Intercorp Financial Services Inc. (NYSE:IFS) Q4 2023 Earnings Call Transcript February 13, 2024
Intercorp Financial Services Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Intercorp Financial Services Fourth 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 will open the floor for questions. [Operator Instructions] It is now my pleasure to turn the call over to Ms. Valentina Porto of InspIR Group. Ma’am, you may begin.
Valentina Porto: Thank you, and good morning, everyone. On today’s call, Intercorp Financial Services will discuss its fourth quarter 2023 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer, Deseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo; Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They’ll be discussing the results that were distributed by the company yesterday. There is also a webcast video presentation to accompany the 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 646-940-8843. 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 do not account for future economic circumstances, industry conditions, the company’s future performance, or financial results. As such, statements are made 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 all and welcome to our fourth quarter and full year 2023 earnings call. I want to thank you very much for attending. I want to start by making a brief summary of our strategy at IFS. You know that our aspiration includes: to become the leading digital financial services solution for clients, providing profitable products and services in our key businesses with the best digital experience for our customers, based on operational excellence and levered on advanced analytics and the best talents are our competitive advantage. This is the strategy we are employing and we continue to execute it with a long-term vision. Regarding economic environment, 2023 was a challenging year in Peru with virtually no GDP growth, and a contraction in domestic demand which translated into a deterioration of the payment capabilities of our retail customers.
On the positive side, inflation decreased consistently during the second half of 2023 and the central bank has reduced the soles reference rate by 100 basis points during the year to 6.25%. Also, expectations of a strong El Nino phenomenon have decreased and for 2024, GDP growth of around 3% is now expected, which is a good recovery versus last year. Despite this challenging environment, IFS continues to show resilience in its core operations. In 2023, we grew our customer base and revenues and we continue to consolidate our results of our digitalization efforts. At Interbank, market shares across key business lines remain strong despite moderation in consumer loans as we are still digesting increased levels of cost of risk, mainly in the consumer finance segments.
Despite of the challenging conditions, Interbank remains well-provisioned and well-capitalized. At Interseguro in 2023, we continued growing in premiums of individual life and retail insurance, while consolidating market leadership in annuities. Investment results continued to be solid in the company. Although global market conditions impacted negatively our investment results in our wealth management business, in 2023, Inteligo’s results recovered from the negative profit posted in 2022. Finally, on payments, despite growth in merchants, volumes have moderated in 2023 and this has taken a toll in anticipated (ph) results. However, Interbank and Izipay continued working on creating synergies, while PLIN continues to accelerate within a fully interoperable B2B system.
We remain confident that IFS will continue generating sustainable returns in the coming years as we are being cautious with our operations. Given the scenario we’re facing today, we continue working on our long-term strategy, which is to ultimately empower all Peruvians to achieve their financial well-being. Now let me pass it on to Michela so she can give you a detailed review of our results. Thank you.
Michela Casassa Ramat: Thanks, Luis Felipe. Good morning and welcome everyone to Intercorp Financial Services year end 2023 earnings call. Today, we will review five sections of our earnings presentation, starting with the macro outlook for Peru. On Slide 3, complementing what Luis Felipe mentioned, the decrease in GDP and in inflation for four quarters in a row has triggered the first cuts in the soles rate, driving it down from the peak of 7.75% to 6.25% as of today. Inflation has decreased from a yearly 8.8% at the peak of June ’23 to 3% as of January, already within the central bank’s target. And exchange rate has remained relatively stable. 2024 is expected to be a year of recovery for the Peruvian economy with an expectation of 3% GDP growth, mainly due to the following reasons.
First, the base effect versus the first quarter 2023, as no major disruption is expected now that El Nino seems to be cooling down. Recovery on public investment after the first year of the newly elected regional government. And lastly, more political stability which should positively impact private investment. On Slide 4, we wanted to point out your attention on the latest news on El Nino. After an inflection point in the probabilities of a strong to moderate El Nino as of the end of 2023, we have started the year with very high probabilities for a non-to-weak Nino. This is very good news for the country as the economic recovery could speed up if no further disruption takes place in the coming months. On Slide 5, we are providing the main operating trends for the year ending 2023 which are all within the latest guidance provided during September.
