CredCredicorp
Ltd. (BAP, $203.92): “Time to Cash in and take these Gains to the Bank”
By: Mitchell Beine, AIM Student at
Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses
my own opinions. I am not receiving
compensation for it and I have no business relationship with any company whose
stock is mentioned in this article.
Summary
- Credicorp Ltd. (NYSE: BAP) offers banking, insurance, and investment services to its clients. It is the largest financial services holding company in Peru where it 92% of revenues coming from Peru.
- The bank derives over 83% of its revenue from its banking segment.
- Peru’s economy has slowed, and this has played a role in the deterioration of BAP’s loan portfolio.
- Credicorp maintains a high P/E valuation, at 14.34x compared to an average of 12.99x for its competitors.
- The stock has risen almost 30% YTD, and has surpassed the initial target price from when it was pitched.
Key
Points: One
of the key risks of many Latin American regions is deterioration in asset
quality, and BAP has not been immune to this risk. Non-performing loans have increased each of
the past four years, from 2.81% in 2013 to 3.66% in 2016. In addition, the quality of loans issued by
BAP has suffered. 2.77% of the bank’s
total loans now qualify as internal overdue loans, up from 2.23% in 2013. This ratio has also increased each of the
past 3 years. These ratios suggest that
BAP’s loan portfolio is diminishing in quality, a significant risk given the
increased economic turbulence of the region.
That BAP’s loans have suffered in quality
should not come as a complete shock; Peru as a country has been struggling in recent
years. GDP grew at just 1.5% from 2015
to 2016, and has fallen from $201B in 2013 to $192B in 2016. If Peru’s economy does not pick up, Credicorp
will find it challenging to achieve high growth to justify its large P/E
valuation.
Management has stressed two things in its
outlook for 2017: growth and risk management.
While the bank has experienced significant growth over the past year,
they have not been as effective in managing the risk they are taking on. It is worrisome that BAP has been unable to
rein in the growing risk and NPLs. It is
possible that the bank is prioritizing growth over asset quality, and this
could have a sharp negative impact on the firm’s share price that has risen by
33% over the past 5 months.
What
has the stock done lately?
BAP’s share price increased by about 4%
after reporting earnings on August 7th. Even before this time, the stock has been
steadily rising since early April, when the stock hovered around $150. It consistently climbed to a high of $213.83
in early September, before coming down slightly to its current spot in the low
$200s. It is clear that the market has
high expectations for BAP to continue to grow, although the growing risk in
their loan portfolio may cause quite a shock for its shareholders in the
future.
Past
Year Performance:
Credicorp has enjoyed a remarkably thorough climb into the $200s. It is clear that this company is trading at a
premium compared to its peers. The
question is whether or not the market has properly priced in the bank’s risk as
well as its growth potential. I believe
that the current price is overinflated, and that it reflects minimal risk that
is not consistent with the bank’s asset quality trend as well as the geographic
region that it resides in. The bank
would have to maintain consistently high growth without a setback, or this
stock could come crashing back down to earth.
My
Takeaway
Credicorp was pitched to the AIM
International Portfolio with a target price of $190.20 on December 2, 2016 with
24% upside. Over the past year, BAP has
surpassed this target and then some, and now sits comfortably above this target
at $203.92. The market may be
understating the growing risk in Credicorp’s loan portfolio, and the recent
pullback from its high of $213.83 suggests that this stock may be facing a
correction in the near future. As a
result, I am recommending that the AIM International Portfolio sell Credicorp
as of 9/20/17.
Source: FactSet
