Good morning and welcome to Intercorp Financial Services' Second Quarter 2023 Conference Call. Please note that today's conference is being recorded. It is now my pleasure to turn the call over to Natalia Nirenberg of InspIR Group. You may begin.

Intercorp Financial Services will discuss its second 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, Interseguro, Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo, and Mr. Carlos Tori, Executive Vice President and Payments at Intercorp Financial Services. They will 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 made are based on several assumptions on factors that will 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 the report issued yesterday. It's 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.

Okay, thank you. Good morning, everyone, and welcome to our second quarter 2023 earnings call. Thank you all very much for attending our call today. I will start as always, by assessing the macro situation in Peru. We expect a mild improvement in some of the key indicators for the second half of the year. However, we continue to operate in a challenging environment. As you know, the country got off on the wrong foot with social unrest and inclement weather in early 2023. Peru had a first half of the year with negative GDP growth. This has taken a toll on the numbers for the full year. Now, GDP growth expectations have been trimmed down to between 1% and 2% range. In the meantime, inflation has moderated and hopefully begun its journey towards the Central Bank target. The currency, Nuevo Sol, has recovered some of its value, which has helped alleviate pressure on prices. Interest rates in Peru have probably peaked and at some point in the second half of the year, we expect the Central Bank to start lowering them again. The potential impact of the El Nino phenomenon for later in the year or early 2024 is still uncertain, so as you've heard, it's a challenging environment. Moving through our business, IFS continues to grow in terms of the number of customers and expanding market shares across key business lines. This has fostered a 15% revenue increase this quarter, and 47% earnings growth compared to the same quarter of last year when market conditions impacted investment results in our wealth management business. However, with only 5% year-over-year growth in expenses below inflation, it has led IFS to register a sound efficiency level of 35% in the quarter. At Interbank, we have the same growth at gross revenue lines despite the moderation in banking activity. NIM has expanded further to 5.6%. However, provisions continue to increase in retail banking as we are digesting the impact on the Peruvian consumer of slower economic growth, high inflation, and especially the effect of the social and weather dislocations previously mentioned. We expect growth moderation of our consumer book in the second half of the year to continue. At Interseguro, we see good investment returns with a well-hedged and predominantly fixed income portfolio. The company remains market leader in the annuity business, while moving into higher growth segments such as individual life and retail insurance which have importantly increased their contribution to total premiums in the last year. Inteligo has managed to grow AUM in dollar terms and shows resilience as investment results start to normalize. Finally, we continue to strengthen our payments ecosystem with Izipay, which represents a growing and profitable operation for us that has started to provide new income streams to our business through better customer engagement, larger float, increased fees, and net interest income. Going back to what I first mentioned, the macro backdrop has temporarily put pressure on risk profile and profitability at IFS, and we have adjusted our guidance for cost of risk and ROE accordingly, as Michela will explain in detail further on. On the first topic, loan loss allowances provide strong coverage. On the profitability outlook, we're confident that once we move towards the next credit cycle, we will be on track to achieve our midterm target of around 18% sustainable ROE. As such, we remain optimistic about Peru and about IFS outlook going forward and continue to build on our key strategic priorities, which are growth, digital, and focus on key businesses. Now let me pass it on to Michela for further explanation of our figures in the quarter.

