Intercorp Financial Services Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to Intercorp Financial Services First 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. After the presentation, we will open the floor for questions. Also, you can submit online questions at any time today using the window on your webcast, and they will be answered after the presentation during the Q&A session. Simply type your question in the box and click submit question. It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its first quarter 2022 earnings. We are 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, Vice President of Retail Banking and Channels of Intercorp. They will be discussing the results that were distributed by the company yesterday, May 12. 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 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 statements do not account for future economic circumstances, industry conditions, or 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.

Thank you, Rafael, and thanks everyone. Good morning. Welcome to our first quarter 2022 earnings call. We really appreciate you taking the time to attend our call, and I hope that you and your families remain safe and healthy. Let me start by giving you a brief overview of the macro and political situation in Peru. Despite accumulated GDP growth figures reaching 3.9% in February, we expect this year's GDP growth to be somewhere between 2.5% and 3%, mainly explained by three factors. One, a less favorable international environment due to global financial conditions, health restrictions in China, and the Russia/Ukraine conflict. Second, a historical increase in production cost and inflation negatively impacting businesses' margins and families' purchasing power. The Central Bank is tightening its monetary policy with the recent announcement of a new 50 basis points rate hike as of yesterday. And third, the level of political uncertainty in our country. We believe that the political front will continue to be uncertain in the coming months, and it will take some time for public and private investment to resume its growth pattern. Despite positive headwinds, in light of commodity prices and exports positively impacting the macroeconomy, IFS continues to show resilience. Our core banking franchise continues to recover with strong growth in consumer financing and commercial banking, with sound risk indicators. We still face volatility in our investment operations, but all-in-all, we have continued our recovery path. As we have mentioned in the past, we strongly believe that our people, our culture, and our ability to adapt to changes through our two-tier digital strategy are our core strengths and the pillars that will allow us to grow profitably in the future. Our deployment of digital products and services continues to evolve, and our franchise continues to grow in the number of customers and in revenues, with sound levels of efficiency. As we will see during the presentation, we recently announced the acquisition of a 50% stake that we did not own in Izipay, a transaction that reinforces our commitment to Peru and completes our 100% ownership of the company. We believe this deal will strengthen our strategic and competitive positioning in the payments landscape in Peru and will allow us to explore new sources of growth and monetization opportunities, both with our retail customers and merchants. At IFS, we continue to make progress and to grow sustainably. We are committed to fulfilling our purpose, which is to empower all Peruvians to achieve their financial wellbeing. 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 and stay healthy.

