Intercorp Financial Services Inc. (NYSE:IFS) Q4 2022 Earnings Call Transcript

Intercorp Financial Services Inc. (NYSE:IFS) Q4 2022 Earnings Call Transcript February 18, 2023

Operator: Good morning and welcome to Intercorp Financial Services Fourth Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today’s conference is being recorded. 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 fourth quarter 2022 earnings. We’re very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive 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 on Monday, February 13. 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. These are not 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 on Monday, February 13. 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 very much. Good morning and welcome to our fourth quarter and full-year 2022 earnings call. Thank to you all for attending today’s call. I wanted to start by making a brief summary of our strategy, the that we are deploying on IFS in order to reach we have shared with you before. Our purpose at IFS is to empower all Peruvians to achieve their financial well-being. We’re committed to do so through our four operating business segments. Our aspiration includes: to increase our customer base by leveraging data and analytics with sound rich management skills; to provide the best digital experience based on operational excellence, this while building a leading digital financial platform to provide profitable solutions in our key businesses that have a clear strategic focus on payments, consumer financing, wealth management, and life insurance.

To achieve all these goals, we continue to work on four main pillars. We are developing a simple, resilient, and scalable technology platform for current and future growth. We are becoming a data-driven organization with deep understanding of Peruvians and consumer preferences. We are focused on attracting and developing the best talent within our remote-first framework that allows us to increase productivity and to reach the best talent regionally. And we want to become a leader in sustainability. We’re adopting stronger and more widespread ESG practices to drive value creation for all of our stakeholders. This is our strategy and we continue to execute it with a long-term vision. We know that we are operating in an environment of macro and political instability in our country.

However, this should not distract us from reaching our objectives. We are being cautious with our operations given the scenario we’re facing, but we remain committed to helping Peru and Peruvians to overcome these challenging times. Regarding GDP growth in Peru, December’s monthly figure is expected to be announced today. But looking at the past month’s figures and considering that we have had disruption occurred at the end of last year, we would expect weakened full-year growth levels. for 2023 show most forecasts pointing to less than 2% growth this year. Nevertheless, we remain confident that Peru’s fundamentals, as well as a low problems and the accelerated trend of digital payments provide plenty of opportunities for our businesses. As you will see during this call, IFS continues to show resilience in its core operations.

Our banking franchise delivered solid results in 2022 with growth in net interest income and fees offsetting the requirement of higher provisions, while delivering clear improvements in efficiency. Our insurance segments continues to recover its investment performance, and the Wealth Management segment posted positive numbers this quarter after two quarter of losses related to market conditions. Finally, our payments ecosystem continues to expand and it’s in good shape to seek further growth. With this, let me pass it on to Michela for a detailed update of our results. Once again, thanks very much for attending our call.

Michela Casassa: Thank you, Luis Felipe. Good morning everybody and welcome again everyone to Intercorp Financial Services fourth quarter and full-year 2022 earnings call. This time, we will review our financial highlights and key messages, but also our guidance for 2023. All the results you will see today are very much aligned with the strategy that we are deploying, as Luis Felipe has just mentioned, with a clear priority on digital growth with focus on profitability. I will start with a brief summary of financial highlights on Slides 3 to 11 of the presentation. On Slides 3 and 5, IFS had another strong quarter in banking and payments, good results in insurance, and the first positive quarter for Wealth Management, showing a recovery in our investment portfolio.

With this final quarter, the full-year shows very strong core results in banking, insurance, and payments, but still a negative year for Wealth Management. Reported earnings in the quarter came at PEN403 million, which represents a 3% increase in recurring earnings quarter-on-quarter and shows an important growth in IFS earnings of more than 50% on a yearly basis. ROE for the quarter came at 16.5%, still impacted by a low ROE in Wealth Management of around 8%, insurance with 13.8%, and as previously mentioned, a strong quarter for banking and payments with 20.2% and 22.3% ROE, respectively. When looking at the full-year figures, reported earnings reached PEN1,671 million or PEN1,448 million when excluding the one-off registered in the third quarter, due to the accounting revaluation from book value to the price paid of the previously owned 50% of Izipay at Interbank.

