A World in Motion 2008 Annual Report a World in Motion a World in Motion
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a world in motion 2008 annual report a world in motion a world in motion A world in motion annual report Credicorp Ltd Claredon House 2 Church Street Hamilton, Bermuda www.credicorpnet.com Banco de Crédito BCP Atlantic Security Holding Corporation Pacífico Grupo Asegurador Prima AFP 2008 2008 annual report a world in motion A world in motion contents 2 Contents Letter from the Chairman 4 Economic Environment 12 The economy in figures 14 Main economic and financial indicators 15 Corporate Strategy 18 A world in motion… 20 Building on our strengths 21 Sustainability on target 21 Integrated individual strategies 24 A pending task 29 Financial Results 30 Main management indicators 32 A graphic view of financial results 33 Business lines 38 The banking business 38 The insurance business 44 The asset management business 47 Credicorp grows with at the pace of its subsidiaries 50 Market value and stock structure 52 Corporate Governance and Social Responsibility 54 Banco de Crédito BCP 56 Banco de Crédito BCP Bolivia 60 Pacífico Grupo Asegurador 60 3 a world in motion 62 Financial Statements 2008 162 Risk Ratings 163 Board of Directors, Senior Management and Audit Committee 164 Contacts dionisio romero seminario Chairman of the Board Letter from the Chairman letter from the chairman 6 Letter from the Chairman Dear shareholders, Once again, on behalf of Credicorp’s Board of Directors, which I have the honor to chair, I submit the annual report on the corporation’s activities during 2008 for your consideration. RESULTS In the first place, I would like to refer to the international financial crisis which was evident since 2007 but reached its massive dimension only in 2008’s second half. It was certainly not expected to be as severe and significant as it has been. This event has in part conditioned the performance of our company, as I will comment below. Despite an atmosphere of crisis and uncertainty, Credicorp’s results were satisfactory. Net earnings reached US$ 357.7 million, 2.0% higher than earnings in 2007. This is a good result, once we take into account we faced exceptional charges worth US$ 93.2 million, of which US$ 49.7 million correspond to the impairment of unrealized losses of our investment portfolio resulting from the general drop in the market value of secu- rities, and US$ 43.5 million for provisioning against potential losses and contingencies related to the alleged fraud, which I will discuss below. The banking business was our main earnings contributor. For the insurance business, 2008 was, once again, a difficult year as a consequence of high claims and losses from the invest- ment portfolio. Third party fund management, an activity we prioritize now, has started to make a positive contribution to our corporation’s bottom line, in particular through pen- sion fund management. DIVIDENDS AND CAPITALIZATION At its February 27th meeting, the Board of Directors agreed to distribute a cash dividend of US$ 1.50 per share, an amount similar to last year’s and which represents 33% of profits made. 7 a world in motion This year, the company’s non-distributed benefits will reach 67%, because of the capitaliza- tion needs in our most important subsidiaries. Last December, it was decided to make a capital contribution to Pacifico Peruano Suiza and Atlantic Security Bank to further strengthen these organizations in view of last year’s equity loss, mainly resulting from the drop in market valuations of our investment portfolios. In addition, BCP also increased its operating capital through ratained earnings worth US$ 180.6 million, in order to support the strong asset growth during this year. SUBSIDIARIES I will summarize now the results and activities of our most important subsidiaries. Banco de Crédito BCP Once again, 2008 proved to be an exceptional year at BCP. Net consolidated earnings reached US$ 423.5 million, measured following international accounting principles. This represents a 28% increase over last year’s results and a return on average equity of 32.8%, the highest return in BCP’s history that we remember Earnings in nuevos soles, calculated pursuant to local accounting principles, were likewise highly satisfactory, having reached S/. 