Good morning, and welcome everyone to Intercorp Financial Services first quarter 2022 earnings call. This time, we will focus on four items on the agenda, which include financial highlights, the announced acquisition of Izipay, our key messages, and takeaways. I will start with a brief summary of financial highlights on slides three to eight. The main highlights are: on slide three, IFS had a good quarter, reaching an ROE of 17.4%, thanks to the strong recovery in core business at Interbank and despite the negative impacts on the investment portfolio, especially at Inteligo, but also at Interseguro. Earnings grew more than 50% on a quarterly basis, thanks to the strong growth in the quarterly results of the core banking business, as well as the partial recovery of insurance and wealth management investment portfolios. On a yearly basis, earnings show a decrease of 24%, mainly due to the extraordinary results registered in the first quarter of 2021 on the investment portfolios of the three subsidiaries, which did not occur this year. On slide four, at Interbank, a strong recovery of core business in the first quarter resulted in a 19.1% ROE. There is solid performance in consumer finance and SMEs, with credit cards and personal loans up 41% year-on-year. We experienced double-digit growth in net interest income and fee income. There is a shift in the loan mix and higher rates driving NIM up, reaching 4.5% in the first quarter, and we continue to have consistent credit quality metrics with a cost of risk at 1.4%. At Interseguro, earnings grew almost threefold quarter-on-quarter, with ROE at 15.7%. Gross premiums plus collections increased 26% year-over-year. The return on the investment portfolio was 5.1%, impacted by negative mark-to-market. Interseguro continues to be the market leader in annuities with a 31.6% share in the first quarter of 2022. At Inteligo, the quarterly results are affected by negative impacts on the investment portfolio. Earnings were impacted by losses on the investment portfolio. There was a slight decrease in the assets under management due to the negative mark-to-market valuations. Among the key performance indicators on slide number five, I would like to highlight the continuous recovery in the quarterly and yearly NIM of both Interbank and Intercorp Financial Services. There has been a 20 basis point improvement in the quarterly NIM of IFS, driving the NIM for the year to 4.5%. On the other hand, at Interbank, the increase in NIM in the quarter is 10 basis points, driving the quarterly NIM to 4.5% and in the month of March, NIM went up to 4.9%. Moreover, the efficiency ratio of IFS shows resilience as it has remained at healthy levels of 37% despite the negative impacts on revenues coming from the investment portfolio. On slide six, total revenue for IFS grew double digits on a quarterly basis, thanks to the partial recovery of Inteligo's revenues and investment gains at IFS. But more importantly, we would like to highlight the yearly recovery in revenues at Interbank, which reaches 16.5% when excluding the extraordinary gains registered in the first half of last year from the investment portfolio. On slide seven, the efficiency ratio was 37.2% in the quarter, in the high range of the 35% to 37% guidance given at the beginning of the year. This quarter, we have continued to see a recovery of expenses driven by banking activity when compared to the previous year. It is important to remember that during 2020, IFS was one of the few financial services institutions in the region that was able to execute an aggressive cost reduction program, which ended up reducing the cost base 5% for the full year and improving the efficiency ratio in such a challenging environment. At Interbank, the efficiency ratio is at 41.7% in the quarter, above the 39.6% registered last year, as expenses have increased 12.5%, in line with our expectations and as reflected in our guidance. The increase in cost at Interbank is mainly due to three reasons: first, a 12.5% increase in technology costs and new ventures, which includes the technology expenses for our digital transformation, as well as new investments in payments and our venture with Rappi. Second, a 19.6% 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 at the bank. And third, a 27.8% increase in variable costs related mainly to credit cards, in line with the percentage increase in credit and debit card turnovers, which generates fees and financing volumes. Moreover, we have continued with our branch optimization program, reaching a total reduction in the number of branches of 37% or more than 100 branches from the peak in 2016. On slide eight, we continue to have a solid capitalization position as evidenced by the ratios of Interbank but also Interseguro and Inteligo. The core equity Tier 1 ratio at Interbank is 10.9% as of March this year, slightly below our 11% guidance due to the dividend distribution that took place in March. This ratio will recover in the following month, to be over the guidance by the end of the year. Now, let's move to the recently announced acquisition of Izipay on slides 10 and 11. Interbank was already the owner of 50% of Izipay, one of the largest acquiring companies in the country. With the recent acquisition by IFS of the remaining 50% for $80 million, IFS becomes 100% owner of this company, which has three main lines of business. First, the acquiring business where Izipay is the market leader in card payments, accepting all different cards and payment platforms, including Visa, MasterCard, Amex, Diners, Apple Pay, Pain, Tunki, and Yape, among others, in which revenues represent around 74% of the total revenues as of 2021. Second, correspondent banking operating around 30% of the market, in which revenues represent 13% of the total. Third, it is also a credit card processor, operating around 30% of the market, in which revenues represent 9% of the total. Izipay is a company that has been growing substantially in the past years, especially in the past 15 months, as evidenced by a 60% growth in the number of merchants and more than 140% growth in the number of transactions. Moreover, it has monetized this growth as evidenced by an 81% growth in revenues in the past 15 months and 135% growth in EBITDA, reaching PEN 115 million in the last 12 months as of March 2022. It is important to notice that there is still a significant space for further growth, given the low penetration of POS and digital transactions in the country. We believe this acquisition will enhance our payment strategy and the value of IFS for the following reasons: first, it is a fast-growing and very profitable business. Second, it is the leader in card-present business with strong potential in e-commerce transactions. Third, there are additional potentials for merchant financing and additional services for merchants, and it will complement its value proposition with IFS product suites, together with some existing synergies in the corresponding banking business. Talking specifically about the opportunity for merchant financing, we wanted to share with you that before this acquisition, we have been piloting a 100% digital solution for self-liquidating working capital loans to merchants linked to their POS flows, which could be used to start up this opportunity in the short term. Now, I will focus on the six key messages we would like to take you home from this call on slide 13. First, we are operating in a very volatile macro and political scenario. Second, we have experienced a strong recovery in our core banking business, which is driving top-line growth. Third, we have a healthy risk profile with consistent credit quality metrics. Fourth, other income continues to be impacted by mark-to-market. Fifth, we continue to work on our two-tier digital strategy to foster growth at IFS. And finally, we are making good progress in our sustainability efforts.

On slide 15, we are showing the evolution of some of the key macro indicators. The exchange rate has registered ups and downs in the past weeks, reaching PEN 3.80 per dollar. Inflation has picked up to 8% as of April, in line with high levels of inflation in other countries, and local currency interest rates have continued to increase as evidenced by yesterday's extra increase of 50 basis points of the Central Bank's reference rate, which stands now at 5%. Expectations of economic activity, both for the next three and 12 months, are in negative territory, at their lowest levels in the past month. Political uncertainty continues to be high, and there are a number of measures that are currently being discussed that could impact our operations, including; first, a further extension of Reactiva loans to a group of clients; second, a further release of CTS funds; and third, a further release of private pension funds. Moving on to slides 17 to 19. On slide 17, we have seen a solid performance in consumer finance and SME indicators in the quarter. Credit cards and debit cards turnover have increased substantially year-over-year, or 87% for credit cards and 52% for debit cards. This growth has allowed us to increase market share more than 230 basis points in the past 12 months for the combined turnover, thanks mainly to our Interbank benefits program, our increased focus on e-commerce and high growth product categories, and finally, also thanks to our upselling strategy. Moreover, credit card sales have increased 92% year-over-year, getting close to 2019 levels. New disbursements of personal loans have also increased substantially, or 90% year-over-year. These two effects combined are driving credit cards and personal loans up more than 40% in the past 12 months. On the SME front, we have seen a strong first quarter in terms of disbursement or three times the disbursements of 12 months ago. On slide 18, one of the very good news of this quarter is the double-digit growth in net interest income and fee income. During this first quarter, net interest income for Interbank grew 15.6%, with a strong contribution from net interest income coming from credit cards and personal loans, which grew 18%. Fee income grew 14.3%, thanks to the strong growth of credit card fee income due to the evolution of credit and debit card turnover, but also to the sustained growth of fee income coming from cash management services in commercial banking. Other income at the bank was down 40% year-over-year, mainly due to the extraordinary gains on the investment portfolio registered during the first quarter last year when we sold a portion of the government bonds we held, anticipating the increase in rates. Excluding that, other income would have also grown double digits. All-in-all, total core revenues for the bank grew 16.5% year-over-year, a very strong recovery in banking revenues, which is returning to a positive operating leverage. On slide 19, we have seen a strong portfolio shift to higher yielding loans in the past 12 months, with an acceleration in this quarter. Retail loans reached 52% of the total portfolio versus 45% one year ago. Moreover, credit cards and personal loans reached 20% of the total loan book versus 15% one year ago and 18% one quarter ago. This effect, together with the increase in the SME loan book, still small, and the increasing rates is pushing NIM upwards, reaching 4.5% in the quarter, but 4.9% in the single month of March. Moreover, risk-adjusted NIM has improved 40 basis points in the quarter and 100 basis points year-over-year, up to 3.6%. We expect the positive trend in NIM to continue in the coming quarters, coming from the following trends and despite an increase in the cost of funds for the full effect of rates in PEN and dollars. The higher rate in the portfolio of credit cards and other personal loans will help, as will our SMEs. The second positive trend would be the increase in rates, which will gradually increase average yields in all products and client segments and a higher weight of the loan book within the total earning assets. Moving onto the third key message on slides 21 to 23. We have a healthy risk profile, which is still below pre-COVID levels. On slide 22, the cost of risk in the quarter was 1.4%, below our guidance of cost of risk below 1.8% and still below pre-COVID levels. From this quarter onwards, we present Stage 3 NPLs and coverage ratio of Stage 3 loans as the relevant indicators of credit quality, fully aligned with IFRS accounting standards. The NPL coverage ratio of Stage 3 loans at 169% is still above pre-COVID levels of 158%, and this is mainly related to the coverage ratio of retail loans, which stands at 256%, well above the 179% pre-COVID. On slides 22 and 23, two positive news items are; on slide 22, the reduction of 55% from the peak of June of the rescheduled portfolio, which is true for both retail and commercial; and on slide 23, the reduction of 34% of Reactiva balances in the past 12 months, which now stands at 9% of the total portfolio. Now, let's move to the fourth key message of this presentation related to the negative impacts on the investment portfolio from mark-to-market.

