Intercorp Financial Services Inc. (NYSE:IFS) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, and welcome to Intercorp Financial Services First Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today’s conference is being recorded. After the presentation, we’ll open the floor for questions. At this time, instructions will be given as to the procedure to follow if you would like to ask a question. Also, you can submit online questions at any time today using the window on the webcast, and they will be answered after the presentation during the Q&A session. Simply type your question in the box and click submit questions. It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Rafael Borja: Thank you, and good morning, everyone. On today’s call Intercorp Financial Services will discuss its first quarter 2023 earnings. We’re very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; Mr. JuanPablo Segura, Chief Financial Officer of Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo; and Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They will be discussing the results that were distributed by the company yesterday. There is also a webcast video presentations to accompany discussion during this call.

If you didn’t receive a copy of the presentation or the earnings report, they are now available on the company’s website, ifs.com.pe, to download a copy. Otherwise for any reason if you need any assistance today, please call InspIR Group in New York at 212-710-9686. I would like to remind you that today’s call is for investors and analysts only. Therefore questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. This do not account for future economic circumstances, industry conditions, the company’s future performance or financial results. As such, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations.

For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services for his opening remarks. Mr. Castellanos, please go ahead, sir.

Luis Felipe Castellanos: Thank you. Good morning, and welcome to our first quarter 2023 earnings call. Thank you all for joining us today. Let me start by giving you a brief overview of the macro situation in our country. As you may be aware, we continue to operate in a challenging environment with GDP growth expectations for the year at 2.5% according to the Ministry of Finance. Economic activity was affected during December 2022 and January this year by certain episodes of social unrest and most recently by heavy rainfalls and flooding impact in Peru’s coast. The possibility of an El Niño phenomenon later this year has not been ruled out. On the other hand, the 12-month inflation rate is slowing down below the 8% mark. Yet, the sustained high inflation is still negatively impacting Peruvian businesses and consumers with pressure on margins and families purchasing power.

Inflation expectations for 2023 remain above the Central Bank’s target range. Internationally, market conditions continue to be volatile and inflation continues to be a source of concern for global central banks. Moving to our business. We continue to experience higher interest rates in both soles and dollars contributing to higher margins this year as we were expecting. However, cost of deposits have also increased sharply, slowing margin expansion. We have seen an increase in the cost of risks mainly in the retail portfolio. We had anticipated cost of risk to increase. However, sustaining inflation and the above mentioned factors are putting additional pressure in our portfolio. The banking superintendency announced a new loan rescheduling program to provide relief for debt holders.

We have been very proactive in using this facility to help our customers. We’re closely monitoring payment behavior and being cautious with our operations given the scenario that we’re facing and we have taken a conservative approach to loan loss provisions this quarter. We remain committed to helping Peruvians overcome this challenging times. On a different note, we have started to report our insurance business under IFRS 17 accounting this quarter. The first time adoption impacts equity by over S/640 million and it will normalize in time. Our Wealth Management segment is slowly recovering its investment performance with a second consecutive positive quarter after a challenge in 2022 due to market conditions. Finally, our payments ecosystem continues to show solid growth and is well-positioned to take advantage of opportunities presented by interoperability as we go after additional growth.

In all, we are pleased to continue to see double-digit growth in IFS’ recurrent revenues and world class efficiency levels. We remain optimistic about IFS’ outlook going forward. Even though, we’re facing challenging conditions, we believe that once the silos, we will return to our path of sustainable profitability and growth. We continue to execute our strategy across our four business segments. We’re confident that our Peruvian [ph] people. Our efficient operations, our digital capabilities and our ability to adapt to changes are our core pillars to achieve our objectives. On a final note, as you are aware, in our last shareholders meeting, shares repurchase program was approved. We are in the process of finalizing details on the institution that will help us in this effort.

Now, let me pass it on to Michela to update you on the results of this quarter and to give you a detailed review of our operations. Thank you very much.

Michela Casassa: Thanks, Luis Felipe. Good morning, and welcome, everyone to IFS first quarter 2023 earnings call. Today, we will review our financial highlights and key messages. Despite certain volatility in our financial results, our cooperating trends are aligned with the strategy we’re deploying as Luis Felipe has just mentioned with a clear priority on digital growth with focus on profitability. Today’s information includes new accounting standards IFRS 17 for the insurance business figures. In 2022 figures have been restated for comparison purposes at Interseguro and IFS level. The first adoption impact is around S/600 million at Interseguro and IFS equity. I will start with a summary of financial highlights on Slides 3 to 9.

