% or more share participation, have the obligation to provide the information that the SBS may require in order to identify their main economic activities and assets structure.
Risk Rating
Law 26702 and SBS Resolutions No. 672 and 18400-2010, require that all financial companies be rated by at least two risk rating companies on a semi-annual basis, in addition to the SBS's assessment. Criteria to be considered in the rating include risk management and control procedures, loan quality, financial strength, profitability, liquidity and financial efficiency. Five risk categories are assigned, from "A" (lowest risk) to "E" (highest risk), allowing for sub-categories within each category. As of September 2011, BCP was assigned the "A+" risk category by its two rating agencies, Equilibrium Clasificadora de Riesgo and Apoyo and Associates International. As of December 2011, BCP maintained the risk category of "A+".
Deposit Fund
Law 26702 provides for mandatory deposit insurance to protect the deposits of financial institutions by establishing the Fondo de Seguro de Depósitos (Deposit Insurance Fund or the Fund) for individuals, associations, not-for-profit companies, and demand deposits of non-financial companies. Financial institutions must pay an annual premium calculated on the basis of the type of deposits accepted by the entity and the risk classification of such entity, made by the SBS and at least two independent risk-rating agencies. The annual premium begins at 0.65% of total funds on deposit under the coverage of the Fund and increases to 1.45% applicable to banks in the highest risk category. BCP is currently classified in the lowest risk category. The maximum amount (defined on a monthly basis) that a customer is entitled to recover from the Fund is S/. 91,621 as of December 31, 2011.
Intervention by the SBS
Pursuant to Law 26702, as amended by Law 27102, the SBS has the authority to seize the operations and assets of a bank. These laws provide for three levels of action by the SBS: a supervisory regime, an intervention regime and the liquidation of the bank. Any of these actions may be taken if certain events occur, including if the bank: (i) interrupts payments on its liabilities, (ii) repeatedly fails to comply with the regulations of the SBS or the Central Bank, (iii) repeatedly violates the law or the provisions of the bank's bye-laws, (iv) repeatedly manages its operations in an unauthorized or unsound manner or (v) has its regulatory capital fall or be reduced by more than 50%.
During the intervention regime, rather than seizing the operations and assets of a bank, the SBS may adopt other measures, including (i) placing additional requirements on the bank, (ii) ordering it to increase its capital stock or divest certain or all of its assets, or (iii) imposing a special supervision regime during which BCP must adhere to a financial restructuring plan.
The SBS intervention regime stops a bank's operations and may last for a maximum of 45 days, which may be extended for an additional 45 days. During this time, the SBS may institute measures such as: (i) canceling losses by reducing reserves, capital and subordinated debt, (ii) segregating certain assets and liabilities for transfer to another financial institution and (iii) merging the intervened bank with an acquiring institution according to the program established by Urgent Decree No. 108-2000, enacted in November 2000. After the intervention, the SBS will liquidate the bank unless it is merged with an acquiring institution, as described in (iii) above.
Regulation from the United States Federal Reserve Bank and from the State of Florida Department of Banking and Finance
Banco de Credito del Peru, Miami Agency ("BCP Miami Agency") is licensed to operate as an International Agency in the State of Florida and was authorized to transact business by the Comptroller of Florida on September 3, 2002. The Office of Financial Regulation of the State of Florida shares regulatory responsibility with the Federal Reserve Bank of Atlanta.
Regulation from the Superintendency of Banks in Panama
BCP Panama is a branch of BCP that is registered in the Republic of Panama. It began operating in June 2002 under an International License issued by the Panamanian Superintendence of Banks, in accordance with Law Decree No. 9 of February 26, 1998, as amended. BCP Panama is subject to an inspection every two (2) years made by auditors and inspectors of the Panamanian Superintendence of Banks, to determine, among other things, its compliance with the Decree Law No. 2 and No. 42 Law on the Prevention of Money Laundering.