On slide 25, we are showing you the historical returns on the investment portfolio of both Interseguro and Inteligo. This quarter, both companies have been impacted by negative mark-to-market, with a return on the investment portfolio of 5.1% for Interseguro and negative for Inteligo. Market conditions are still negatively impacting these figures, which historically have been above 6% for Interseguro and around 10% for Inteligo. We expect the quarterly volatility to remain during the second quarter and hopefully to improve in the second half of the year. On slide 27, there is a summary of our two-tier digital strategy, which we introduced to you in the last conference call. On one hand, we have the digitalization of our core activities with the main goal of allowing clients to interact with IFS companies and fulfill their needs 100% digitally, with a high NPS, as evidenced by the 20 additional points in NPS of our digital customers when compared to non-digital retail customers. On the second front, we have new growth initiatives, which aim at increasing the client base and creating new sources of revenue and profitability. On the digitalization front, some examples of our digital solutions include the piggy bank, a 100% digital solution for savings, which allows clients to have specific pockets of savings for specific purposes and helps clients to save with just one swipe. My Finances, another solution in the Interbank app, which shows clients their credit score and helps retail clients control their expenses and manage their budget, now incorporates a credit scoring solution and gives them suggestions on how to improve their creditworthiness. Interbank Benefit, our 100% digital rewards program platform; Plin, the P2P and QR code payment solution; Dividelo, our buy now pay later solution linked to digital purchases; Interbank.pe for businesses, allowing commercial clients to open business accounts 100% digitally and fulfill their cash management needs; SOAT Digital, the first 100% insurance product; and finally, ERNI, our mutual funds investment platform. On the second front of our digital strategy, we have several initiatives that we have been working on in the past years that are at different stages. On the consolidating growth phases, we are including: First, Interbank 100% digital accounts for retail and commercial clients, which today constitute the most important part of the growth of our client base for both retail and commercial clients; Second, Tunki, our digital wallet; And third, Plin, our P2P and QR code payment solution, enabling interoperability with multiple financial institutions and acting as a bridge between the banked and unbanked. We are also working on two additional initiatives which are currently at early stages of development, which include RappiBank, our alliance with Rappi, and Shopstar, our marketplace aiming to become the preferred e-commerce option for IFS customers and to test our initiatives such as Dividelo and loyalty initiatives. All of these initiatives are being developed with a strong focus on advanced analytics, allowing us to improve our risk management, increase personalization and contextuality of campaigns, and enhance sale leads and their hit ratios.