First, we continue to register sound capital levels with Core Equity Tier 1 ratio closing the year at 11.8% and total capital ratio at 15.5%. There has been further moderation in the yearly total loan growth to 6% as of December and 7% in consumer loans and a stabilization of NIM at 5.5%. We continue to see good efficiency levels both at IFS and at the bank level as we are strictly monitoring and managing cost, especially at the bank which has reached a cost-income ratio around 37% as of year-end, a strong improvement versus last year mainly due to the good operating leverage. Cost of risk continues to be high in consumer lending, pushing the bank year-end cost of risk to 4.3% in the lower range of the latest guidance. IFS ROE for the full year 2023 stands at 11.3%, impacted by cost of risk at Interbank and soft investment results at Inteligo slightly above the latest guidance.
Now let’s move to the second section of the presentation which focuses on profitable growth. On Page 7, we see a continuous growth of customer base at IFS or 11% year-over-year in banking, 6% in insurance, 9% in wealth management, and 25% in payment merchants. On Slide 8, in line with a previously mentioned macro scenario in previous quarter, we have further moderated banking activity by tightening credit standards which had an impact in credit and debit card purchases as well as in retail and SME loan disbursements. Reduced activity in banking and increased costs of risk in the consumer portfolio had impacted the banking earnings and ROE, while investment returns impacted wealth management results. This quarter though, we have positive news in the insurance business which posted solid investment results.
With this, IFS earnings are at PEN286 million and ROE at 11.6% for the fourth quarter, driving the full year earnings to PEN1,080 million and ROE to 11.3% as shown in Slides 9 and 10. On Slides 11 and 12, good news in top line as total revenues continued to grow, 4% in the quarter and 10% for the full year, thanks to the growth register in banking of 10%, wealth management growing more than 8 times from a low base in 2022, insurance growing 1% and payments 5%. On Slides 13 and 14, we wanted to give you more details on the risk profile of the portfolio. First of all, we wanted to mention that 44% of Interbank’s portfolio is focused on commercial banking, which continues to behave nicely mainly due to our conservative approach which has always focused on low-risk clients and has had a small participation in small and micro companies.
This conservative approach has allowed us to maintain a lower PDL versus our peers to balance our higher focus in the riskier consumer portfolio. On the consumer portfolio, we have three different risks. First, the unsecured consumer portfolio, which is the one being impacted by the macro scenario and which represents 22% of the total loan book. Second, mortgages, which are also 22% of the loan book, and third, payroll deductible loans to the public sector employees, a low-risk segment which represents 12% of the total loan book. This quarter, cost of risk of the bank remains high at 5.2% with retail cost of risk at 8.3%. Coverage ratio for the retail portfolio remains strong at 194% and above pre-COVID levels. Commercial banking cost of risk has seen a slight increase with an improvement in coverage ratio.
On Slide 14, we are giving you an update of the reschedulings in the consumer loan book. During the last quarter of 2023, these reschedulings represent 20% of the unsecured consumer loans and have increased only PEN100 million. Payment behavior for performing loans is different for customers with reschedulings. The unpaid portion for regular clients is only 2% while it is around 14% for rescheduled clients for installments matured as of December. Finally, on this section on Slide 15, we wanted to highlight the tight management of costs we continue to pursue, which shows a 5% decrease in total expenses at IFS for the fourth quarter of 2023 and 6% reduction at Interbank versus the previous year. With this, total expenses for the full year have only increased 2% at IFS, maintaining the efficiency ratio below 37%, and has increased only 1% at Interbank, driving the cost-income ratio down more than 300 basis points to 37.3%.