Atlantic Security Bank (ASB), a subsidiary of ASHC, is a Cayman Islands bank with a branch in Panama. ASB is regulated by the regulatory authorities of the Cayman Islands while its Panama branch is regulated by the banking authorities of Panama. The supervision of ASB by Cayman Islands and Panamanian regulatory authorities is less extensive than the supervision and regulation of U.S. banks by U.S. banking authorities. In particular, ASB does not have a lender of last resort and its deposits are not guaranteed by any government agency.
ASB is registered as an exempt company and is licensed in the Cayman Islands pursuant to the Banks and Trust Companies Law. ASB holds an unrestricted Category B Banking and Trust License, as well as a Mutual Fund Administrator License. As a holder of a Category B License, ASB may not take deposits from any person residing in the Cayman Islands other than another licensee, an exempt company or an ordinary non-resident company which is not carrying on business in the Cayman Islands.
ASB may not invest in any asset which represents a claim on any person residing in the Cayman Islands, except a claim resulting from: (i) a loan to an exempt or an ordinary non-resident company not carrying on business in the Cayman Islands; (ii) a loan by way of mortgage to a member of its staff or to a person possessing or being deemed to possess Caymanian status under the immigration law, for the purchase or construction of a residence in the Cayman Islands to be owner-occupied; (iii) a transaction with another licensee or (iv) the purchase of bonds or other securities issued by the government of the Cayman Islands, a body incorporated by statute, or a company in which the government is the sole or majority beneficial owner. In addition, ASB may not, without the written approval of the Cayman Islands Monetary Authority (the "Authority"), carry on any business in the Cayman Islands other than permitted by the Category B License.
There are no ratio or liquidity requirements under the Cayman Banking Law, but the Authority expects observance of prudent banking practices. As a matter of general practice, the ratio of liabilities to capital and surplus should not exceed 40-to-1 and the ratio of risk-weighted assets to capital and surplus should not exceed 8.33-to-1 (approximately 12%). There is a statutory minimum net worth requirement of US$480,000, but the Authority generally requires a bank or trust company to maintain a higher paid-in capital appropriate to its business. The Authority requires compliance with the guidelines promulgated by the Basel Accord on Banking Regulations and Supervisory Practices although, in special circumstances, different gearing and/or capital risk asset ratios may be negotiated. Compliance with the Cayman Banking Law is monitored by the Authority.
Continuing Requirements
Under the law of the Cayman Islands, ASB is subject to the following continuing requirements: (i) to remain in good standing under the Cayman Islands Companies Law, including the filing of annual and other returns and the payment of annual fees; (ii) to file with the Registrar of Companies any change in the information or documents required to be provided and to pay annual fees; (iii) to file certain prescribed forms with the Authority on a quarterly basis; (iv) to file with the Authority audited accounts within three months of each financial year (in the case of a locally incorporated bank which is not part of a substantial international banking group, a senior officer or board member discusses these accounts each year at a meeting with the Authority) and (v) to file an annual questionnaire.
ASB is required by the Cayman Banking Law to have at least two directors. Additionally, ASB must receive prior approval from the Authority (i) for any proposed change in the directors or senior officers, though in exceptional cases a waiver can be obtained enabling changes to be reported after the event or annually in the case of a branch of a substantial international bank; (ii) for the issue, transfer or other disposal of shares (it is rare for a waiver to be granted with respect to shares except in the case of a branch of a substantial international bank and where the shares are widely held and publicly traded); (iii) for any significant change in the business plan filed on the original license application or (iv) to open a subsidiary, branch, agency or representative office outside the Cayman Islands. Finally, ASB must obtain the prior approval of the Authority to change its name and must notify the Authority of any change in the principal office and authorized agent in the Cayman Islands.