Thank you, Felipe. Good morning, and welcome, everyone, again. Today, I will review four sections of our earnings presentation, starting with an introduction to our results on Slides 2 to 4. On Slide 2, the macro outlook is slightly improving, as shown by the decrease in inflation of the last quarter and the stabilization of the sole's rates, together with a relatively stable exchange rate, as Felipe mentioned. The new estimate from the Central Bank for reaching the inflation target of 3% in the first quarter of 2024. Still, economic growth represents a challenge as evidenced by the negative trend registered in the last month considered to be the worst semester in a long time, and the new expectation of GDP for year-end is below 2%. On Slide 3, financial performance at IFS continues to post growth with ROE impacted by the high cost of risk of consumer finance and soft investment results. There are six key messages in this slide. There has been a moderation in year-over-year loan growth from 15% in the first quarter to less than 12% this quarter with a stronger moderation in commercial banking loans. Good top-line year-over-year growth continues at 15% this quarter, and NIM continues to increase, but with a lower pace, reaching 5.6% at Interbank. There has been a further increase in cost of risk coming from consumer lending, pushing the bank's cost of risk in the quarter to 3.6% and the weaker cost of risk to 6%. The high risk of the consumer portfolio is a result of sustained and consistently high inflation as seen in many other countries and the negative GDP growth in the first semester of this year in the Peruvian economy and the social and climate disruptions of the first quarter. We have seen a deterioration in the consumer payment behavior during the last quarter. Nonetheless, the coverage ratios remain healthy. We continue to see good efficiency levels both at IFS and at the bank level as we are strictly monitoring and managing costs, especially at the bank, which has reached a cost-income ratio of 37% in the quarter, a strong improvement versus last year, mainly due to good operating leverage. IFS ROE of 14.3% this quarter has been impacted by cost of risk at Interbank and soft investment results are incredible. Finally, we continue to register some capital levels with a core equity Tier 1 ratio up 30 basis points in the quarter, reaching 11.4% and total capital ratio at 15.2%. On Slide 4, we continue to build on our three key strategic priorities, which are: first, growth, reaching 5.8 million clients at Interbank and growing earnings 47% year-over-year, Digital, with a digital retail banking NPS of 46% and 73% of our retail clients being digital. Third, focus on our key businesses with growing market shares in consumer finance at 21.2%, acquiring business at 44%, and in annuities at 28%. Now, on the first Page 6 to 10, let's talk about our growing customer base and sustainable earnings. On Slide 6, the continuous growth of the customer base at IFS is at 15% year-over-year in banking, 17% in insurance, 10% in wealth management, and 53% in payment merchants. On Slide 7, IFS' second Q reported earnings of PEN 331 million are up 24% or 7% on a quarterly basis adjusted and 47% year-over-year with an ROE of 14.3%. The quarterly and yearly increases in earnings are mainly due to a recovery in the investment results in wealth management and strong results coming from Interseguro. Payments have performed nicely, despite the decrease in earnings as EBITDA continues to grow, and most KPIs grow at double digits. On Slide 8, good news is top-line as total revenues continue to grow double digit or 15% year-over-year, mainly due to the growth registered in banking of 18%; wealth management recovering from negative territory one year ago, and payments of 8%. On Slide 9, another positive is our fee income, which constitutes a source of incremental and diversified revenues growing almost 10% year-over-year in banking, which represents 63% of IFS's fees and payments, which represents 27%. On Slide 10, sound efficiency levels at IFS at 34.9% in the quarter and 37.3% for banking with both ratios being very good, mainly thanks to the operating leverage of the bank, which was very strong in the quarter with revenues growing 18% year-over-year and costs growing only 3%. This has helped the efficiency ratio of the bank to improve by 500 basis points year-over-year. On digital, I would like to start this part of the presentation by reinforcing and highlighting that we are building 100% digital solutions for our customer journey, which includes day-to-day banking, savings, financial planning, financing, insurance, wealth management, and acquiring from merchants through Izi and IzipayYa. On Slide 13 and 14, positive news in our digital indicators, which continue to show nice trends when compared to the previous year. Still, we believe there is a way to go in moving these indicators further. As of June 2023, digital customers reached 73% of retail customers who interact with the bank during the last 30 days, up 5 points in the past year. Digital sales reached 65%, up 2% from last year. Our digital self-service indicator has improved sharply from 75% to 83%. NPS for digital customers continue, expected