Credicorp Ltd.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

A financial holding company primarily engaged in providing banking, insurance, and investment services throughout Latin America, mainly in Peru, Bolivia, Panama, and Colombia.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Credicorp’s business is quite diversified, making it a challenge to value. Its earnings are spread across multiple units and geographies.

Business Overview

Credicorp Ltd. (BAP) is a financial services leader in Latin America. It operates through four main subsidiaries:

  1. Banco de Crédito del Perú (BCP): BCP is Peru’s largest bank, offering a wide range of financial products and services, including lending, deposits, and wealth management. BCP is the core of Credicorp’s business.
  2. Atlantic Security Bank (ASB): ASB provides financial services to corporations and high-net-worth individuals in offshore markets, mainly Panama and the rest of Central America.
  3. Pacifico Seguros: A leading insurance company in Peru, selling a variety of insurance products ranging from property to life insurance.
  4. Credicorp Capital: This unit is responsible for investment banking and wealth management operations across the Latin American region.

Credicorp’s revenues are derived from its diverse activities, with the majority coming from interest income, service fees, and commissions.

The financial services industry in Latin America is experiencing several notable trends:

  • Digitalization: Increased adoption of digital banking and payment platforms is transforming the industry, with both BAP and its competitors heavily investing in these technologies.
  • Financial Inclusion: Efforts to bring financial services to underserved segments are gaining traction. BCP’s mobile banking service is crucial for addressing this opportunity.
  • Economic Recovery: Latin America’s economies are in a recovery phase which has resulted in increased loan and investment activity.
  • Regulatory Environment: Changes in regulations and increased regulatory scrutiny of capital requirements are affecting banks and financial institutions.
  • Increased Competition: New fintech companies are challenging traditional banks, which have had to innovate quickly to keep up, resulting in increased investment in infrastructure and technology.
  • Interest rate fluctuations: Central banks have been raising their interest rates due to high inflation, increasing the cost of funding and lowering the demand for loans.

Competitive Landscape

Credicorp competes with local and international banks in Latin America. However, being Peru’s largest bank offers BCP a competitive advantage.

  1. Local Competitors: These include other large banks operating in Peru and across Latin America. BCP has a competitive advantage because of its size and scale, as mentioned before.
  2. International Banks: Global banks with a presence in Latin America compete on capital and breadth of services. However, these banks often lack a deep understanding of local markets compared to Credicorp.
  3. Fintechs: Fintech companies are challenging traditional banking with innovative payment and banking solutions. In the long run, this will erode the profitability of traditional banking.

While Credicorp has a strong position in Peru, its diversification into other regions and new business lines exposes it to various competitive threats and regulatory risks.

Financial Performance

Credicorp’s profitability has historically been driven by its core banking business in Peru (BCP). Recent quarterly earnings show strong growth in net interest income (driven by higher interest rates and an expansion of loan portfolio), alongside improved asset quality. However, non interest income (from trading and financial services) has shown a drop. This suggests a reliance on traditional banking activities to generate revenue.

  • Margins: BCP maintains decent operating margins, while margins at their insurance operations are higher, albeit contributing a lower total revenue.
  • Revenue: The company experienced growth in its loan portfolio and overall business volume.
  • Profitability: Has seen fluctuations due to changes in interest rates, and various accounting one-off items. As of the latest earnings, the company has started increasing interest margins.
  • Growth: The company is expected to have healthy growth over the next few years.

Key metrics used to assess its performance are returns on equity, loan growth, asset quality, and operating margins.

Moat Assessment: 2.5 / 5

Credicorp has a narrow moat based on the following factors:

  • Brand Recognition and Customer Loyalty: BCP’s long history and strong brand in Peru provide a level of customer loyalty that can be difficult for competitors to replicate. This is enhanced by their branch network and digital banking infrastructure which makes it more difficult to switch.
  • Network Effect: BCP’s large customer base in Peru attracts more customers, as people often prefer using banks that their friends and family already use. But that isn’t applicable outside of Peru.
  • Niche Advantage in High Net Worth: ASB’s focus on high-net-worth individuals in offshore markets provides a relatively strong niche, in which it is more difficult to compete with on a local level.

However, Credicorp’s moat is not as wide as some other companies due to the following limitations:

  • Regulation: The financial services industry is heavily regulated and subject to changes in policies that could alter a company’s profitability or position.
  • Limited Intangible Assets: Most of Credicorp’s earnings come from lending, where brand names or patents aren’t as important. This is quite different from software or pharmaceutical companies, which are also a lot more profitable.
  • Competition from Fintech: The rise of fintech companies provides a persistent threat to BCP’s core business. A better fintech company may eat into the profits in a faster time than they have in the past.
  • Low Switching costs: The financial services provided by Credicorp are largely the same as the ones provided by their peers and other large financial institutions.

Therefore, Credicorp has a Narrow Moat given its some competitive advantages, but they are limited, and the company is exposed to strong competitors and regulatory risk.

Risks to the Moat and Business Resilience

Credicorp faces the following risks:

  • Financial Stability and Asset Quality: If the Peruvian economy and the other countries in which the company operates takes a downturn, the company will face higher default rates. Recent earnings have started to show improvements in this area.
  • Regulatory Risks: Changes in banking regulations and capital requirements could hurt the company’s performance. A change in a local regulatory landscape could easily erase all of Credicorp’s competitive advantages, particularly those in the insurance business.
  • Economic and Political Instability: Political instability, economic crises, and currency fluctuations in Peru and other Latin American markets where Credicorp operates are also significant risks to be prepared for.
  • Competition: Fintech disruptors could eat away at Credicorp’s customer base, and other larger financial institutions could try to compete with them on pricing, products, and services.
  • Macroeconomic Shocks: Emerging economies tend to have higher volatility, and the company is at risk of high losses during a global economic downturn.

Management commentary from earnings calls emphasizes that they are investing in technology and looking for efficiencies, as well as trying to adapt their portfolio to have a more balanced offering across products and geographies to mitigate these risks.

Understandability: 3 / 5

Credicorp is reasonably easy to understand for someone familiar with financial services companies:

  • The company’s main business model is straightforward and relatively simple to grasp, with banking, insurance, and investment businesses as its core products.
  • The drivers of performance are mostly tied to economic indicators, interest rates, and loan volumes, which are fairly well understood.
  • The multiple operations of Credicorp can at times make the business a little complicated to follow as a whole.

It is important for an investor to note all the differences between the subsidiaries. It is not enough to consider the holding company alone.

Balance Sheet Health: 4 / 5

Credicorp’s balance sheet is strong overall: * The company maintains a stable debt-to-equity ratio and strong solvency ratios.

  • The capital requirements enforced by regulators limits the company’s ability to take on excessive debt.
  • The company’s Tier 1 capital ratio (a key indicator of financial strength) is expected to stay well above regulatory minimums, showing good liquidity and the ability to meet its short-term obligations.

Credicorp’s balance sheet is strong overall and shows a well-capitalized and liquid business. The company is well positioned to navigate the potential economic headwinds ahead.

Conclusion

Credicorp presents a compelling investment option for those looking to invest in a relatively large company in Latin America. Its large business and presence in Peru, and its geographic and product diversity, offers the company a sustainable competitive advantage, a large share in a growing market, and diversified revenue. Although the company maintains a healthy balance sheet and is well capitalized, its performance is still exposed to the volatility of emerging markets and an increase in competition. In the end, like any other stock, its success relies on the ability of management to successfully allocate capital while keeping an eye on the rapidly changing world around it.