Banco de Credito del Perú S A : INFORMES DE CLASIFICACIÓN DE RIESGO.

Firmado Digitalmente por:

MARTHA PATRICIA HUAPAYA HUAPAYA

Fecha: 17/05/2024 03:58:21 p.m.

Banco de Credito del Peru

Primary Credit Analyst:

Camilo Andres Perez, Mexico City + 52 55 5081 4446; [e-mail]

Secondary Contact:

Ivana L Recalde, Buenos Aires + 54 11 4891 2127; [e-mail]

Table Of Contents

Ratings Score Snapshot

Credit Highlights

Outlook

Key Metrics

Anchor: 'bbb-' For Commercial Banks Operating In Peru

Business Position: Leading Universal Bank In Peru With Strong Business Stability

Capital And Earnings: Solid Capitalization To Continue In 2024-2025

Risk Position: Difficult Economic Conditions Weigh On Asset Quality, But Pressures Should Somewhat Recede

Funding And Liquidity: Diverse And Stable Funding Thanks To Large Retail Operations, Along With Healthy Liquidity

Support:No Uplift To The SACP

Environmental, Social, And Governance

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Table Of Contents (cont.)

Key Statistics

Related Criteria

Related Research

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Banco de Credito del Peru

Ratings Score Snapshot

Issuer Credit Rating

BBB-/Stable/A-3

Credit Highlights

Overview

Key strengths

Key risks

Strong business position given that Banco de Credito del Peru (BCP) is the largest bank in the country with a diversified business mix.

The country's complex political landscape dents short- to medium-term economic growth, with a knock-on effect on the banking industry and BCP.

Strong operating performance and capitalization.	Low per capita income weakens Peru's economic resilience and limits
	debt capacity.
A bank of high systemic importance to Peru.

BCP has robust business stability thanks to its leading position in Peru's financial system. We expect BCP's well-recognized franchise, large and stable client base, and diversified business lines to continue providing good business stability and to remain a rating strength.

We expect capitalization to remain solid. This is due to the consistent improvement in results after the peak of the pandemic and the bank's ability to adjust dividend distributions, if necessary. However, BCP's risk-adjusted capital (RAC; calculated according to S&P Global Ratings' methodology) ratios could be pressured amid rising economic risk for Peru's banking industry. This could prompt us to revise downward BCP's stand-alone credit profile (SACP), but not its ratings, which the sovereign ratings currently limit.

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Banco de Credito del Peru

Nonperforming loans (NPLs) remain relatively high, but should improve during the rest of 2024 and 2025 if Peru's

economic conditions stabilize. Muted economic growth amid the unstable political scenario, social unrest, and adverse

climate events in Peru kept the bank and the system's asset quality pressured during 2023. However, although political

uncertainty remains, we expect better economic prospects to support some correction in asset quality this year.

The ratings on BCP incorporate its diversified and stable funding profile and sound liquidity coverage. The bank

continues to have a sticky deposit base and wide access to domestic and international capital markets, as well as to

central bank funding.

Our ratings on Peru limit those on domestic financial institutions, including BCP. This is because we don't consider

that the entities could withstand a sovereign default scenario, given their large exposure to the country in the form of

loans and securities.

Outlook

The stable outlook on BCP for the next two years mirrors the outlook on Peru. We expect that the ratings on the bank will move in tandem with those on the sovereign because of BCP's high exposure to the domestic market. We rarely rate financial institutions higher than the sovereign where they operate because we consider it unlikely that these institutions would remain unaffected by developments in domestic economies.

If higher risks materialize, damaging the operating conditions for banks in Peru--indicated by a downward revision of our Banking Industry Country Risk Assessment (BICRA) economic risk score--it could hurt the bank's capitalization and intrinsic credit fundamentals, but wouldn't lead to a negative rating action.

The stable outlook on BCP also considers that increased systemic risks for financial entities operating in Peru, combined with a hypothetical deterioration in the bank's intrinsic creditworthiness, would not affect the ratings unless the SACP falls below 'bbb-', which is unlikely at this point.