On slide 28, we continue to see strong progress in our digital indicators. As of March 2022, digital customers reached 65% of our customers who interact with the bank during the last 30 days, up five points in the past year. Digital sales have also performed well. At Interbank, retail digital sales reached 61% in March, and at Interseguro, SOAT Digital sales reached 81%, both increasing sharply in the last year. We have continued to see an important number of new digital accounts being opened, both for individuals and businesses. As of the end of March, 60% of new retail savings accounts were opened digitally, while 89% of new business accounts were opened digitally. We are also introducing a new indicator to show some of the improvements in our analytical capabilities. Personalized campaigns reached 25% as of March this year, increasing from 11% one year ago. Now moving to our new growth initiative on page 29. Tunki is our digital wallet and ally to the banked and unbanked. It was the first digital wallet in Peru to deliver government financial aid in the context of COVID, 100% digitally to Peruvians and has now reached 1.8 million users. We have increased five times the number of merchants using Tunki in the last 12 months and six times the number of transactions. The strategic rationale for Tunki includes first, its role as a bridge between the banked and unbanked, enlarging the payment ecosystem, also to merchants; and second, its potential monetization through first, top-ups; second, service payments; third, float; and fourth, microloans. On slide 30, Plin has reached 7 million users in two years, of which 42% used Interbank as their main bank. We believe Plin is the most successful launch of a digital solution in Peru, given the high number of users achieved in only two years. It provides P2P and QR code payments with the Interbank app in Tunki, allowing interoperability with BBVA, Scotiabank, and many other financial institutions. The number of micro-merchants has tripled during the last 12 months, as well as the number of transactions that have doubled in the past three months. The sources of value we see for Plin include first, improving our value proposition for retail customers and merchants by providing them a seamless digital payment experience through QR or P2P 24/7; second, replacing cash and bringing more customers to the ecosystem; and third, providing monetization opportunities on payments at merchant POS, similar to debit card transactions. Moving to our initiatives currently at early stages on slide 31, RappiBank. Our alliance with Rappi has reached more than 60,000 credit cards placed. The current NPS is at 60 basis points. Nevertheless, this initiative continues to be at an early stage, and its path forward continues to be refined. The second initiative in early stage is Shopstar, our marketplace aiming to become the preferred e-commerce platform for IFS customers. After its initial pilot in the second half of 2020, it was launched in the first month of 2021 and reached almost 70,000 active customers for the full year 2021, and more than 20,000 have made a purchase in the first three months of this year, three times more than the level registered in the first three months of 2021. All of the different initiatives described before have the purpose of accelerating even further the growth in our client base to improve our digital value proposition and to increase the level of engagement, satisfaction, and loyalty among others. On slide 32, you can see that our retail client base has grown 19% in the last 12 months, reaching 4.7 million customers. 34% when talking about digital customers and 21% when speaking of commercial clients, most of whom are being acquired digitally. The last key message refers to our sustainability efforts. As introduced during our last conference call, the focus of our ESG initiatives this year will be on three fronts: first, to promote inclusion and bancarization; second, focus on the environment and sustainable finance; and third, to promote a culture of sustainability. As of March this year, there have been different positive developments, which we would like to share with you. First, on the environmental pillar, we have two sources of good news. First, Interbank and Interseguro have obtained their carbon footprint for 2021. Second, we have just disbursed the first sustainable linked loan for the fishing industry with a $22 million loan. On the social front, we have recently launched our 100% digital financial education platform, which aims at promoting financial inclusion in the country, Aprendemas. We have again been awarded Great Place to Work top positions for Interbank, Interseguro, and Inteligo. Moreover, we have received the number one position prize in a new category created, which is Best Place To Work from Home. On the corporate governance front, we received the good news that we have been included for the first time in the General ESG Index of the Bolsa de Valores de Lima. Before ending the presentation, let me now move to the comparison with guidance for this quarter. Capital ratios remain at the same levels with the total capital ratio above 15%, and core equity Tier 1 ratio above 11%. The first quarter total capital ratio stands at 15.5%, above guidance, and the core equity Tier 1 ratio at 10.9%, slightly below guidance as we have just distributed dividends, but will gradually rebuild capital in the coming months. Second, our continued path to recovery in core profitability with IFS ROE above 16% as guidance. In the first quarter, ROE was 17.4%, above guidance. Third, high single-digit growth in total loans, led by double-digit growth in consumer loans together with the substitution of a portion of Reactiva loans in commercial banking. As of March, total loans grew 10.2%, slightly above guidance, and consumer loans are growing more than 20%. Fourth, revenues will continue to recover with NIM between 4.2% and 4.6% after closing 2021 at 4.1%. The recovery of NIM is taking place at Interbank a little faster than expected, with first quarter 2022 NIM already at 4.5% and March NIM at 4.9%. Fifth, cost of risk, we would be below 1.8%. It is still below pre-COVID levels. The first quarter cost of risk is at 1.4%, reflecting a good quality portfolio and well below guidance. And finally, we will continue with our focus on efficiency, and we expect the efficiency ratio to be between 35% and 37%. The first quarter efficiency ratio was 37%, in line with our guidance. On slide 37, let me recap the six key messages of this presentation. First, we are operating in a volatile macro and political scenario. Second, we have seen a strong recovery in our banking core revenues. Third, we continue to have a healthy risk profile. Fourth, our investment income has been impacted by mark-to-market, but we expect normalization throughout the year. Fifth, our two-tier digital strategy continues to foster our growth. And sixth, we are making good progress in our sustainability efforts. Finally, we wanted to let you know that we will be holding our first virtual Investors Day on June 22 to discuss more in detail our strategy. We hope you can all be there with us. Thank you very much. Now, we welcome any questions you might have.

We will now begin the question-and-answer session. The first question is from Ernesto Gabilondo with Bank of America. Please go ahead.

and good morning, everybody.

Ernesto, are you there? We can't hear you. No, no, we can't.

Mr. Gabilondo, can you hear us? It sounds like Mr. Gabilondo is having audio issues. We'll move on to the next question from Jason Mollin with Scotiabank. Please go ahead.

Luis Felipe and Michela, thanks for the presentation. My first question is on the sensitivity of IFS's net interest income to interest rates. Clearly, it looks to be having a positive effect. How is debt positioning itself? What is the sensitivity today to a 100 basis point change on the net NII? But also on your balance sheet, on your investments, if you can give us some color there, that would be very helpful. And how do you think management can prepare for what you expect going forward? My second question is on the RappiBank joint venture. You showed some figures on credit cards and NPS. I saw in the 20-F that at the end of December 2021, RappiBank had 209,000 customers. So maybe you can give us some perspective on how that's evolving and what you expect there relative to what you showed for March, and what the number of clients at the end of 2021? Thank you.

Okay. Jason, thank you very much for your question. Let's maybe, Michela, you can start with the sensitivity on the NIM question, and I can then wrap that.