In the annual comparison, earnings showed a decrease of 7% in the reported figures or 20% in the normalized figures, which is mainly due to the very strong and above average results on the investment portfolio in insurance and Wealth Management during 2021, which turned negative in the case of Wealth Management for 2022. This specific trend on the return on investment portfolio is penalizing the overall yearly trends. Reported ROE for the full year of IFS was 17.7% and was 15.5% when excluding the one-off. The low normalized annual ROE was mainly due to the negative impact from investments as ROE for banking, insurance and payments for the full-year are all high at 19.8%, 26.6%, and 26.7%, respectively. In banking, we had a positive quarter in core activity with some signs of moderation, due to the macro scenario.

The shift in loan mix and repricing continue to positively impact NIM this quarter up to 5.4%. As already anticipated in our previous conference calls and in-line with the change in portfolio mix, cost of risk has reached 2.5%, ending the year at 1.9%. This was a very good quarter for the operating leverage of the bank, which drove efficiency ratio down to 38%. On insurance, earnings were shy due to a stronger discipline on pricing and rates paid for annuities, which slightly impacted market share, and ROE of 13.8% was below average levels, despite another strong quarter and investments with return on the investment portfolio at 7.4%. In Wealth Management, results recovered strongly than previous quarter, reaching a positive result with a 7.6% ROE, still in the path to recovery, however well below sustainable profitability.

Finally, on our payment business, on one side, Izipay continues with a solid growth in business with acquiring fees up 8% on the quarter and 32% year-over-year, strong growth in number of merchants and transactional volumes and gaining market share within our volumes in e-commerce this year. Additionally, Plin and Tunki continue with very strong growth of users and transactions as we will see in more detail further on in the presentation, which should help us to benefit from the near future interoperability and to advance with our payment ecosystem. Among the key performance indicators for the quarter in the year on Slide 6 and 7, I would like to highlight the continuous improvement in the NIM of IFS. There has been a 20 basis points improvement in the quarter with NIM, driving it up to 5.4% and the full-year up to 5%.

Another ratio to highlight is the quarterly efficiency ratio, which stood at 34.8%, going back to pre-pandemic levels. On Slides 8 and 9, total recurring revenues for IFS grew 6% in the quarter, thanks to the growth registered in banking of 7%, payments of 15%, and the recovery in revenues from Wealth Management from PEN3 million to PEN56 million this quarter. On a full-year basis, IFS revenues increased 7%, thanks mainly to the increase in revenues of 15% in banking and 22% in payment. On Slide 10, the efficiency ratio of IFS was 34.8% in the quarter. The full-year efficiency ratio was 36.1% and would be 37.4% when excluding the positive impact from the one-off in revenues. Also, it is important to note that there is an impact in the reported cost fee use of IFS of 2022, due to the consolidation of Izipay figures starting April, which reflects a higher increase in expenses as they are included this year and they are not considered in of 2021.

Normalizing Izipay effect in 2021, expenses at IFS grew 8% on a quarterly basis and only 3% year-over-year. This is a very material point, as it makes a strong difference with the reported figures and represents a key differentiating element of IFS profitability. We believe this will be the case as revenues continue to increase faster than cost, thus improving the operating leverage of the company further. In fact, 2022 has been a good year in terms of recovery of the efficiency ratio and the positive operating leverage at the banking business, which is the main contributor to the overall cost base of IFS. In the fourth quarter, the efficiency ratio of the banks stood at 37.9%, down from 42.2% in the fourth quarter of 2021. The operating leverage of the bank for the fourth quarter of 2022 was very strong with revenues growing 20% year-over-year and costs growing only 2%.

When looking at the yearly figures, the bank cost base has increased 8%, mainly due to three reasons. The higher increase, 21%, is the increase in technology costs and new ventures, which include the technology expenses for our digital transformation, as well as new investments in payments. A 6% increase in personnel costs, which is mainly coming from the increase in mandatory employee profit sharing in-line with the improvement of the local GAAP earnings. An 8% increase in variable costs related mainly to credit cards, which is below the percentage increase in credit and debit cards purchases we generate fees and financing volumes. Other expenses have grown single-digit, reflecting our continuous cost efficiency efforts. Moreover, we have continued with our branch optimization efforts, reaching a total reduction in number of branches of 43% or more than 120 branches from the peak in 2016.

