Wednesday, September 27, 2017

A Current AIM International Fund Holding: CredCredicorp Ltd. (BAP) by Mitchell Beine "Growing risk in this Peruvian firm’s loan portfolio helps explain the recent pullback"

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.

  • 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.
Source: FactSet 

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