to become a top NPS in the next years, reaching 46 points this quarter, relatively stable versus previous quarters. We continue to see an important number of new digital accounts being opened for both individuals and businesses. As of the end of June, 95% of new business accounts were opened digitally. Insurance and wealth management digital indicators show positive developments as well with digital premiums still small, but reaching 9.4%, digital self-service, reaching 54%, and digital transactions for fund management reaching 43%. Now let's move to the performance of our four key segments on Slide 16 to 24. Starting with banking and in line with our focused strategy, we continued increasing market shares, reaching 22.7% in consumer loans as of June 2023, 19.4% in retail loans, 15.1% in retail deposits, and 9.4% in commercial loans. However, in line with the increased riskiness of the portfolio, we have further tightened our credit underwriting standards in consumer loans and small businesses, which has already had an impact on new disbursements. On Slide 18, sustained growth came across all revenue lines in banking in the second quarter with 18% year-over-year growth in the top line with net interest income growing 20%, coming mainly from increased volume and yield on loans. Fee income increased 9%, mainly explained by an increase in fees from credit and debit cards, and other income increased 11%, coming mainly from FX trading. On Slide 19, the interest-earning assets mix and continuous repricing efforts pushed yield on loans upwards 60 basis points in the quarter and 240 basis points in the year, reaching 11.5% and meaning 10 basis points in the quarter and 70 basis points in the year, reaching 5.6%. Risk-adjusted NIM stabilized in the quarter as the increase in yields has been offset by an increase in the cost of risk of consumer loans. Good news in yields has been partially offset by rising funding costs. The cost of funds reached 4% in the quarter, up 40 basis points on a quarterly basis and 180 basis points year-over-year. Costs of funds have been rising at market level mainly due to two reasons: a continuous migration of retail deposits to more expensive term deposits, both in soles and dollars, and the higher remuneration to commercial and institutional deposits in soles as rates continue to be high and in dollars, as rates have continued to increase. During the month of July, we have started to see a first correction of the overnight deposit rate in soles, which constitutes the first turning point in cost of funds. Our loan-to-deposit ratio of 102% continues to be better than the industry's average of 105%. Deposits continued to increase their share in total funding, and retail deposits market share has continued to increase. On Slide 21, we have seen a pickup in the cost of risk up to 3.6%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 6%. This increase is mainly focused on credit cards and personal loans as favorable loans to public sector employees and mortgages have performed relatively better. As previously mentioned, the high risk of the consumer portfolio is the result of sustained and consistently high inflation in the country as seen also in many other countries, negative GDP growth in the first semester of this year in the Peruvian economy and the social and climate disruptions of the first quarter. During the first quarter, we granted some credit card customers rescheduling programs in line with the guidelines for the social disruption and El Nino phenomenon. Those accounts, which had a large component of unilateral solutions due to social and climate impacts, are in the process of maturing, impacting cost of risk already this quarter. The NPL coverage ratio continues to be high at the bank at 173%, and risk mitigation in retail banking at 258%, much higher than the 179% level pre-COVID. On Slide 22, moving on to our insurance business, there has been a decrease in annuities due to a normalization of the market to pre-COVID levels and our market share has recovered and is at 28%; both individual life and retail insurance business lines, which constitute high profitability business lines, continued to grow nicely year-over-year or 28% for life insurance and 9% for retail insurance, increasing their contribution to total premiums. On Slide 23, the quarterly return on the investment portfolio came at 6.4%, below the extraordinarily high second quarter of 7.8%. The insurance portfolio is composed of 85% fixed income, 9% real estate, and 6% equity and mutual funds as of the end of June. On Slide 24, wealth management is 6% up in terms of assets under management. Returns remain in positive territory and are not fully recovered yet. On Slide 25, we want to give you a summary of the developments in our payment ecosystem, which we have continued strengthening. After the acquisition of the remaining 50% of Izipay in April 2022, we launched the first value-added service Arisale, an integrated solution for billing and inventory management for merchants. The second quarter has already seen nice adoption of our solution, reaching more than 7,000 merchants as of the end of July, paying monthly fees. Moreover, during May this year, Tunki plus Izipay combine to launch IzipayYa, a solution targeting micro merchants with interoperable QR codes and same-day availability of cash. Growth in merchants in volumes continues. Izipay merchants increased 53% year-over-year, reaching 1.2 million. Transactional volumes grew 16% year-over-year. Additionally, e-commerce transactions are gaining share within our transactional volumes, reaching 16% as of the end of June. Izipay represents a growing and profitable operation. Revenues continued to grow nicely, 8% year-over-year, supported by the increase in the transactional volumes and merchants with some pressure on MDRs coming from increased competition. EBITDA continues to increase as well at 9% year-over-year, reaching PEN 30 million in the quarter. 