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On Slide 11, we have a solid capital position as evidenced by the ratios of Interbank, but also in Interseguro and Inteligo. Core Equity Tier 1 ratio at Interbank is at 12% as of December 2022 and the total capital ratio stands at 15.1%, well above the industry’s average of 14.4%, despite the strong growth in loans registered this year. Starting January 2023, we will implement some changes to the calculation of capital ratios in-line with new regulations published by the superintendency with limited impact for the banking segment and some changes in Wealth Management established by the Central Bank of Bahamas. Now, I will focus on the six key messages we would like you to take home from this call on Slide number 13. First, the macro outlook continues to be challenging and impacted by the political uncertainty.

Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, 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. Fourth, milder quarterly recovery in Wealth Management and above average investment results in insurance. Fifth, we continue to see a positive evolution in our payments business; and finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62 points improving 9 points from last year and a figure that is 16 points above the world’s industry average. On Slide 14, we are showing the evolution of some of the key macro indicators.

GDP growth continues to be low with an estimate of 1.8% for the yearly growth of the fourth quarter. Interest rates have continued to increase with the central bank’s reference rate at 7.75% And the dollar rate at 4.25%. However, there has been a post of the new increases in the soles rates during the last week central bank meeting. The exchange rate has registered the ups and downs in the past weeks and it’s now down to 3.81 soles per dollar at the end of December. Inflation continues high at 8.5% as of December, reverting the first signs of change in trend due to the disruption that’s registered by the protests in different parts of the country, mainly in the south, and the blockage of highways. On Slide 16, moving to the good news of banking, we have continued to see a good performance in activity in the quarter, despite continued slowing down in financing growth as discussed during the previous calls as we have just adjusted our credit underwriting standards in specific sub pockets of low income clients which start to see some impacts of the slowdown of the economy and sustained inflation and now on top of the disruption of December and also January.

Moreover, due to the disruption in payments from clients caused by the protests, especially in the south of the country, but some extent also in other regions, we have given additional payment facilities to clients by rescheduling some payments in consumer finance, and to a minor extent, also in SMEs. Despite these, credit cards and debit cards purchases continue to increase 7% on a quarterly basis and 28% on a yearly basis. In the same way, balances have increased 8% in the quarter and 29% on a yearly basis in line with the industry. We continue to see important growth in purchases as both credit and debit cards continue in their path of increased penetration in the country, which is still low. This growth has allowed us to increase market share around 100 basis points in the past 12 months for the combined purchases, thanks mainly to our Interbank benefit loyalty program, our increased focus on e-commerce and high growth product categories.

And finally, also thanks to our upselling strategy. New disbursement of personal loans have seen a recovery when compared to the previous quarter, has registered lower year-over-year growth of 8%. On the SME front, disbursement continue to be strong in the fourth quarter and are 17% above third quarter and twice the level of last year and are helping this portfolio to grow nicely during 2022 starting from a very low base of less than 3% market share in the segment. On Slide 17, we continue to see solid double-digit growth in banking revenues, thanks to double-digit growth in net interest income and fee income. Net interest income grew 23%, with a strong contribution of net interest income coming from credit cards and personal loans, but also from the repricing of commercial banking loans.

Fee income grew 12%, thanks to the strong growth of credit cards fee income, due to the evolution of credit and debit cards purchases, but also to the sustained strong growth in fee income coming from cash management services in commercial banking. Other income at the bank recovered and was up 9% year-over-year. All-in-all, total core revenues grew 20% in the fourth quarter when compared to the fourth quarter of 2021, a very strong recovery in banking revenues, which continues with a positive operating leverage, as previously mentioned. On Slide 18, we continue to see a strong portfolio shift to higher yielding loans. Retail loans reached 54% of the total portfolio versus 49% one year ago. And moreover, credit cards and personal loans reached 22% of the total loan book versus 18% one year ago.

Reactiva loans as of December represent only 5% of the total loan book, down from 9%, 1 year ago. These effects, together with the increase in the SME loan book, still small, and the increase in rates is pushing yield of loans upwards 70 basis points in this quarter and 220 basis points in the year reaching 10.5%, and NIM, 40 basis points in the quarter and 100 basis points in the year reaching 5.4%. Risk-adjusted NIM has remained stable in the quarter due to the increase in the cost of risk. We have also seen rising cost of funds as we start to see both the effect of the rise in the rates of dollars, funds, and the continuous raises in soles rates as shown on Slide 19. Cost of funds reached 3.2% in the quarter, up 40 basis points in the quarter and 160 basis points in the year.