|BCP Bolivia
Until March 2010, the Bolivian banking system operated under the Ley de Bancos y Entidades Financieras (the Law of Banks and Financial Entities) No. 1488, enacted on April 14, 1993, which was modified by Law 3076 of June 20, 2005, which granted supervisory powers to the Superintendency of Banks and Financial Entities (now referred to as the Financial System Supervisory Authority (Autoridad de Supervisión del Sistema Financiero), pursuant to Supreme Decree 29894). In addition, the law established that Banco Central de Bolivia (the Central Bank of Bolivia) would regulate financial intermediation and deposit activities, determine monetary and foreign exchange policy, and establish reserve requirements on deposits and capital adequacy, which banks and financial companies were required to follow. Also, the Autoridad de Supervisión del Sistema Financiero (the Financial System Supervisory Authority) supervised brokerage activities and mutual fund management that was conducted through BCP Bolivia's subsidiaries Credibolsa S.A. and Credifondo S.A. These subsidiaries operated under the Ley del Mercado de Valores (the Securities Markets Law) No. 1834, enacted on March 31, 1998.
The new constitution of Bolivia, which was approved by referendum in February 2009, established that the Bolivian financial system is to be regulated as follows:
|The Central Bank of Bolivia is responsible for maintaining the stability of the internal monetary value and has authority to regulate monetary policy, control foreign exchange policies, regulate the payment system, authorize the issuance of money and administrate international reserves in coordination with the Economic Policy stated by the Public Sector.
|All financial entities (banks, mutual funds, securities, insurance and others) are regulated by the Financial System Supervisory Authority (or FSSA). The FSSA (or ASFI in Spanish) has assumed all regulatory functions held previously be the Superintendency of Banks and Financial Entities and the Superintendency of Pensions, Securities and Insurance.
The changes to existing laws by the new Bolivian constitution have not materially impacted BCP Bolivia's business.
The Bolivian government announced that through the first quarter of 2012 they intend to adopt a new law that involves the application of a new tax burden to the banks and non-bank financial institutions regulated by ASFI. Every institution whose profits exceed the 13% of coefficient of equity returns will be taxed with an additional aliquot of 12.5%. The government also intends enact a related decree, simultaneously with the new law, which will raise the capital adequacy ratio over 10% to strengthen the equity of financial institutions operating in Bolivia. A draft of the new law has not yet been published.
|Grupo Pacífico
Grupo Pacífico's operations are regulated by Law 26702 and the SBS. Peruvian insurance companies must submit regular reports to the SBS concerning their operations. In addition, the SBS conducts on-sight reviews on an annual basis. The SBS conducts these reviews primarily to evaluate a company's compliance with solvency margin and reserve requirements, investment requirements and rules governing the recognition of premium income. If the SBS determines that a company is unable to meet the solvency margin or technical reserve requirements, or is unable to pay claims as they come due, it may either liquidate the company or permit it to merge with another insurance company.
Under Peruvian law, insurance companies may engage in certain credit risk operations, such as guarantees, bonds and trusteeships, but are prohibited from offering other banking services, operating mutual funds or offering portfolio management services. In addition, insurance companies may not conduct brokerage operations for third parties.
Peruvian insurance companies are also prohibited from having an ownership interest in other insurance or reinsurance companies of the same class or in private pension funds.
Establishment of an Insurance Company
Insurance companies must be authorized by the SBS to commence operations. Peruvian law establishes certain minimum capital requirements for insurance and reinsurance companies, which must be satisfied by cash investments in the company. The statutory amounts are expressed in constant value.
Solvency Requirements
Pursuant to Law 26702, the SBS regulates the solvency margin of Peruvian insurance companies. The solvency margin calculations take into account the amount of premiums written and losses incurred during a specified period prior to the date of the calculation.
Insurance companies must also maintain solvency equity, which must be the greater of (i) the solvency margin and (ii) the minimum capital requirement, as established by law. The required amount of solvency equity is recalculated at least quarterly. If an insurance company has outstanding credit risk operations, part of the solvency equity must be set aside for its coverage.
Legal Reserve Requirements
Peruvian law also requires that all insurance companies establish a legal guarantee reserve for policyholders by setting aside 10% of income before taxes until the reserve reaches at least 35% of paid-in capital.