On Slides 3 and 4, IFS first quarter recurring earnings are S/308 million with an ROE of 13.3% when normalizing an impairment effect from new reschedulings at Interbank. The quarterly and yearly decreases in earnings are mainly due to a higher cost of risk in the consumer portfolio, but also to a lower than expected result from investments and insurance and wealth management. Payments has performed nicely and continues with double-digit growth in most KPIs. On banking, we have seen some signs of moderation in growth due to the macro scenario as we have continued our focus on low risk clients within the consumer portfolio. NIM was up this quarter 10 basis points reaching 5.5% despite the further increase in cost of funds as yield on loans improved 40% in the quarter.

As discussing our previous conference calls and in line with the change in portfolio mix and sustained inflation, cost of risk has increased reaching 3.2% this quarter impacted by two additional and unexpected events, which are the social protest and unusual heavy rains on some specific regions of Peru. Due to these events, we have helped our clients with some rescheduling of loans mainly on credit cards in line with the superintendency guidelines, which will start maturing in the coming months. On insurance, the first figures reported on the IFRS 17 showed earnings below our expectations mainly due to soft results from the investment portfolio. On wealth management, results continue its recovery path, however still below sustainable profitability.

Finally, on our payments business on one side is Izipay continues with the solid growth in business, strong growth in number of merchants and transactional volumes, and gaining share within our volumes in e-commerce in the year. Additionally, Plin and Tunki continue with strong growth of users and transactions as we will see more detail further on in the presentation and which should help us to benefit from the interoperability that has just started and to advance with our payment ecosystem. Among the key performance indicators for the quarter in the year on Slide number 5, I would like to highlight the very good quarterly efficiency ratio, which stood at 33% at IFS going back and even better than pre-pandemic efficiency levels. On Slide 6 and 7, good news in top line as total recurring revenues for IFS grew 21% year-over-year, thanks to the growth registered in banking of 21%, wealth management of 10%, insurance of 8% and payments of 7%.

On a quarterly basis, growth of 2% is impacted by seasonality mainly coming from a strong fourth quarter. On Slide 7, another positive is our fee income, which constitute a source of incremental and diversified revenues growing 11% year-over-year with important contributions from banking, which represent 63% of IFS fees, payments at 26% and wealth management at 12%. Moreover, banking fees continue to grow double-digit on a yearly basis thanks to double-digit growth of credit card fees and a negligible impact from lower account fees as we have not been charging Interbank fees to our retail clients for many years now in line with our digital growth strategy. On Slide 8, the efficiency ratio of IFS was 33% in the quarter and was 37% for banking.

Both ratios are very good, mainly thanks to the operating leverage of the bank, which was very strong in the quarter with revenues growing 21% year-over-year and costs growing only 7%. This has helped the efficiency ratio of the bank to improve almost 500 basis points in the year. On Slide 9, we have a solid capital position as evidenced by the ratios of Interbank, but also of Interseguro and Inteligo. First quarter capital ratios at Interbank are now Basel III compliant following the latest superintendency implementation, which cease a gradual implementation in the minimum required limits for both total capital ratio and Core Equity Tier 1. Core Equity Tier 1 ratio at Interbank is at 11.1% as of March, and total capital ratio stands at 15.2% both including already the effect of dividend distribution.

There have also been some changes in wealth management capital requirements established by the Central Bank of Bahamas, which raised the minimum limit to 12%, and there have also been some additional deductions to capital that have resulted in the decrease of the capital ratio on a quarterly basis. Now, I will focus on six key messages we would like you to take home from this call on Slide number 11. First, the macro outlook continues to be challenging impacting banking profitability. Second, we have implemented IFRS 17 with impacts in the insurance business disclosures end at IFS level. Third, wealth management results still impacted by investments but registers its second consecutive positive quarter in terms of earnings. Fourth, we continue to work on our two-tier digital strategy showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability.

Fifth, we continue to see a positive evolution in our payment business and finally, we continue making progress in our sustainability efforts. On Slide 12, we’re showing the evolution of some of the key macro indicators. GDP growth continues to be low with a revised estimate of 2.5%. Interest rates have been stable in soles at 7.75% and the dollar rate has continuing its upward trend up to 5.25%. The exchange rate is now down to 3.76 soles per dollar at the end of March. It has continued to go down during the next month. Inflation continues high at 8% as of April, but showing a downward trend from the peak of 8.8% of June last year. Moving on to banking on Slide 13. We have strengthened the focus on low risk clients in consumer finance and SMEs, as shown in the quarterly decrease of new loan disbursements in personal loans and SME loans.