We have the best loan-to-deposit ratio among peers at 101% as of December versus a system average of 107%. On Slide 20, as anticipated, we see increasing levels of cost of risk in-line with the shift in the loan mix, but also from the impact of the sustained high inflation and the latest disruption in the economy, due to the process. Cost of risk in the quarter was up to 2.5%, already above pre-COVID levels of around 2%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 4.7%, again above pre-COVID level. During this quarter, we have made some adjustments to the calculation of the expected loss, which includes an update of the forward-looking variables, but also apply a more conservative view on the consumer portfolio, shifting expert criteria from commercial banking to retail banking, which resulted in an extraordinary negative impact in retail and a positive one in commercial.

This is the main reason why the reported cost of risk figures show a 6.1% for retail and a reversion of 1.6% in commercial banking. For this reason, the NPL coverage ratio continues to be very high in retail banking at 244%, which is much higher than the 179% that we had recalled. Now, let’s move to the third key message on Slide 23. Our digital indicators show nice trends when compared to the previous year. Still, there is a way to go in moving these indicators further. As of December, digital customers reached 71% of customers who interact with the bank during the last 30 days, up 6 points in the past year. Digital acquisition reached 57%, up 19 points from last year, and digital sales reached 64%, increasing 6 points in the last year, all indicators focused on retail.

We see an important number of new digital accounts being opened, both for individuals and businesses. As of the end of December, 58% of new retail saving accounts were opened digitally, while 94% of new business accounts were opened digitally. NPS for digital customers continues its path to become a top NPS in the next years, reaching 49 points this quarter, improving 3 points versus the previous year. Insurance digital indicators show positive developments as well with SOAT insurance already at 80% and Vida cash life premiums, a digital product, reaching 39% of total life premiums. On Slide 25, in-line with our digital strategy, we continue to see an important growth in our customer base of 18% in retail, 29% in digital retail customers, and 20% in commercial banking customers reaching more than 5 million customers as of the end of December.

On Slide 27 and 28, we are showing improvement in the Wealth Management portfolio and another strong quarter in the insurance portfolio. Wealth Management, on Slide 27, had a positive yet small return on the investment portfolio, almost entirely reverting losses from other income and strongly improving revenues, up to 56 million in the quarter. This has helped improve bottom line results for the quarter, but remain in negative territory in the year in figures. Good news for the insurance segment with another quarter of strong returns on the investment portfolio with ROIC at 7.4% in the quarter, still above average historical levels. Now, moving on to payments on Slide 30. We are showing strong growth in number of merchants and transactional volumes.

Merchants increased 14% in the quarter and 73% year-over-year, reaching more than 1 million. Transactional volumes grew 10% in the quarter and 33% year-over-year. Moreover, e-commerce transactions are gaining share within our total transactional volumes, reaching 17% as of the end of December and in line with our strategy. Revenues continued to grow nicely, 15% in the quarter and 8% year-over-year, supported by the increase in transactional volumes and merchants. We are also including info related to EBITDA this quarter to show the improvement registered this quarter, which reached 26% and 24% year-over-year. 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 services, continue to pilot low-risk loans to merchants, and use Izipay as a distribution network for Interbank products, as well as a source of float.

On Slide 31 and 32, Plin and Tunki continue with their accelerated growth. Plin reached almost 10 million users as of the end of December with Interbank participation as main bank account still above 40%, and Tunki users reached 2.5 million. Number of merchants continue to increase as well or 91% year-over-year for Plin and 65% for Tunki. The number of transactions has seen a strong acceleration in the past three quarters. This quarter, the strong growth of the previous quarter has continued, reaching a 33% quarter-over-quarter for Plin and 45% quarter-over-quarter for Tunki. We are currently working on getting ready for Plin and Yape interoperability. 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.

Technical tests start next week, and we expect full deployment to be ready in April. On Slide 34, moving on to our sustainability strategy, we have continued to build upon our focus areas. Our efforts in the last 12 months have allowed us to improve our Corporate Sustainability Assessment score this year, reaching 62 points, an improvement of 9 points as we announced during our last conference call. But now we are also able to compare this result with the world’s industry average for 2022, which was 46 points. Thus, we are 16 points above that average, which reflects improvements in the environmental, social and governance and economic areas. Our latest developments in ESG include, on the social front, being all four companies in the top 10 positions of Great Place to Work Peru 2023, further contents and learnings through Aprendemas, our financial services education platform with almost 700,000 users, and in the governance front, we have received the Number 1 position by Merco on top companies, both in the reputation category and in the ESG category as Interbank .