Moving on to the digital performance section of the presentation on Slide 17 and 18, we are continuously building 100% digital solutions for our customer journey across our businesses. We have positive news in our digital indicators, which continued to show nice trends when compared to the previous year. As of December ’23, digital customers reached 75% of retail customers who interacted with the bank during the last 30 days, up 4 points in the past year. Digital sales reached 63% and our digital self-service indicator has improved sharply from 77% to 82%. MPS has seen a deterioration for the first time in many quarters, mainly impacted by the actions related to risk profiling. The insurance and wealth management digital indicators show positive developments as well, with digital self-service reaching 59% at Interseguro, so our sales reaching 82% and digital premiums still small, but reaching 10% at Interseguro, and digital transactions for fund management reaching 48% at Interfondos.
Now let’s move to some more details on the performance of our four key businesses on Slides 20 to 30. On Slide 21, we have seen 10 — we have seen a year-over-year growth at the bank this quarter with net interest income growing 13%. Let me go back, sorry. On Slide 20, started with banking, and in line with our focus strategy, we continue increasing market shares reaching 15.1% in retail deposits, 9.6% in commercial loans, and retail loans at 19.1% as of December 2023. There are a couple of things that we have been working hard in the past month and that are bringing nice results as shown in the market share increase to 14.7% in payroll inflows from 13.6% one year ago and the 17.7% market share in sales financing, up from 11.7% just 12 months ago.
Now on Slide 21, we have seen a 10% year-over-year growth at the bank this quarter, with net interest income growing 13%, coming mainly from increased volume and yield on loans, 2% growth in fee income and 4% in other income. On Slide 23, there has been a decrease in yield on loans of 30 basis points reaching 11.3% and NIM decreased 10 basis points to 5.5%. Risk-adjusted NIM decreased in the quarter in line with the increase in the cost of risk of consumer loans. Good news this quarter is that cost of funds remain flat at 4.2% as shown in Slide 24 as we start to see the first impacts of a decrease in the soles rate. Cost of funds has been rising in the past at market level, mainly due to two reasons. First, a continuous migration of retail deposits to more expensive term deposits, both in soles and dollars, and the higher remuneration to commercial and institutional, mainly in dollars as rates have continued to increase.
Correction in overnight deposits rate in soles continues, though at a slow pace. Our loan-to-deposit ratio of 103% is in line with the industry’s average. Positive news is that the deposits continue to increase its share in total funding and that retail deposit market share has continued to increase. Now moving to insurance. Premiums were down 4% in the quarter and market share of annuities was 26.4% as of November ’23. Individual life and private annuities business lines continued to grow nicely quarter-over-quarter, or 6% and 40% respectively, increasing their contribution to total premiums. On Slide 25, the quarterly return of the investment of the portfolio came extraordinarily high at 7.2% compared to the previous quarter, mainly due to some dividends received from particular investments.
The insurance portfolio is composed of 86% fixed income, 9% real estate, and 5% equity and mutual funds as of December ’23. Let me move now to wealth management. Good news in wealth management with the yearly growth in asset under management and 4% growth on a quarterly basis. This quarter, we saw a negative impact from investment results, but the core business continues growing. On payments, we want to give you a summary of the developments of our payment ecosystem. Growth in merchants and volumes continues with some moderation. Izipay merchants increased 25% year-over-year, reaching 1.3 million while transactional volumes grew 3%. E-commerce transactions are growing at the same pace and represents 16% of our total transactional volumes as of the end of December.
In the case of IzipayYa, our solution for micro-merchants growth in merchants was 35% and was very strong in transactional volumes or 70%, all of which are linked to an Interbank account. On Slide 28, Izipay represents a growing and profitable operation and is working on creating synergies with Interbank. Revenues continued to grow 1% on a yearly basis and 13% in the quarter, supported by the increase in transactional volumes and merchants with some pressures on MDRs coming from increased competition. We have seen a moderation in the transactional volume this quarter in line with the decreasing economic activity as market share continues to increase, reaching 57% in physical acquiring and almost 24% in virtual acquiring. EBITDA has seen a contraction in the quarterly figures due to margin compression in a more competitive landscape.