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, continuing to pilot low-risk loans to merchants, and using Izipay as a distribution network for Interbank products as well as a source to increase float. As shown in Slide 28, we are starting to provide new sources of revenue coming from increased float in Interbank and coming from Izipay flows, which have increased 32% year-over-year as well as from greater transactional volumes from micro merchants, which have grown 2x year-over-year, thanks to IzipayYa. On Slide 29, Plin has been accelerated by the new landscape of an interoperable P2P system. Plin reached almost 12 million users as of the end of June, with Interbank's participation at 46%. The number of merchants continued to increase as well at a pace of 84% year-over-year for Plin, with Interbank's participation at 56%. The volume of transactions has continued its strong growth, reaching twice the volume registered in the same quarter one year ago. Plin and Yape interoperability has started in April. 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 progress into the financial system, reducing the use of cash, which continues to be high in the country. The number of transactions for Interbank has increased by 82% from April to June. On Slide 31, let me give you an update on our operating results for the second quarter and a revised guidance for ROE and cost of risk. First, total capital ratio of 15.2% and a core equity Tier 1 ratio of 11.4% as of the end of June are above our guidance. ROE of 13.7% in the first semester has confirmed the trend in cost of risk and investment results. Thus, we are revising our guidance downwards to around 14% ROE. 11.6% total loan growth and 18% consumer lending growth is above our guidance, though we expect further moderation in the coming months. NIM for Interbank was 5.6% in the first semester, in line with guidance. The cost of risk for banking was 3.4% in the first semester and 3.6% in the quarter, above the higher end of the guidance. Following quarters may continue to be challenging depending on the behavior of the consumer portfolio. We are revising our guidance upward to 3.2% to 3.6% for the yearly cost of risk. Efficiency levels for IFS and Interbank continue to be good at 34.2% and 37.1%, respectively, for the first semester and within guidance. On Slide 32, we have continued to strengthen our sustainability strategy upon our focus areas. Our latest development on the environmental front includes a co-hosted event on climate risk with Peru's sustainability. Additionally, our target for sustainable financing for 2023 has been set to PEN 500 million, aiming to build more sustainable business. On the social front, our financial services education platform, Aprendemas, as well as the launch of IzipayYa are solutions that are contributing to financial inclusion. Moreover, Interbank has been recognized as #1 in the Merco Talento Ranking for talent attraction and retention and was certified by Aequales as a company committed to equality and diversity. Finally, on our governance front, Interseguro released its first sustainability report in line with the GRI framework and Inteligo Group companies approved the responsible investment policy aligned with the Principles for Responsible Investment. On Slide 33, let me finalize the presentation with some key takeaways. First, we have seen a first half of 2023 with a challenging macro scenario aggravated by social unrest and climate factors. Second, we have a growing customer base, 15% revenue increase year-over-year, and market share expansions in our key areas of focus. Third, further NIM expansion of 5% to 5.6% in banking due to increased yield on loans. Retail cost of risk continues to increase on the back of the macro scenario, strong coverage in retail banking. Fifth, investment results are normalizing on insurance and wealth management, driving IFS earnings up 47% year-over-year in the second quarter. Sixth, we have sound efficiency levels, IFS cost income ratio at 34.9% and banking at 33.3% are benchmarks in Latin America. Seventh, we continue to strengthen our payment ecosystem and Izipay represents a growing and profitable operation. Finally, we are revising our guidance for cost of risk and ROE for this year. However, after the current credit cycle, around 18% sustainable ROE remains our midterm target. Thank you very much. Now we welcome any questions you might have.

Thank you. The first audio question comes from Ernesto Gabilondo with Bank of America.