Okay. Good morning, Jason. As I mentioned during the last call, we are actually monthly updating our sensitivity calculations because given the speed and number of increases in rates, now this is actually changing, okay? But basically, what we have seen is that for a 100 basis point increase in the soles rate, we are seeing a neutral to positive effect. What we are seeing now as the further improvement in NIM versus what we expected is more coming from the portfolio mix, okay? But also not these increases in rates. What is lagging a little bit behind, but we believe will start impacting in the next month is the financial expenses, okay? For example, there have been a number of positive impacts in the cost of funds coming from the exchange rate, for example, okay? That will not necessarily be repeated in the future. So, NIM will continue to improve as we see the full effects of the rates in the portfolio. But we are expecting a faster increase in the cost of funds than we saw before. This is why the update that we have today for soles rates is a neutral to positive impact. Now when we shift to the dollar impact of a 100 basis point increase, this is a little bit different and is actually a negative impact of around between $4 million and $5 million because we have less earning assets in dollars and more bonds and liabilities. So, hopefully, with the mix of the two and with the shift of the portfolio, what we are expecting is that this, on top of the increase of rates that we have seen and even with the dollar ones, NIM will continue to improve in the coming quarters, to be in the high range of our guidance.

Yeah. Let me address, particularly on the interest rate sensitivity of the portfolio. At the bank, it's very straightforward. We do have a large portfolio of sovereign bonds, all of them related to the Peruvian government. They are short-term bonds. The average duration is about three years, so the impact there is important. So far, over a portfolio of around PEN 8 billion, the rate moves that have been very sharp have had a negative impact of around PEN 700-plus million, which are in DPV. They don't hit the P&L; they go to equity. Given that we have plenty of capital, that's not a concern. With the evolution of time, given the short duration, that should be sweeping away. But we are obviously monitoring that. And then I think the other important part where we do have investments that could be sensitive to interest rate movements is in our insurance portfolio. Let me pass it on to Gonzalo, who can address the specific effects that we can have there and how we are managing that.

Great. Thanks, Luis Felipe. Our portfolio has a high percentage of fixed income securities at around 80%, so definitely, our portfolio will lead to rate increases. They don't flow to results; they will reduce the possibilities of realized gains because of the by sale of securities. On the other hand, what we're seeing is that as rates are increasing, the rates we're offering our clients are not moving up at the same speed, so our spreads are increasing. So, even though we'll have a reduced possibility of realizing in the short term, in the long term, what we're seeing is an increase in spreads in the sale of our annuities.

Okay. Thanks, Gonzalo. And then on the RappiBank effort, as we mentioned, it's an early stage venture for us. That was launched. It had a couple of setbacks because of the pandemic. We kind of realigned and relaunched. It's still early. We are refocusing. As we mentioned, we are piloting a way of just opening accounts. We reached, as you well said, 200,000 accounts or wallets. We quickly saw in agreement with Rappi that that was easy to place but not very clear paths for monetization there. So, we have actually stopped growing through accounts. We have moved to credit cards where we have achieved close to 60,000 credit cards. We are closely monitoring the evolution of those cards. The bottom line is there's traction on the product; however, we are not being very successful in those customers actually taking loans on their credit card. Now they're using the credit card; they use all the benefits that are coming through the usage of the card in Rappi, but we're having trouble actually making that stick as a credit card loan. We have too many people that are repaying their full amounts, so it's actually a bit costly. So, as you've seen in the last quarter, we almost didn't grow in the number of credit cards placed because we are reworking the value proposition, segment of customers, analyzing all the data we're getting, and all that. Again, that's an early stage, so we'll probably go through lots of pivoting before we come up with a very specific product that allows us to become aggressive in terms of growth. So, basically, that's the status there. We are monitoring it closely, and hopefully, we'll be able to find, sooner than later, good profitable sources of growth. If not, we will have to continue monitoring to see what other decisions we can take.

That's very helpful. Luis, I wanted to follow up on your comments regarding the overall outlook for Peru's economy. You mentioned that it could take time for investment recovery to occur. What do you believe needs to happen for that to occur? What are the potential catalysts that could positively influence investment? Additionally, what concerns might exacerbate the situation? Can you outline any downside scenarios or catalysts that could emerge?

Sure. Let me address that question, which seems simple but has many aspects to it. For investor and consumer confidence to return, we need to see stabilization in the political environment. Despite inflation being an international issue, the macro fundamentals of Peru remain strong. The Central Bank is well-structured and is actively working to keep the macro accounts healthy, with efforts from the Minister of Finance and their team. However, there are concerns about the executive consistently appointing individuals we believe lack the necessary qualifications for key government roles, leading to instability due to high turnover and uncertainty. Additionally, Congress has been approving populist measures that do not instill confidence in investors that we are headed in the right direction. There is ongoing tension between the executive and Congress, although there have been some recent agreements among different parties. People's opinions on these agreements vary, but there is a lot of surrounding noise. From my perspective, a catalyst for improvement could be appointing a new prime minister who instills confidence along with a new cabinet that can foster trust with the market and encourage a positive relationship with Congress. Unfortunately, that change hasn’t happened yet. One major concern has been the proposal for a new tax, which Congress has rejected. However, if this proposal resurfaces, it will likely remain a concern. While the situation remains uncertain, there is hope that political factions can collaborate to return to a more stable environment. This would align with the positive economic outlook resulting from Peru's potential and the beneficial commodity cycle.

Thank you for the comments. We really appreciate it. No, it's a tough question. It's difficult to tell, but thank you for that. Fantastic.

The next question is from Ernesto Gabilondo with Bank of America. Please go ahead.