Credit and debit card purchases are flat on a quarterly basis, but continue to grow 25% year-over-year. In the same way, balances have increased 6% in the quarter and 27% year-over-year. We continue to see important growth in turnover as both credit and debit cards continue in their path of increased penetration in the country, which will – is still – which is still low. This growth has allowed us to increase market share of around 50 basis points in the past 12 months for the combined turnover. Thanks mainly to our Interbank Benefit loyalty program, our increased focus on e-commerce and high growth product categories and finally to our upselling strategy. There is positive is the fact that we continue to see double-digit growth in banking revenues on Slide 14.

Thanks to double-digit growth in all revenue lines. Net interest income grew 24% with a strong contribution from credit card and personal loans, but also from the repricing of commercial banking loans. Fee income grew 13%, mainly due to the growth of credit cards fee income, but also to the sustained growth in fee income coming from cash management services in commercial banking. Other income at the bank grew 15% year-over-year, mainly due to FX trading income. All in all, total core revenues grew 21% on a yearly basis. Continuous repricing efforts push yield on loans upwards 40 basis points in the quarter and 260 basis points in the year, reaching 10.9% and NIM 10 basis points in the quarter and 100 basis points in the year reaching 5.5%. Risk adjusted NIM has decreased 50 basis points in the quarter, mainly due to the increasing cost of risk of consumer loans.

We have continued to see rising cost of funds, reach 3.6% in the quarter up 40 basis points on a quarterly basis and 180 basis points on a yearly basis. We continue to have though the best loan to deposit ratio among peers at 99% as of March 2023 versus a system average of 104%. On Slide 17, we have seen a pickup in cost of risk as previously mentioned by Luis Felipe up to 3.2%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 5.4% during the first quarter, we have granted some credit card customers rescheduling programs in line with SBS guidelines for the social disruption El Niño phenomenon. Monthly volume of rescheduling increased from an average of S/60 million in 2022 to S/130 million to S/160 million in the first three months of the year, representing around 6% of the credit card portfolio as of the end of March.

As of the end of April only a small portion of these loans have matured, for which it is still early to understand the consumer payment behavior, which we will closely monitor and manage during the next four to six month when most of these facilities mature. NPL coverage ratio continues to be very high at bank level at 178% and even more in retail banking at 252%, much higher than the 179% pre-COVID. Now, let’s move to the second key message of this presentation related to the insurance business and the newly adoption of IFRS 17, which mainly impacts annuities business. On Slide 19, the first quarter earnings of S/31.3 million with a 40% ROE are the first results under IFRS 17. This quarter, we have registered some negative impacts in our investment portfolio of an impairment of a fixed income investment, plus the negative impacts on real estate valuation from the depreciation of the dollar.

Moreover, we have registered a positive translation result from the devaluation of dollar again, as with the liabilities and their IFRS, we have a higher position in liabilities in dollars. On Slide 20, there has been a decrease in annuities due to a contraction of the market, an increased competition, but our market share remains strong for annuities at 25%. Both individual life and retail insurance businesses continue to grow double-digit year-over-year or 28% and 17% respectively. On Slide 21, the quarterly return over the investment portfolio came at 6.6% below the extraordinary heights fourth quarter 2022, that 25% above the previous year. On wealth management, the wealth management performance is still impacted by market conditions on the other income profit line.

Good news is the asset under management evolution is positive this quarter with contribution from both our offshore wealth management platform as well as the local mutual fund business. On Slide 26 to 28, positive news is in our digital indicators continued to show nice trends when compared to the previous year. Still, we believe there is a way to go in moving these indicators harder. As of March 2023, digital customers reached 71% of customers who interact with the bank during the last 30 days, up 6 points in the past year. And digital sales reached 60% up 1% from last year. We continue to see an important number of new digital accounts being opened for both individuals and businesses. For example, as of the end of March, 96% of new businesses account were opened digitally.

NPS for digital retail customers continues its path to become a top end NPS in the next years, reaching 47 points this quarter, improving 2 points versus previous year. On Slide 27, insurance digital indicators show positive developments as well with Vida cash life premiums and digital product reaching 35% of total life premiums. Wealth management digital journey is also underway with 41% of digital transaction within the local business conducted on our digital platform. On Slide 28, in line with our digital strategy, we continue to see an important growth in our customer base of the bank with a 17% increase year-over-year in retail, 29% in digital retail customers and 23% in commercial banking customers, reaching S/5.5 million as of the end of March.