Downside scenario

We could take a negative rating action on BCP if we were to take a similar action on the sovereign.

Upside scenario

We could upgrade BCP if we were to take a similar action on the sovereign, while the bank's SACP remains above 'bbb-'.

Key Metrics

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Banco de Credito del Peru--Key ratios and forecasts

		--Fiscal year ended Dec. 31--
(%)	2021a	2022a	2023a	2024f	2025f
Growth in customer loans	7.0	1.0	-3.2	4.0-6.0	6.0-8.0
Net interest income/average earning assets (NIM)	4.7	6.2	7.4	6.8-7.4	6.0-6.8
Return on average common equity	15.5	21.2	20.2	19.0-22.0	15.0-20.0
Return on assets	1.6	2.3	2.5	2.4-2.8	2.0-2.5
Gross nonperforming assets/customer loans	4.1	4.2	4.4	4.2-4.5	4.0-4.4
Net charge-offs/average customer loans	1.9	1.5	2.4	1.4-2.0	1.4-2.0
Risk-adjusted capital ratio	10.3	10.8	10.9	10.9-11.4	10.8-11.3
All figures are S&P Global Ratings-adjusted. Note: Forecasts produced by S&P Global Ratings. a Actual. f--	--Forecast. NIM Net interest margin.--

Anchor: 'bbb-' For Commercial Banks Operating In Peru

Our bank criteria use our BICRA's economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Peru (where BCP mostly operates) is 'bbb-'.

Banks in Peru benefit from a record of consistent economic policies, solid economic institutions, and a credible and effective central bank. These factors help moderate the effects of recent events (e.g., social disturbances and climate phenomena) and the prolonged political impasse in the country that limits growth prospects. Peru's economic risk also reflects its low per capita GDP (about $6,000) and the banking industry's high exposure to cyclical sectors such as small and midsize enterprises (SMEs) and microlending. After somewhat recovering in 2022 from the pandemic, profitability and asset quality remain somewhat weak. We think high loan loss provisions, good capitalization, and prudent underwriting practices help to contain losses in the system.

Banks also benefit from the country's solid regulatory framework, with ample supervisory coverage. The central bank and Superintendencia de Banca y Seguros--which regulates banks and insurers--are very active. In 2023, banks in Peru started implementing adjustments to align with Basel III principles. Despite some pressure on results, the system maintains good profitability and capital building capacity. We consider the financial system to have healthy capital metrics and a diversified funding mix, with a significant share of deposits from loyal customers. We also believe the government can provide liquidity if necessary. The law on loan interest rate caps and elimination charges for late payments didn't erode banks' profitability, but additional similar measures could weaken the system's competitive dynamics.

Business Position: Leading Universal Bank In Peru With Strong Business Stability

Our view of the bank's business position reflects BCP's leading position across lending segments, its large scale, and its diversified business with operations in retail and wholesale banking and treasury activities. These factors confer significant business stability. As of the end of March 2024, BCP was the country's largest bank in terms of loans (with a

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market share of 32.9%) and deposits (34.6%). MiBanco Banco de La Microempresa S.A. (MiBanco; BCP's subsidiary focused on microlending) had shares of 3.8% of loans and 2.9% of deposits.

The bank's revenue mix remains healthy. Net interest income accounted for 74% of BCP's total operating revenue in 2023, slightly up from the 69% average in the past three fiscal years, given the recovery in margins due to higher interest rates and amortization of nonprofitable loans under government programs. Fee revenues accounted for 19% of operating revenue, and trading income accounted for the remainder. We expect the revenue structure to remain stable in the next few years considering the bank's business strategy.

BCP continued to deliver solid bottom-line results in 2023, as it did in 2022, mainly thanks to the continued increase of its net interest margins (NIMs) amid a contractive monetary policy cycle given the average short duration of the bank's lending portfolio. In addition, its funding structure, heavily composed of transactional deposits, has helped to contain funding costs amid high interest rates.