Reserve Requirements
Pursuant to Law 26702 and regulations issued by the SBS, Peruvian insurance companies must establish technical reserves. See "—(6) Pacífico Peruano Suiza—(ii) Claims and Reserves." Law 26702 also requires insurance companies to create a reserve for IBNR claims, which are reflected as a liability, net of recoveries and reinsurance, in the Consolidated Financial Statements. Reserves for IBNR claims are estimated by using generally accepted actuarial reserving methods. See Note 3(e) to the Consolidated Financial Statements. Finally, Grupo Pacífico is required by the SBS to establish pre-event reserves for risk of catastrophes, which, in accordance with IFRS principles, are not considered in our financial statements. See "—(6) Pacífico Peruano Suiza—(ii) Claims and Reserves."
Investment Requirements
Pursuant to Law 26702, the total amount of an insurance company's solvency equity and technical reserves must be permanently supported by diversified assets, which may not be pledged or otherwise encumbered. The investment regulations further state that deposits in and bonds of one financial institution together cannot exceed 10% of the total of an insurer's solvency equity and technical reserves combined. In general, no more than 20% of an insurance company's combined solvency equity and technical reserves may be invested in instruments (including stocks and bonds) issued by a company or group of companies. In order for an insurance company to invest in non-Peruvian securities, the securities must be rated by an internationally recognized credit rating company and the asset class must be authorized by Peruvian SBS regulations. Securities owned by insurance companies must be registered in the Public Registry of Securities of Peru or the comparable registry of their respective country.
Related Party Transactions
Law 26702 generally provides that insurance companies may not extend credit to or guarantee the obligations of employees or members of the board of directors, except for certain home mortgage loans to employees.
Ownership Restrictions
Law 26702 sets forth the same types of restrictions regarding the ownership and transfer of insurance company shares as it does regarding the ownership and transfer of shares in banks. See "—(11) Supervision and Regulation—(ii) BCP—Overview".
|Prima AFP
Prima AFP's operations are regulated in Peru by the Consolidated Sole Text of the Private System for the Administration of Funds Act, approved by Supreme Decree No. 054-97-EF. Operations are controlled and supervised by the SBS. In addition, AFPs are under the supervision of the SMV (Superintendencia del Mercado de Valores). AFPs must submit reports to the SBS, members and beneficiaries in general, with regard to the administration of pension funds and any information linked to the AFP's operations.
Under Peruvian legislation, AFPs can only have one type of business activity, that is, they can only offer services linked to the administration of pension funds under the category of Individual Capital Accounts. Also, AFPs must pay benefits provided by Law and administer retirement, disability, death benefit and funeral expense risks. AFPs must submit audited financial information, in accordance with SBS regulations. There are certain limitations on the ownership and transfer of AFP shares
SBS authorization is required for an AFP to begin operations. Peruvian law establishes a minimum capital requirement, paid in cash by the shareholders.
SBS has put in place many investment limits. These limits restrain the amounts AFPs are allowed to invest considering asset class, economic group, issuer, among others. In addition, some of these limits vary regarding the risk profile of the fund. Among these limits, the most general investment limits are as follows:
|The total amount invested in instruments issued or guaranteed by the Peruvian State cannot exceed 30% of the fund value;
|The total amount invested in instruments issued or guaranteed by BCRP cannot exceed 30% of the fund value;
|The total amount jointly invested under the two aforementioned points cannot exceed 40% of the fund value and;
|The total amount invested in instruments issued by the government, financial institutions, and non-financial institutions whose commercial activities are mostly abroad, cannot exceed 50% of the fund value. The Central Bank has set a maximum operating sub-limit at 30%.
As mentioned before, the Central Bank can set maximum operating percentages and/or sub-limits to the aforementioned investment limits.