Now let’s move to payments. On Slide 30, we are showing solid yearly growth in key business drivers. Merchants increased 67% year-over-year, reaching S/1.2 million. Transactional volumes grew 24% year-over-year. Moreover, e-commerce transactions are gaining share within our transactional volumes, reaching 16% as of the end of March. Revenues continue to grow nicely, 7% on a yearly basis supported by the increasing the transactional volumes and merchants. EBITDA shows a slight contraction year-over-year, mainly due to an unusually high first quarter 2022 cost by specific seasonal impacts end to a slight decrease in margins. We have been working to accelerate the growth of our payment ecosystem by having all our assets work towards a common strategy.

We are focusing on increasing transactional volumes, offering merchants additional service – services continue to pilot low risk loans to merchants and use Izipay as a distribution network for Interbank products, as well as a source to increase float. On Slide 31 and 32, Plin and Tunki continue with their accelerated growth. Plin reached 11 million customers as of the end of April with Interbank participation still above 40% and Tunki users reached S/2.6 million. Number of merchants continued to increase as well or 59% year-over-year for Plin and 56% for Tunki. The number of transactions has continued its strong growth or 7% only the month of April for Plin and 6% for Tunki. Plin and Yape interoperability has just started. This is an important development for financial inclusion in the country, which the central bank has encouraged and which should help to bring more people into the financial system, reducing use of cash, which continues to be high in the country.

We expect to benefit from more digital transactions, less cash, more data, and increased float. On Slide 34, moving to our ESG update, we have continued to enhance our sustainability strategy upon our focus areas. On our environmental front, Interbank has received a minimum recognition for its carbon footprint measurement and along with Interseguro and Inteligo awarded a certification on behalf of Greenhouse Gas Protocol for the measurement of their GHG emissions. Our latest developments on the social front, include being all four subsidiaries in the top 10 positions of the Great Place to Work Peru 2023, as well as the development of further contents and learnings through our financial services education platform Aprendemas. Finally, on our governance front, we have been included for the second year in the S&P ESG sustainability index, along with other 13 companies that carry out the best sustainable practices.

Moreover, our recent published Interbank sustainability report for the year 2022, summarizes our performance on the environmental, social and governance fronts under the Global Reporting Initiative framework. To strengthen our sustainability culture, we have co-designed with Dalberg our first IFS sustainability forum that involve the participation of our four subsidiaries to reinforce our sustainability commitment. Now, let me give you an update on our operating results for the first quarter 2023. Total capital ratio of 15.2% in Core Equity Tier 1 ratio of 11.1% with new basal free implementation and after dividend distribution are above our guidance. ROE of 13.3% in the quarter has been impacted by cost of risk and investment results. Year-End ROE recovery will depend mostly on the recovery of those two factors.

Loan growth of 15% is above our guidance, though, we expect some moderation in the coming months. NIM for Interbank was 5.5% when excluding the impairment effect in line with guidance. Cost of risk for banking was 3.2% in the quarter, slightly above the higher end of the guidance. Following quarters might continue to be challenging depending on the behavior of repayment of the reschedulings done this quarter and the overall behavior of the consumer portfolio. New guidance for efficiency ratio at IFS level is to be below 36%. This first quarter efficiency ratio at IFS was 33.3%, and the efficiency ratio for Interbank was 37% this quarter better than guidance. Now, let me recap the six key messages of this presentation. First, the macro outlook continues to be challenging impacting banking profitability.

Second, we have implemented IFRS 17 with impacts in the insurance business disclosures as well at IFS. Third, wealth management result are still impacted by investments. Fourth, we continue to work on our two-tier digital strategies showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fifth, we continue to see a very positive evolution in our payment business and ecosystem. And finally, we continue to make progress in our sustainability efforts. Thank you very much. Now we welcome any questions you might have.

Q&A Session

Operator: Thank you. At this time, we will open the floor for your questions. First, we will take the questions from the conference call and then the webcast questions. [Operator Instructions] Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.

Operator: Our next question will come from Juan Recalde with Scotiabank. You may now go ahead.

Operator: Our next question will come from Yuri Fernandes with JPMorgan. You may now go ahead.

Operator: [Operator Instructions] Our next question will come from Carlos Gomez with HSBC. You may now go ahead.

Operator: At this time, we’ll take the webcast questions. I’d now turn the call over to Rafael with InspIR Group.

Operator: There appears to be no further questions at this time. I would like to turn the floor back over to Ms. Casassa for any closing remarks.

Michela Casassa: Okay. Thank you very much. Thanks again everybody for joining us in our call today. And we will see everyone back again during our second quarter earnings call. Thank you. Bye-Bye.

Operator: This concludes today’s conference call. You may now disconnect.