On the other hand, the rising cost of risk--due to increased credit risks amid challenging economic

conditions--somewhat limited earnings last year. The bank's return on equity (ROE) decreased slightly to 20.3% in 2023 from 21.2% in 2022. However, we expect solid profitability to continue in 2024, mainly because interest rates should remain relatively high during the first part of the year.

Like the rest of the industry, BCP granted loans under government programs during the peak of the pandemic (Reactiva and FAE), which continue to amortize. Currently, these loans accounts for less than 2% of BCP's consolidated loans (down from 20.0% at the end of 2020). The amortization of the Reactiva loans, which have low margins, has also contributed to the bank's recent better results.

Chart 1

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Capital And Earnings: Solid Capitalization To Continue In 2024-2025

Our opinion of the bank's capital and earnings stems primarily from our forecast for a risk-adjusted capital (RAC) ratio of 10.5%-11.5% for the next two years. The downside risks to growth and investment from continued political volatility in the country led us to keep our negative trend in the economic risk of our BICRA for Peru. If the economic risk score in our BICRA worsens, it would not affect the anchor for banks, but the risk weights we apply to banks would increase, which would weaken BCP's RAC ratio. This could prompt us to revise downward the bank's SACP but not our ratings, which the sovereign ratings currently limit.

Our base-case scenario incorporates the following assumptions for 2024-2025:

• Peru's GDP growth of about 2.7% in 2024 and 3.0% in 2025.
• Average monetary policy rate of 5.0% in 2024 and 4.0% in 2025.
• Annual loan portfolio growth of about 6%.
• High NIM in 2024 but somewhat lower in 2025.
• Cost of risk of about 2% of total loans amid lower credit risks.
• Higher-than-pre-pandemicNPL ratios, but somewhat lowering amid better macroeconomic prospects.
• Dividend distributions of 65%-70% of results, but with flexibility to reduce them if needed, as was the case in 2021.

The solid quality of BCP's capital base mainly consists of paid-in capital, reserves, and retained earnings. In addition, the bank's total adjusted capital (TAC) doesn't include hybrid instruments. Regulatory capital metrics remain sound, with the global ratio at 17.5% as of the end of 2023, well in excess of the regulator's minimum requirement of 12.5% and above the industry average.

Risk Position: Difficult Economic Conditions Weigh On Asset Quality, But Pressures Should Somewhat Recede

Like the whole Peruvian banking industry, BCP's asset quality remains strained. The bank's NPL ratio (including MiBanco and according to SBS methodology) increased to about 4.6% as of March 2024, from the 3.0% pre-pandemic. The system's NPLs averaged 4.5% as of March 2024, also up from historical levels of 3.0%. The rise in NPLs follows a challenging macroeconomic scenario last year in Peru, mainly due to the consequences of a volatile political landscape and adverse climate events that particularly hurt the quality of microcredits, loans to SMEs, and consumer credits in the middle-to-low income segments.

Our base-case scenario considers that better domestic economic conditions and BCP's recent improvements to its new loan originations will help to keep asset quality manageable in 2024-2025, with NPLs receding to 4.0%-4.2%. However, we will monitor latent higher credit risks that could arise from continued political uncertainty and climate events.

BCP has maintained its risk diversification among economic sectors and customers, without considerable concentrations. Its 20 largest exposures represent about 10% of its total loan portfolio and less than 1x its total capital

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base. In addition, BCP's banking operations remain mostly simple. It has no complex products or exposure to sophisticated derivatives operations (mostly used for hedging purposes), asset-backed securities, collateralized debt obligations, or structured credits.

The Peruvian financial system has high dollarization. Although it has fallen consistently in the past decade thanks to the central bank's measures, it remains at about 28% of total loans, higher than in Brazil, Chile, Colombia, and Mexico. Although banks generally offer dollar-denominated loans to borrowers with revenues in that currency such as exporters, we think banks still offer a significant amount of such loans to non-dollar revenue generators. BCP's dollar-denominated loans account for 30% of total loans in 2023, similar to the industry average.