Now, let me move to the new guidance for 2023 on Page 37. And let me mention that insurance figures included in the guidance includes preliminary IFRS 17 figures, which are currently under review and which may lead to some adjustments. The guidance reflects a full alignment with our strategy, which has three clear priorities. One, grow client base and top line in a sustainable and profitable way; two, provide a top experience to clients digitally; three, focus on key businesses, including consumer finance, payments, efficient funding, insurance and Wealth Management. 2023 guidance goes as follows. First, we are maintaining the same guidance for the capital ratio, which implies capital ratios to remain at sound levels, with total capital ratio at around 15% and core equity Tier-1 ratio at around 11%.

Second, a continued path to recovery in core profitability with 2023 IFS ROE at around 18%. In terms of loan growth for 2023, we expect again high single-digit growth in total loans when excluding last repayments of Reactiva led by low double-digit growth in consumer loans. For 2023, we are focusing the NIM guidance on Interbank. We expect Interbank NIM to be between 5.5% and 6% after closing 2022 at an average 4.9%. Cost of risk for banking is expected to increase in 2023 and to be above pre-COVID levels and reach a number between 2.6% and 3%. Finally, we will focus on efficiency, especially on positive operating leverage. At this time, we are not ready to include the guidance for the efficiency ratio at IFS level, which we will do during the next quarter once IFRS 17 is fully reflected in the figures.

But we are also adding, as guidance, the efficiency ratio of the bank as it is one of the main drivers of efficiency for IFS. We expect Interbank efficiency ratio to be below 39% for 2023 as we expect revenues to continue growing double-digit while expenses don’t. On Slide 38, let me recap the six key messages of this presentation. First, the macro outlook continues to be challenging and is impacted by the political uncertainty. Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, we continue to work on our 2-tier digital strategy, showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fourth, there has been a mild recovery in Wealth Management in the quarter and above average investment results in insurance.

Fifth, we continue to see a positive evolution in our payment business. And finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62, 16 points above the world’s industry average. Thank you very much. Now, we welcome any questions you might have.

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Q&A Session

Operator: Thank you. The first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo: Hi. Good morning, Luis Felipe. Michela, thank you for your presentation and for the opportunity to take questions. My first question is related to the monetization of the digital initiatives. We have seen in the region that the digital transformation has shifted to profitability versus client growth. And also, we have detected that the monetization is really coming from having digital deposits and digital loans, while the other products like payments, digital insurance, digital wealth management, the electronic marketplace are key to build the ecosystem and the relationship with the client, but are not necessarily the key elements that will monetize the client. On the other hand, we have seen that Peru is not really a country that is facing the competition from fintechs that we’re seeing in Brazil, Mexico or Colombia.

So, can you elaborate on how your digital initiatives would translate into better efficiencies and a higher ROE at a consolidated level? And what would be the time line to achieve that? And then my second question is a follow-up on your 2023 guidance. Just how should we think about the OpEx growth at a consolidated level? Would it be at the same pace of growth that we saw last year that’s most at double digit or do you think will be above inflation plus certain digital investments? Any color on that will be very helpful. Thank you.

Luis Felipe Castellanos: Okay. Hi, Ernesto, thanks for your question. It’s really a very profound question that probably will require many minutes of hours of conversation. But let me take a crack at it to see if at least I can go to start with some of your points. I completely agree with you in terms of a change in the way some companies or firms are looking at their digital efforts, obviously, we’ve seen what happened in the market and now the search for growth is switching to profitability or to more specific income-generating activities. Luckily, I think that’s the view that we’ve had since the beginning. As we’ve mentioned before, we had a 2-tier digital strategy. And the first part of the digital strategy, what we call the first tier, essentially to digitize what we do.

Okay. So basically, there’s no magic there. What we are doing is to be able to provide consumers the ability to do in a digital way, everything they do with the Interbank or Interseguro physically today, but digitally. That has been the premise around what we’ve been doing. So, now like 90% plus of the things that a customer can do with the bank, for instance, can be done digitally. And the focus there has been laser sharp on making sure that that new proposition has lower customer acquisition costs or lower customer serving costs, while providing what you can call traditional banking products, let’s say, but in a digital way. And we’ve made lots of progress there. As you know, 71% €“ 70% plus of our customers do not touch a branch in the interaction with Interbank for the last 30 days, for instance.