EM Banks Through the Credit Quality and Value Lens

Gravity Works As WeWork Doesn't; Now Plan B

Emerging Market Banks: Measuring Their Response and Resilience to the Tougher Credit Quality Outlook

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Peru is reeling from a torrid and tragic C19 crisis, exacerbated by political turmoil. Peru, often cited as one of the few positive narratives in LATAM in the last 30 years, is sadly down on its luck.The lack of financial inclusion/penetration and education are often cited rightly as a potential driver of growth. Two-thirds of the population in Peru are not clients at any bank. This is not the way things were supposed to have panned out a decade ago. However, if inclusion had been greater in Peru, there would have been less exposure to the virus due to the reduced use of cash. It is good to see that Yape, a BCP application that allows money to flow instantly and securely between mobile phones and Yape card are gaining traction. 80% of Yape Card users do not withdraw their cash but use it electronically: they are transitioning from a cash to a digital economy. BCP has also launched programmes such as "ABC" talks and “Mujeres Emprendedoras”.Microfinance is carried out by Mibanco and Encumbra, All these initiatives are welcome but are long overdue.<a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  is one of a coterie of “must-have” banks in many EM portfolios such as popular Sberbank and OTP even. They all remain expensive and reveal subpar fundamental momentum as measured by our PH Score™. This is not a signal of stellar returns.Credicorp’s most recent results were subpar on a LTM basis though the third quarter was viewed by some experts as better than Q2. (The bank swung back to a profit of 104.6 million Peruvian soles at Q320 from a loss of 620.4 million soles in the linked quarter, but fell 90.4% from 1.09 billion soles in the year-ago quarter). Results though do not signify a turnaround in the bank’s fortunes. One could argue that sky-high LLRs will -in great part- be reversed but this may be premature in the short-term as vaccine logistics remain highly complex and a great deal of damage may be permanent. The bank has a significant loan portfolio to small and midsize enterprises, which has been one of the worst-affected segments of the economy. Amid economic fallout tied to the COVID-19 pandemic, more than 40% of loans in neighbouring Colombia received forbearance, a number that will not be so dissimilar in Peru. At BCP, refinanced loans and internal overdue loans &gt;90 days climbed by 31% and 17.5% q-o-q. Management claims to have front-ended the bulk of the blow caused by the coronavirus pandemic with more aggressive provisioning than any other major LATAM bank. This may have some merit. There will be LLR reversals here for sure but the glass may be more empty than full and BCP’s call for a “V”-shaped recovery based on tentative Q3 High Frequency data may be rather optimistic.Our PH Score™ shows that the bank reported a sharp decrease in Profitability -ROE, ROA, and NIM- (the latter related to the Reactiva Perú programme), while Efficiency, Capital Adequacy, and Asset Quality all showed erosion. Asset Quality is deteriorating fast in SME-Pyme, Microfinance, Consumer, and Credit Cards. On the other hand, there was a huge increase in aforementioned Provisioning and better Liquidity.<div class="content-highlight">A FV of 33%, a PBV of 1.92x, an Earnings Yield of 1.4%, are unappealing though the Dividend Yield is not unattractive. A PH Score™ of 3.4 is in the bottom quartile globally.</div>

Peru is reeling from a torrid and tragic C19 crisis, exacerbated by political turmoil. Peru, often cited as one of the few positive narratives in LATAM in the last 30 years, is sadly down on its luck.The lack of financial inclusion/penetration and education are often cited rightly as a potential driver of growth. Two-thirds of the population in Peru are not clients at any bank. This is not the way things were supposed to have panned out a decade ago. However, if inclusion had been greater in Peru, there would have been less exposure to the virus due to the reduced use of cash. It is good to see that Yape, a BCP application that allows money to flow instantly and securely between mobile phones and Yape card are gaining traction. 80% of Yape Card users do not withdraw their cash but use it electronically: they are transitioning from a cash to a digital economy. BCP has also launched programmes such as "ABC" talks and “Mujeres Emprendedoras”.Microfinance is carried out by Mibanco and Encumbra, All these initiatives are welcome but are long overdue.Credicorp Ltd (BAP US)  is one of a coterie of “must-have” banks in many EM portfolios such as popular Sberbank and OTP even. They all remain expensive and reveal subpar fundamental momentum as measured by our PH Score™. This is not a signal of stellar returns.Credicorp’s most recent results were subpar on a LTM basis though the third quarter was viewed by some experts as better than Q2. (The bank swung back to a profit of 104.6 million Peruvian soles at Q320 from a loss of 620.4 million soles in the linked quarter, but fell 90.4% from 1.09 billion soles in the year-ago quarter). Results though do not signify a turnaround in the bank’s fortunes. One could argue that sky-high LLRs will -in great part- be reversed but this may be premature in the short-term as vaccine logistics remain highly complex and a great deal of damage may be permanent. The bank has a significant loan portfolio to small and midsize enterprises, which has been one of the worst-affected segments of the economy. Amid economic fallout tied to the COVID-19 pandemic, more than 40% of loans in neighbouring Colombia received forbearance, a number that will not be so dissimilar in Peru. At BCP, refinanced loans and internal overdue loans &gt;90 days climbed by 31% and 17.5% q-o-q. Management claims to have front-ended the bulk of the blow caused by the coronavirus pandemic with more aggressive provisioning than any other major LATAM bank. This may have some merit. There will be LLR reversals here for sure but the glass may be more empty than full and BCP’s call for a “V”-shaped recovery based on tentative Q3 High Frequency data may be rather optimistic.Our PH Score™ shows that the bank reported a sharp decrease in Profitability -ROE, ROA, and NIM- (the latter related to the Reactiva Perú programme), while Efficiency, Capital Adequacy, and Asset Quality all showed erosion. Asset Quality is deteriorating fast in SME-Pyme, Microfinance, Consumer, and Credit Cards. On the other hand, there was a huge increase in aforementioned Provisioning and better Liquidity.A FV of 33%, a PBV of 1.92x, an Earnings Yield of 1.4%, are unappealing though the Dividend Yield is not unattractive. A PH Score™ of 3.4 is in the bottom quartile globally.

BAP: Subpar Fundamental Momentum at an Elevated Valuation