Chart 2

Funding And Liquidity: Diverse And Stable Funding Thanks To Large Retail Operations, Along With Healthy Liquidity

BCP's funding is in line with the industry average, in our view. Customer deposits are the bank's main funding source, accounting for 81% of the total base at the end of 2023, compared with the 76% average of the previous three years. The funding also includes interbank credit lines and market debt accounting for roughly 14%, and central bank's repurchase agreements (repos) for 5%.

More than half of deposits (including those of MiBanco) are retail deposits, which we consider more stable than

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wholesale deposits, particularly during economic downturns and stressful conditions. BCP's stable funding ratio, according to S&P Global Ratings' methodology, was 119% at the end of 2023.

BCP's broad liquid assets covered its short-term wholesale funding needs by 2.4x at the end of 2023. Although the ratio is somewhat higher than those of many banks in Latin American countries, it's similar to the Peruvian banking system's average, in part due to the higher reserve requirements. We believe the bank's debt maturity profile is manageable, and it has a record of adequate debt management.

Chart 3

Support:No Uplift To The SACP

We think BCP has high systemic importance to the Peruvian financial system. The bank is Peru's largest financial institution in terms of loans and deposits, and it plays an important role in the country's payment system. As a result, we believe there's a moderately high likelihood of extraordinary government support. Nonetheless, the ratings on BCP don't benefit from government support at this point because the rating on Peru is below the bank's SACP.

We consider BCP as a core subsidiary of Credicorp Ltd. (BBB-/Stable/--), given its importance to the group. BCP accounts for about 80% of the group's total assets and net income. Our rating on BCP is currently at the same level as

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Credicorp's group credit profile. If the group's credit quality was to worsen, it wouldn't affect the ratings on BCP given that we think it's insulated from its parent. This is because BCP is a regulated entity, and we expect the regulator to intervene to protect the subsidiary in a scenario of the parent's stress, as seen in other cases in the industry in recent years.

Environmental, Social, And Governance

Environmental, social, and governance (ESG) factors have no material influence on our credit rating analysis of BCP. The influence of ESG credit factors on BCP's credit quality is similar to that of the industry and domestic peers. Peru is somewhat exposed to natural disasters such as earthquakes, volcanic activity, landslides, and the El Niño climate pattern. However, BCP, like the rest of domestic banks, has been able to contain credit and operating losses at moderate levels during such conditions.

In addition, the bank has low exposure to the agriculture sector, which is vulnerable to these conditions. The bank also has solid loan diversification. However, the Peruvian economy depends to some extent on the commodity metals sector, which domestic banks generally don't directly finance. Still, banks are indirectly exposed to those sectors through the whole supply chain (suppliers, subcontractors, and employees who are also retail clients).

Key Statistics

Table 1

Banco de Credito del Peru--Key figures

		--Year-ended Dec. 31--
(Mil. PEN)	2023	2022	2021		2020		2019
Adjusted assets	189,806.7	189,032.3	196,172.9	193,646.7	149,254.6
Customer loans (gross)	131,714.4	135,999.0	134,689.9	125,875.9	104,864.0
Adjusted common equity	22,771.5	21,495.4	19,309.1	16,706.4		17,322.0
Operating revenues	16,268.8	14,450.7	11,718.3	11,156.9		11,912.1
Noninterest expenses	6,613.5	6,301.5	5,651.6		5,161.2		5,131.7
Core earnings	4,666.1	4,502.2	3,044.5		816.8		3,647.0
PEN--Peruvian nuevo sol.
Table 2
Banco de Credito del Peru--Business position
								--Year-ended Dec. 31--
(%)					2023	2022	2021	2020	2019
Loan market share in country of domicile			33.6	34.2	34.7	34.5	33.0
Deposit market share in country of domicile			35.7	36.2	36.1	35.2	33.7
Total revenues from business line (currency in millions)		16,268.8	14,450.7	11,718.3	11,156.9	11,912.1
Commercial and retail banking/total revenues from business line	93.2	91.8	90.7	90.5	90.2
Trading and sales income/total revenues from business line				6.3	6.8	8.0	7.9	7.7
Other revenues/total revenues from business line					0.5	1.5	1.3	1.6	2.1

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