Peru has surprisingly become one of the jewels of South America, stabilizing after years of armed conflict, corruption, economic ruin and disarray. And at the center of the miracle is the financial services giant Credicorp (BAP), which has helped to finance gold and copper miners and guided the government back to stability. Businesses expanding their factories, students needing college loans and homeowners needing to finance cars and homes all turn to BAP, which does a third of the entire country’s banking business. Shares have started the month with a 3% gain.
BAP’s top asset is Banco Credito de Peru, the nation’s largest bank with a 45% share of business lending. According to Mathew Clark of the Christian Science Monitor, ”Peru’s past two pro-business, yet center-left governments have steered the country toward record economic growth, greater transparency, and rapid decentralization. The result: Peru has matured politically to the point where analysts and investors are beginning to talk about another regional powerhouse creeping up alongside Brazil.” Bank chief Walter Bayly also notes that Peru’s economy has benefited from low inflation and a strong government balance sheet unencumbered by the bad loans weighing down southern Europe.
The Peruvian economy has been resilient throughout the global recession and grew 9.8% in 2009. A new superhighway is being constructed that will connect its Pacific coast to Brazil. Peruvian government officials have said that this project will replace the Panama Canal as the main passage for trade between rising superpower China and the agricultural juggernaut. Analysts expect the superhighway to add a full percentage point to Peruvian GDP growth, though new oil, gas, and mining ventures should also fuel the economy.
BAP credit specialist Giuliana Cuzquen explained recently that the recovery has been reflected in higher average daily balances of loans in the first quarter — up 15.9% over the first quarter in 2009. These higher lending volumes resulted in 12% earnings growth relative to last year and 7% over last quarter. The company has guided investors to expect 12% to 15% loan growth this year.
Meanwhile, BAP management has done a good job of reducing overhead: Administrative expenses dropped 16.3% Q/Q while overall operating expenses fell 8.6%.
Credicorp also owns Prima AFP, the second largest asset management group in Peru. Prima has managed assets effectively, showing annualized returns over the past three years of 16.40%, 19.90%, and 12.85%. The unit manages 30.8% of Peruvian private pension assets.
The firm’s Pacifico Insurance Group unit provides automobile, life, health, and other general insurance to about a third of Peruvians. The unit’s earnings shrank slightly in the first quarter due a flood in the highlands surrounding Machu Picchu but offset some of the decline with smart asset allocation moves.
Credicorp has performed exceptionally well for shareholders by funding Brazilian and Peruvian businesses, earning 35% annualized returns over the past 5 years reflecting 27% annualized growth in earning. And it is up 160% since March 9, 2009, alone.
Yet the shares are still relatively cheap, selling for less than 15x trailing earnings and 11x forward earnings. The stock out to trade at $120 once global banks’ price/earnings multiple swell again, providing 35% upside this year. It’s a buy for anyone with a long time horizon for investments.
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