1,334.5 million, 51% higher than in 2007. Practically all revenue items contributed to BCP’s improved results. Net financial income increased 30%, commissions from bank services grew 20%, and among the other non fi- nancial revenues, commissions from exchange transactions increased a remarkable 83% year over year. Higher net financial income is principally accounted for by more loans, which measured in average daily balances grew 36% compared to 2007. In this respect, it is worthwhile under- scoring that despite the accelerated growth of loans in recent years, which practically tri- pled between 2004 and 2008, this portfolio’s quality has also improved annually. Past due loans at year-end 2008 reached 0.8% of the total portfolio, while provisions reached 2.7 times the non-performing portfolio. Loans increased in all market segments. However, Retail Banking loans to individual and small companies, performed remarkably well. This business unit expanded its portfolio in 43%, measured in average daily balances and has made the largest contribution to the bank’s growth in earnings, deposits and loans. letter from the chairman 8 Such positive evolution of both results and operations was influenced by Peru’s dynamic economy. Gross Domestic Product continued to grow strongly, and expanded 9.8% in 2008. Operating expenses also experienced significant growth last year, and were 12% higher than in 2007. Such behavior is accounted for by accelerated growth of our physical and technological infrastructure, in the last two years. In 2007 and 2008, we opened 97 branches, installed 251 automated tellers and started operations through 1,491 Agentes BCP, our branchless banking network. In addition, we invested US$ 61 million to improve technological support for our operations. Finally, in these two years we have hired 5,200 new employees, principally to meet the needs of our new branches. We are persuaded with these investments we are laying down the foundations for sustained growth, as Peruvian economy develops. Banco de Crédito BCP Bolivia Last year was also a year of exceptional results at our subsidiary in Bolivia. Its net earnings reached US$ 44.5 million, 65% higher than in 2007, or average return over equity of 53.4%. In recent years, this subsidiary has become a significant source of earnings for our corporation. Exceptional growth of profits is accounted for by larger financial margins, significant in- creases in non-financial revenues, in particular commissions charged for the services we provide, and improved credit risk which did not required significant provisioning. Improvements in financial markets are principally due to the growth of retail loans and treasury investments, rather than to an overall growth of loan portfolio, which remained almost unaltered. Pacífico Peruano Suiza The insurance activity experienced hardship in 2008. In consolidated terms, the insurance group generated a loss of US$ 15.9 million to Credicorp, despite a 32% increase in net premiums. Poor performance is explained by high casualties in practically all lines of business, and losses experienced in investment portfolios after the overall reduction in securities’ valuations. Casualty rates for certain types of insurance even exceeded premiums charged, as in health care and general risk, where severe damage hurt corporate clients. 9 a world in motion The negative results, in addition to unrealized losses in the investment portfolio, deteriorated the company’s solvency by reducing operative capital. Accordingly, the Pacifico Peruano Suiza General Shareholders’ Meeting held in December increased the capital by S/. 55.1 million. However, not all is bad news in the insurance activity. It should be underscored that the life insurance business managed by our Pacifico Vida subsidiary continued to grow strongly. Total premiums increased by 30% since 2007 yielding net profits worth US$ 9.0 million, despite US$ 2.1 million of impairment from unrealized losses of our investment portfolio. Adjustments in risk underwriting and premiums charged in the high casualty lines were made throughout the year to improve results from operations. Improvements became evi- dent in the closing months of 2008. Atlantic Security Holding Corporation The Bernard Madoff Securities Inc. fund management alleged scam, a Ponzi scheme that shocked the international financial community in December and filled us with indigna- tion, has hurt thousands of persons and companies worldwide, including Atlantic Security Bank and some of its clients. The severe international financial crisis has also had a negative impact on this subsidiary’s bottom line, in view of its high exposure to market risks created by the significant portion of assets it holds as securities, the prices of which have dropped significantly. Net losses, in particular during the closing quarter reached US$ 59.4 million, accounted for, as I already mentioned, by exceptional US$ 69.5 million charges to cover unrealized losses stemming from the impairment of our investment portfolio’s loss in value and provisioning for potential losses and contingencies related to the abovementioned alleged scam. In addition to this negative bottom line, unrealized losses for US$ 46.7 million were experienced in the equity account, where at year end 2007, we had accomplished unrealized earnings totaling US$ 17.4 million. letter from the chairman 10 To replenish lost wealth and improve the bank’s capital solvency, a decision was made in December to increase the bank’s capital through a cash contribution of US$ 20.0 million, and by providing a US$ 15.0 million subordinated loan. Prima AFP Pension funds also experienced a tough year in 2008, as the international financial crisis affected the funds’ value. The combined yield of the three types of funds managed by AFPs was negative by 20.4%.