SBS requires a guaranteed minimum profitability for funds under management. Part of the guarantee is the Encaje Legal, an obligatory reserve, which must be funded by the AFP. The amount will depend on the instruments in the portfolio, but is, on average, 1% of funds under management. In addition, Peruvian law establishes that companies must set up a legal reserve equivalent to 10% of net income, until the reserve is at least 20% of the capital.
|Selected Statistical Information
In the following tables, we have set forth certain selected statistical information and ratios regarding our business for the periods indicated. You should read the selected statistical information in conjunction with the information included in "Item 5. Operating and Financial Review and Prospects—(A) Operating Results" and the Consolidated Financial Statements (and the notes that accompany the financial statements). The statistical information and discussion and analysis given below for the years 2007, 2008, 2009, 2010 and 2011 reflect our consolidated financial position as well as that of our subsidiaries, as of December 31, 2007, 2008, 2009, 2010 and 2011 and our results of operations for 2007, 2008, 2009, 2010 and 2011.
|Average Balance Sheets and Income from Interest-Earning Assets
The tables below set forth selected statistical information based on our average balance sheets prepared on a consolidated basis. Except as otherwise indicated, we have classified average balances by currency (Nuevos Soles or foreign currency (primarily U.S. Dollars)) rather than by the domestic or international nature of the balance. In addition, except where noted, the average balances are based on the quarterly ending balances in each year. Any of these quarter-end balances that were denominated in Nuevos Soles have been converted into U.S. Dollars using the applicable SBS exchange rate as of the date of such balance. Our management does not believe that the stated averages present trends materially differ from those that would be presented by daily averages.
Average Balance Sheets
Assets, Interest Earned and Average Interest Rates
|Year ended December 31,
Avg. Rate
|(U.S. Dollars in thousands, except percentages)
|Interest-earning assets:
|Deposits in Central Bank
|Nuevos Soles
|Foreign Currency
|Deposits in other banks
|Nuevos Soles
|Foreign Currency
|Investment securities
|Nuevos Soles
|Foreign Currency
|Total loans (1)
|Nuevos Soles
|Foreign Currency
|Total dividend-earning assets
|Nuevos Soles
|Foreign Currency
|Total interest-earning assets
|Nuevos Soles
|Foreign Currency
|Noninterest-earning assets:
|Cash and due from banks
|Nuevos Soles
|Foreign Currency
|Reserves for loan losses
|Nuevos Soles
|Foreign Currency
|Premises and equipment
|Nuevos Soles
|Foreign Currency
|Other non-interest-earning assets and gain from derivatives instruments and other interest income
|Nuevos Soles
|Foreign Currency
|Total non-interest-earning assets
|Nuevos Soles
|Foreign Currency
|Total average assets
|Nuevos Soles
|Foreign Currency
|Figures for total loans include past-due loans, but do not include accrued but unpaid interest on such past-due loans in the year in which such loans became past due. Accrued interest is included.
Average Balance Sheets
Liabilities, Interest Paid and Average Interest Rates
|Year ended December 31,
Avg. Rate
Avg. Rate
Avg. Rate
|(U.S. Dollars in thousands, except percentages)
|Interest-bearing liabilities:
|Demand deposits
|Nuevos Soles (1)
|Foreign Currency (1)
|Savings deposits
|Nuevos Soles (1)
|Foreign Currency (1)
|Time deposits
|Nuevos Soles (1)
|Foreign Currency (1)
|Due to banks and correspondents
|Nuevos Soles
|Foreign Currency
|Nuevos Soles
|Foreign Currency
|Total interest-bearing liabilities
|Nuevos Soles
|Foreign Currency
|Non-interest-bearing liabilities and net equity:
|Other liabilities and loss from derivatives instruments and other interest expenses
|Nuevos Soles
|Foreign Currency
|Equity attributable to Credicorp equity holders
|Nuevos Soles
|Foreign Currency
|Minority Interest
|Nuevos Soles
|Foreign Currency
|Total non-interest-bearing liabilities and equity
|Nuevos Soles
|Foreign Currency
|Total average liabilities and equity
|Nuevos Soles
|Foreign Currency
|Includes the amount paid - for the deposit insurance fund.
Changes in Net Interest Income and Expense: Volume and Rate Analysis
|Increase/(Decrease) due to changes in:
|Increase/(Decrease) due to changes in:
|Net Change
|Net Change
|(U.S. Dollars in thousands)
|Interest Income:
|Interest-earning deposits in Central Bank