Thank you. Hi. Good morning, Luis Felipe and Michela, and good morning everybody. Thanks for your presentation and for the opportunity to ask questions. My first question is on loan growth and asset quality. What do you think would be the level in which inflation and interest rates to start to have an impact in loan growth and in asset quality? Then my second question is on your digital transformation. It was very interesting for me to see your new digital strategies. Especially I would like to hear on your new growth strategy related to payments, the Neobank, and open banking. I'm just wondering if you would like to create a Neobank or a specific area to allocate the Neobank. I think if that is the case, it will be very helpful if you can start disclosing a P&L and key performance indicators in the future as they differ from those of a traditional bank. Then my last question is on your ROE. We saw your reported first quarter ROE was higher than 17% and above the 16% guided. So do you think you can maintain this level of ROE in the next quarters? Where do you see your sustainable ROE? Thank you.

Let me begin by thanking you for your question. I will address your inquiries in reverse order, starting with number three, followed by number two, and leaving number one for Michela. We have had a strong start to the year and are confident in our ability to maintain those levels of return on equity. While our guidance is slightly below those levels, we don't feel the need to adjust it at this point since it's early in the year and we've only completed one quarter. There are uncertainties ahead, particularly regarding investments, and recent market developments have negatively impacted the situation. Nonetheless, we believe the fundamentals of IFS and our other businesses remain strong. We anticipate some volatility but hope to sustain our current return on equity levels. Regarding sustainable return on equity, I believe Michela can clarify, but we expect IFS to achieve over 18% sustainable return on equity in the coming years. So far, we have seen a good start this year amidst a volatile environment, which could bring surprises each quarter due to market fluctuations. We are comfortable with our current position as the fundamentals are improving. Regarding the second part of your question, we've discussed the topic of a Neobank previously. While we may explore the possibility of one in another country eventually, regulations in Peru prevent us from holding two licenses for different banks. Therefore, all our operations will fall under the Interbank license. As we've also mentioned before, we are separating the dynamics and value creation of our various businesses as much as possible. Currently, our ventures are primarily in the investment stage and not generating significant additional revenue. However, some, like Tunki, are starting to generate marginal revenue through top-ups and new features. We will look to develop products where it makes sense to explore different business lines, but it's still early. Once we see enough critical mass, we will present it as part of our financial results, working on generating leading indicators to provide insights into their progress. Currently, our focus is on activity metrics, which we are presenting. Our vision entails providing transparent information about these ventures' development and their sources of value. We plan to hold an Investor Day where we welcome your participation. Generally, we are pleased with the digitalization of our core Interbank business. Unlike other banks, our strategy involves creating satellite operations and observing how they develop in relation to the core. We are confident that the products and services we are creating will attract many customers to our core digital Interbank bank. We will clearly outline this process during the Investor Day. Tunki serves as an example of our approach. It acts as a low-cost acquisition channel for unbanked individuals and is envisioned as a link between the banked and unbanked, particularly through Plin, the only wallet accessible to the unbanked that allows transactions with our platform. We are conducting segmentation to identify which customers using Tunki can transition into our digital Interbank solutions. Once they are within our solutions, we can offer them loans, cards, and deposit accounts in a fully digital manner, converting them into 100% digital customers. Our strategy differs significantly from those of institutions that establish Neobanks but do not share them with other services, likely because their core operations are not as digital as ours. In our case, once customers engage with our core digital bank, they tend to be very satisfied, contributing to a higher Net Promoter Score. Over the past couple of years, we have closed more than 37% of our retail branches or what we refer to as financial stores. I believe we may have taken the most aggressive approach in the region for branch rationalization. Despite this, our revenue, customer base, and market share remain stable or are even growing, which reflects how effectively our core digitalization of the main bank is evolving to meet customer needs.

Okay. Thank you, Luis Felipe. Hi, Ernesto. Let me talk about loan growth and asset quality. First, you have seen that we have closed this first quarter with high levels of growth, actually taking out the Reactiva impact, which at the end of the day, has little impact on revenues because the Reactiva loans were at very, very low yields. The total loan book has grown 10%. The biggest part of this growth is coming from retail and especially from credit cards and other personal loans, which have grown 41% year-over-year. What we are seeing today is that the risk profile of our portfolio is still better than pre-COVID levels. So even now, credit cards and other personal loans as a total balance are above pre-COVID levels, the overall portfolio with still Reactiva loans and higher mortgage loans than pre-COVID makes a total portfolio mix with lower risk than pre-COVID. So this reflects, as you are seeing in the cost of risk. However, when we look at the retail portfolio itself and at credit cards specifically, which is the highest risk portfolio, the risk profile of the credit card portfolio itself is also still much better than pre-COVID. Of course, we have in mind that we are running many different analyses on how inflation and high interest rates will at some point limit the growth we are seeing. We believe it will come in the following months. Still, there are significant pockets of clients where we could grow. So we are trying to identify which pockets of clients are more insensitive to the impact from inflation and interest rates. We still believe there is room for significant growth, at least in the coming quarters. We need to see what else happens with the economy, because some of the expected impacts on asset quality are due to new funds that will be released to the market. The new release of private pension funds and the release of the CTS, as we saw during the last year, partially helped clients honor their debts. So that is also an extra positive impact we might expect in the future. Having said that, it is true that with the recomposition of the portfolio mix, the cost of risk should gradually increase in the coming months, but we still believe it will be below pre-COVID levels for the full year this year. So, I don't know, Ernesto, if that covers that part of the question.

Yes. Very, very helpful. Thank you very much, Michela and Luis Felipe.

You are welcome.

Thank you, Ernesto.

