Is Credicorp Ltd. (NYSE:BAP) Expensive For A Reason? A Look At The Intrinsic Value

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Bank stocks such as BAP are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Emphasizing data points such as book values, as well as the return and cost of equity, can be beneficial for gauging BAP’s value. Below I’ll look at how to value BAP in a relatively useful and uncomplicated way.

Check out our latest analysis for Credicorp

What Model Should You Use?

Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. Financial firms operating in Bermuda face strict financial regulation. In addition, banks tend to not hold substantial amounts of tangible assets as part of total assets. Excess Returns overcome some of these issues. Firstly, it doesn't focus on factors such as capex and depreciation - relevant for tangible asset firms - but rather emphasize forecasting stable earnings and book values.

Deriving BAP's True Value

The central assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns in excess of cost of equity is called excess returns:

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

These factors are combined to calculate the true value of BAP's stock:

This results in an intrinsic value of $191.19. Relative to today's price of US$239, BAP is trading above what it's actually worth. This means BAP isn't an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell BAP. Fundamental factors are key to determining if BAP fits with the rest of your portfolio holdings.

Next Steps:

For banks, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
2. Future earnings: What does the market think of BAP going forward? Our analyst growth expectation chart helps visualize BAP’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether BAP is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on BAP here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.