We have been working to accelerate the growth of our payment ecosystem by having all of 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 to increase float. We are starting to see results from this strategy as evidenced by the following four key figures. 25% yearly increase in Izipay flow coming to Interbank accounts and 48% increase in average balances from merchants. 1.5 times yearly increase in transactional volumes from micro-merchants, thanks to IzipayYa and more than 5,000 new credits disbursed in our test of the new lending model to merchants.
On Slide 29, PLIN has been accelerated by the new landscape of interoperable P2P system. PLIN reached more than 14 million users as of the end of December with Interbank participation at 46%. The volume of transactions has continued its strong growth, reaching 2.4 times the volume registered the same quarter one year ago. PLIN and Yape interoperability started in April and QR code interoperability was added in September. This has been an important development for financial inclusion in the country, which the central bank has encouraged and which should help to bring more Peruvians into the financial system, reducing the use of cash which continues to be high in the country. Number of transactions have increased 3.3 times since the interoperability started.
On Slide 30, moving to our ESG update. We have reinforced our sustainability strategy. Our efforts in the last 12 months have allowed us to reach 61 points in the 2023 corporate sustainability assessment with an improvement of 11 points on the environmental dimension. Moreover, we have been included in the Standard & Poor’s Global Sustainability Yearbook 2024 based on our 2023 CSA score. On the social front, IzipayYa in our financial services education platform Aprendemas are positively contributing to financial inclusion. On the environmental front, we are increasingly involved in green and sustainable financing by helping our customers grow their businesses in a sustainable way. Interbank has obtained a green certificate from Enel that certifies the consumption of renewable energy in 2023 at our main headquarters and has signed a contract to supply this cleaner energy until 2025.
Now, let me move to the final part of the presentation where we provide the guidance for 2024 and some takeaways. On Slide 32, 2024 guidance goes as follows. First, capital ratios to remain at sound levels with total capital ratio above 14% and Core Equity Tier 1 ratio at around 11%. Second, a continued path to recovery towards our midterm target in core profitability with 2024 IFS ROE above 12%. In terms of loans growth for 2024, we expect mid-single digit growth in total loans. For 2024, we are focusing the NIM guidance on Interbank. We expect Interbank NIM to be stable and above 5.5%. Cost of risk is expected to remain high in 2024 above pre-COVID levels and reach a number below 4.3%, thus below 2023. It is important to remember that we included a moderate Nino phenomenon in our forward-looking variables during the second half of 2023.
And last, we will continue to focus on efficiency, especially on positive operating leverage. IFS efficiency ratio is expected to be around 37%, one of the best in the region. On Slide 33, let me finalize the presentation with some key takeaways. First, after a weak 2023, macro sentiment for 2024 is relatively positive with minor disruption expected from El Nino. Second, good performance in insurance business and positive investment results in wealth management. Third, retail, and more specifically consumer finance cost of risk remains high, but with strong coverage ratios. Fourth, tight management of costs reflected in solid efficiency levels. Cost of funds stabilizing on soles rates outlook and we are strengthening our digital positioning and presence in payments.
Thank you very much. Now we welcome any questions you might have. Let me only just mention that we have recently been notified that IFS has been included again in the MSCI small cap index. Now we welcome any questions you might have.
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Q&A Session
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Operator: Thank you. At this time, we will open the floor for questions. First, we will take the questions from the conference call and then the webcast questions. [Operator Instructions] And the first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.
Ernesto Gabilondo: Thank you. Hi, good morning, Luis Felipe and Michela, and good morning to all your team, and thanks for the opportunity to ask questions. I have three questions from my side. The first one is on your cost of risk guidance. So given that El Nino seems to have changed to a low non-impact, how should we think about the cost of risk in the first quarter of this year? You have a very strong reserve coverage ratio. So just wondering if there is a possibility that at some point in ’24, we can have some reversal of provisions related to El Nino? And also, when do you expect the cost of risk to normalize to historical levels? Because the cost of risk for this year above 4.3, it continues to be high, your historical levels.