Michela, good morning and congratulations on the results. And as always, congratulations on the transparency and the clear explanation. I particularly like how you show the Reactiva loans and the acquisition of Izipay. I wanted to ask you about that. First, to confirm, you're paying $80 million for Izipay, so in our numbers, that's about six times EBITDA as per your numbers. Please let me know if that is correct. And second, can you give us an idea about the market share of Izipay in the payment system? Thank you.

Yeah. Hi. You are right. It's PEN 80 million for 50% of the company, given that we already owned the other 50%. Now Izipay is 100% owned by IFS, 50% directly, 50% by Interbank. But in the end, we consolidate the whole entity in our books. In terms of the multiple, actually, my numbers show a little bit lower than that. I think it was around five times. But let me pass it on to Carlos Tori, who is our Head of Retail Banking and Payments, so he can confirm these numbers.

Yeah. The multiple depends a lot on the FX you take on the numbers and if you use the first quarter or you're expecting numbers for the year. But yeah, it's somewhere around there, $80 million for 50%. So yeah. In terms of market share, I would say there’s no regulator or publicly available data. So we don't know how much the competition processes. We have some idea because we can see within our numbers on our credit cards and debit cards which transactions go where, which depend on the merchants. So we have some idea. We know market share is growing. But we don't have or can disclose an exact number because it would be an extrapolation from what we see. So, I don't know.

Can you give us an idea? Are we talking 5%, 20%, 50% market share? What range should we be looking at?

It should be around 50%. 50%.

I would like to discuss Izipay. This acquisition was driven not just by price, as the transaction was enabled by a motivated seller. We seized the opportunity for an asset we have pursued for many years but, under different circumstances, could not acquire due to varying interests. With Scotiabank reassessing their position in Peru and across Latin America, we viewed this as a significant opportunity. Strategically, this acquisition provides a strong foundation for our payment strategy and could accelerate our goals. Many competitors in the region are beginning to develop similar assets. Given Izipay's traction, platform capabilities, size, and connection with existing customers, we believe this will significantly enhance our aim of being the leading manager of a payment ecosystem in the country. This is the primary advantage of this transaction for us.

Thank you. You mentioned Scotiabank as a selling partner; are there any others?

No. This was an asset owned 50% by Interbank and 50% by Scotiabank.

Very clear. Thank you so much.

You are welcome.

Hi. Good morning, everyone, and thank you for the presentation. I have two questions. The first one is regarding net interest margin. I would like to know what percentage of the loan portfolio, or if you prefer to explain it by segment, is associated with floating rates. I want to understand which segment of the portfolios will reprice with the increase in Central Bank rates. Additionally, I would like to know your base case scenario for net interest margin returning to pre-pandemic levels, especially considering the higher increase in credit card rates and the growing mix of retail loans. I realize this is uncertain and that you're regularly analyzing it, but I'm interested in the best-case scenario. The second question is about the cost of risk. I would also like to know when you expect to see the cost of risk align more closely with the historical levels of IFS. This question aims to clarify whether 2023 could still be viewed as a transitory year or if it will align more with pre-pandemic levels. Thank you very much.

Okay. Well, thank you very much, Daniel, for your question. On this part, let me pass it on to Michela, who will probably have more of the details you are looking for.

Good morning, Daniel, and thank you for the questions. Let me start with NIM and the portions of the portfolio that have floating rates. But perhaps let me put the answer in a different way, because what is actually going on is that we are passing some of the increases in rates to different products in the portfolio. So, let’s talk about consumer financing, so credit cards, personal loans, payroll deductible loans for public sector employees. We have been increasing the rates on new disbursements. A portion of the increase in the interest in the loan yield that you see is coming from that, together with the change in mix. But when you look at new rates and new disbursements, they are clearly above previous levels. It is a little more difficult in mortgages, which also have a fixed rate. But even there we have started to raise rates on new disbursements. It is a little more challenging there due to competition, as that's the product that has increased the least in rate. Now, moving to the commercial loan book, it's a little similar. There, you price based on spreads. If the cost of funds increases, you start to price your loans to your clients in that way. And in the SMEs, where it is not based on spread, but it is more like retail, even there we have started to grow nicely in this first quarter, but this growth is coming with higher disbursement rates. So, I would say that when talking about new disbursements, almost all products are increasing rates; of course, you will see different impacts in the average yields of the portfolio because of the duration of the different products. So, the impact in a higher duration product will be smaller, but it will come in time. Complementing this part with the base case scenario for NIM. To be sincere, I am not comparing to pre-COVID levels because there are aspects I am uncertain about whether or not will be exactly the same in 2023. This also relates to cost of risk. However, we are seeing that for the next three quarters and up until year-end, NIM — and I’m talking specifically about Interbank now — will gradually improve quarter-by-quarter. This improvement is coming from the portfolio mix and also the yield of each product due to transferring increased rates to our new disbursements, along with a lower incidence of Reactiva loans. So, I really don't know. I can imagine that in 2023, at some point, we should be in NIMs, hopefully, if nothing significant changes, hopefully above 5%. And in terms of cost of risk, it's a little aligned because it depends on the portfolio mix. This year, from the numbers we are seeing, we are guiding that the cost of risk will still be below pre-COVID levels. Again, there are many external factors like the new measures on private pension funds and CTS that will inject liquidity into the system that may improve this cost of risk. So, 2023, whether or not that's going to be already at pre-COVID levels or considered a transition year will depend heavily on how we close the year. One thing I'm sure of is that the cost of risk in 2023 will be much higher than in 2022 because of the maturity of this retail portfolio that has been growing rapidly in the past months. However, I'm not completely sure if it will return to pre-COVID levels, which were between 2.2 and 2.5 cost of risk pre-COVID. So, there’s still a way to go there. Let me know if this covers your questions.