Then my second question is on your NIM expectations. Want to double-check if I’m correct, can we expect NIM to behave between stable and NIM expansion of 20 basis points this year? And also would like to hear from you what should be the key drivers for NIMs in this year. I don’t know if it will be the recovering loan growth, probably more appetite on consumer segment after leaving behind the impact of El Nino and also lower funding costs now that we are going through this easing cycle. And my last question is on expenses, we have seen that IFS has been doing an important effort to maintain costs under control. So how should we think about OpEx growth this year? Should be in line with inflation, a little bit above inflation? Just wanted to understand if you will continue to do investments in technology or disruptive initiatives.
I also wanted to break it down of how much of the OpEx will be related to that. And also related to this question, I will also appreciate if you can share with us in which part of the P&L should we start to see the results or the benefits of all these new investments? Thank you.
Luis Felipe Castellanos: Okay. Thank you very much, Ernesto. Let me give a crack at the introduction to the answer and probably Michela will help us with a little bit more detail. In terms of cost of risk guidance, El Nino actually, what’s going on is we don’t expect to have as strong rates and damage to certain infrastructure due to El Nino. However, we are living through El Nino phenomenon. It’s been the case for the whole most of 2023 and we expect it to continue. As you’ve seen, temperature is really high, the sea temperature, the ocean temperature, is also high. So even though we don’t expect a strong disruption to infrastructure unless the rains that are not expected now to happen, strongly do appear. No, that’s something we cannot continue to rule out.
The El Nino still impacts many of the industries of work in Peru, like fishing, like agriculture, in certain ways. So even though –again, the rainfall will be more moderate or not very important, we do see some disruption there. So we have to be careful when we talk about El Nino. Having said that, we do expect the second half to be better than the first half. And Michela will probably elaborate on that. And then on NIM, I think she also has some of the details. And in terms of expenses, the only thing I can tell you, and she can do some of the breakdowns that what we know as management is that what we can control is costs, and we’re very focused on that. And that discipline will continue and it’s built in two basic premises. Austerity in our operations.
But the second premise is we continue investing in building our future. So we won’t sacrifice the building of our real future for having this mindset of course going forward. No. But do we run a very focused on austerity culture that, as you can see, is giving good results in terms of operating leverage. Having said that, let me pass on to Michela, who I’m sure will give you a little bit more of detail on each of the subjects that you have raised. Thank you very much.
Michela Casassa: Thanks, Luis Felipe. Hi, Ernesto. Thank you for your questions. Let me go in order first with your question related to cost of risk. Okay. As you can see, the guidance that we are providing is to be below cost of risk of 2023. And if you see at the evolution of cost of risk during 2023, it has been going up during the third quarter and to a minor extent during the fourth quarter. Why is that? And we have discussed in the previous conference call, is specifically the consumer lending portfolio, the unsecured portion, and specifically related to the fact that with no GDP growth and sustained inflation, there has been a deterioration of the payment ability of Peruvian families. So now, in the second half of 2023, we also included within the forward-looking variables of our provisions a moderate Nino.
And at the time it was something above PEN100 million. For next year what we are expecting is a first quarter, which is still high even with no Nino. And this is because the picking up of all the reschedulings that we have been doing during 2023 has matured a portion of it in the third quarter, fourth quarter, but we will still see some of that during the first quarter of 2024. After that, we should expect, or we are expecting downward trends in the cost of risk. And to the last question of the cost of risk part not related to when should we see historical levels, I think we will not go down to below 3% as was pre-COVID. And this is just because of the portfolio composition. Yes, we are expecting 2025 to be a level with much lower provisions at 2024, but I wouldn’t expect that number to be below pre-COVID levels.
Now let me move to NIM expectations. We are providing a guidance of above 5.5% relatively stable NIM. And this is because there are opposing trends within NIM during 2024. There are some positive trends, and that for sure is related to cost of funds, specifically cost of funds in soles as rates have already started to go down. But there are also some negatives related to yield on loans. And this is coming specifically from higher percentage from commercial loans and lower percentage in the mix of consumer loans, given that we have been decreasing the portfolio in the last months of 2023, and we expect that portfolio to continue shrinking for some months in 2024. Okay, so putting all of that together, this is why we are giving a stable NIM expectation for 2024.