Perfect. Thank you so much. It's very clear, very clear with all the details.

Thanks.

Thank you.

Yes. Hi. Good morning, and thank you for the call. I wanted to follow up, Michela, on the NIM. In the press release, you mentioned that you had slightly lower rates compared to the previous quarter. So I'm just wondering, you mentioned that you're increasing new disbursement rates on new disbursements. What happened between the fourth quarter and this quarter? Are you seeing more competition? Just maybe some color, or maybe you're going to less risky clients and that's affecting a little bit the yield on the consumer lending. So that's on the NIM. And my second question is on commercial lending, which was relatively weak this quarter. I'm just wondering if you can give us some color. Is it just overall private investment in the economy that is affecting the commercial segment? Or is there something else? Is the liquidity of the company? What are you seeing there? Thank you.

Good morning, Alonso. Thank you for the question. Sorry, help me understand the first question. You are talking about the evolution from the fourth quarter to the first quarter of NIM of IFS, is that correct?

Of Interbank specifically. Because in the press release, you mentioned that the average rate on loans was stable quarter-on-quarter and the mix helped. But there were slightly lower rates across the board, right? So I'm just wondering what happened.

Yeah. Okay. Let me explain what is happening there. When you look at the average rate of each single product, it is increasing, okay? Under IFRS, we have these additional effects that are coming — I don’t know if you remember that we had some impairments from the reschedulings that we did last year. That continues to have an impact, which is sometimes positive, but sometimes it's negative. So, this particular quarter, what you are seeing there has like an extraordinary impact that makes the rate flat, but that should not be the case going forward. Each single product is increasing its average yield. Moving to the commercial lending decrease; there are a couple of things to comment there. First, Reactiva. When we look at the growth, both with and without Reactiva because, at the end of the day, the balances that are going down from Reactiva have very low yields. We are quite focused on that the loans from commercial banking without Reactiva are growing, and actually, they are growing very nicely. In the first quarter, there was a lot of competition, to be sincere, in the large corporate segment, why? Because of the number of increases in rates that we were trying to pass to clients, but the market dynamics were not allowing that. So you know that from time-to-time, you have always seen this in previous years, we focus on profitability. So if we see big transactions with low or negative yields, we will not enter. So, we saw a decrease in market share in the first quarter in the large corporate segment. That has changed and improved a lot in April, where because rates continue to increase, we have seen the overall market dynamics become more favorable toward raising rates for the large corporate segment. That is not the case, for example, on the SMEs. SMEs have a completely different picture. We are growing and will start to see more improvements in market share, and we are also able to translate the increasing rates without any issues. Therefore, going forward, it is true that investments are not happening. So, medium-term financing is not something that is booming, but there are certain sectors in which we are very strong, such as the agri-export segment, which is performing exceptionally well in Peru. So, we are focusing on trying to grow profitably in large corporate, in midsized companies, and in SMEs in those specific segments that are not following the GDP evolution in the country.

Yeah. Sorry, Michela. Let me add something. I think we've mentioned it before, but especially in corporate, the mortgage, and businesses are very sensitive to rates. We will continue to be very disciplined in terms of pricing. We have mentioned, as we've always mentioned, we are not obsessed with size or just market shares. We're very focused on profitability. We've seen this quarter how things played out in the corporate segment, where some of our customers were receiving loans with rates that did not make sense. We just let them go, and we will continue to do so, because we know the right pricing will come along with time. So we are not playing the size or market share game. We are playing the profitability game to strengthen our relationships with our customers. Sometimes we will sacrifice market share against profitability, and this quarter was a clear example of that.

Thank you, Luis Felipe and Michela. Great color. Thank you.

Thank you, operator. We have one question from the webcast. Can you please give us more details on the decline quarter-over-quarter in total deposits?

Sure. Michela, can you help out with that, please?

Yes. Hello. Let me tell you a little bit of what's been going on because we haven't discussed much about deposits and liquidity. First, I think it's important to have in mind that as of March, our loan to deposit ratio stands at 99%, which is still below the 106% of the system and is actually still below the pre-COVID levels. Our loan to deposit ratio, but also the system loan to deposit ratio, pre-COVID was usually above 100%. In previous years, you would see numbers for Interbank at around 103%, 104%. What happened with COVID is that there was extra liquidity in the overall system from several measures. We had PEN 60 million of Reactiva, and all the private pension fund flows that came into the system, along with the CTS. We’ve seen the system operate with extra liquidity, mainly in soles. Last year, the loan to deposit ratio of Interbank as of March 2021 was 89%. We were very happy because we were very liquid, but that came at a cost. What has happened in this first quarter is that liquidity at the system level has started to disappear because those flows have been utilized for different purposes, and Reactiva loans have been repaid; thus, the Central Bank took out that liquidity. Meanwhile, we've been optimizing the cost of funds by letting some high-cost institutional funds go away, so that we can limit the impact of increasing rates in our short-term deposits. So, going forward, it is possible that this trend we've seen in the system will continue, but there is uncertainty that comes with the new measures currently in approval that would release additional private pension funds and the CTS, which might normalize things a bit. The expectation is that the loan to deposit ratio will continue to tighten and return to more normalized pre-COVID levels in the following quarters.

This concludes our question-and-answer session. I would like to turn the conference back over to Mrs. Casassa for any closing remarks.

Okay. Thank you very much. Thank you, everybody again for attending these first quarter results, and we hope to see you all on June 22nd at our first virtual Investor Day. Please don't miss it. Bye.

Bye everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.