My first question will be on Peru's outlook. Can you provide us like an update on what could be the impact on El Nino? I don't know if you have been looking to weather institutions to understand what could be the expectation. I don't know if it could be between low to moderate. And also, at the end, the floods in Peru tend to materialize early next year. So wanted to double check that with you. And then we have seen some demonstrations that took place in the country a couple of weeks ago. They wanted to remove the president and to go for early elections. I believe, at the end, didn't have a material impact. But are you hearing the possibility of new demonstrations? So again, any color on El Nino and the potential outlook will be appreciated. Then on my second question is on your ROE guidance. So you are lowering it for this year, and you are maintaining it medium-term at 18%. But I would like to understand when you expect to reach the 14%. Do you think it could be achievable next year? And what could be the drivers behind it? Would it be a normalization of the cost to risk and probably a more normalized coverage ratio? Or what are your expectations on that?

Okay Ernesto, thanks very much for your questions. Let's see, on El Nino, obviously, we are following it very closely. Unfortunately, it's not here yet. I would say, based on what we've been reading, the people we've been meeting, the think tanks and the agencies that follow these phenomena would say there's a 50-50 chance. The probabilities of having a strong or extreme El Nino are not that high. It's probably going to be a 50% probability of it being low to moderate El Nino. But again, every week, we get new information. Some of them collide with each other; let's say we see the U.S. agencies probably assign more probabilities, and the next week we get something from the Australian agency with less likelihood. So it's pretty unclear. The fact is that temperatures in the country and in the region are higher than expected. So we are preparing to have something. That's another reason why we are moderating our growth, just to, because we've seen probably Michela will elaborate later, but for a while in some segments, higher risk segments, we are moderating growth; but also we're starting to prepare in some regional areas that are usually affected by El Nino. If something happens, it's unlikely that it will happen by the end of the year, which is not ruled out, but that's not the primary scenario. It's probably, as you mentioned, going to happen in terms of heavy rains and floods if they come early next year, more likely in late January or February, which is usual. So again, there are not a lot of updates there; we are, like you are probably following the news, not very complete things yet, just as prepared similar to what the government is doing. The government is putting a lot of funds in order to reinforce certain infrastructure to make sure that this phenomenon is not as bad as we've seen. But again, we have to play it by ear once we get more information. In terms of the social unrest and political turmoil that we saw at the beginning of the year, that has come down significantly. There have been some announcements of continued people trying to do things that were not very successful. Those happened in July, specifically on the 19th of July. At the end, I think the report was about 20,000 to 25,000 people actually going through those demonstrations. So it has not had an impact. I personally think that the level of these things has come down significantly. I do not expect them to pick up. However, again, it's going to be news-dependent. If something comes around the government that makes some people push again something could happen. But our scenario is that the probability is very low so far. So I think that's water under the bridge with the news that we have right now in front of us. And hopefully, that will continue to be the case. And then on the ROE, cost of risk front, just briefly. Again, we haven't worked in detail in the numbers for next year. There are lots of things moving around. Obviously, we will come back to you and the market when we have more clarity. What we're seeing in terms of increased cost of risk has to do with two things, as Michela mentioned. First, a slower economy—that's a fact, high inflation impacting the consumer for so many months—that's also a fact. The impact that we had in the first semester because of these dislocations of the social unrest and the El Nino phenomenon will not repeat. Let's see what happens with El Nino. So that's kind of what we see as external factors that affected our already slow-growing economy. So it's going to be probably negative growth or, sorry, moderate growth, not negative, but starting this quarter and hopefully for next year, mediocre growth of around 1% to 2%, hopefully picking up at some point next year, but it's not going to—basically the start—it's not to continue going down negatively. And hopefully, next year will be also the same. Inflation should start to come down, which should put some relief. So again, I don't want to project next year, but there are many macro conditions that should turn positive. Let's see how they go, but not negative growth and lower inflation should provide positive headwinds for our operations. Again, as we mentioned, midterm, we are very confident that the 18% is achievable given the nature of our businesses, the stage where they are, the investments that we're doing, the efficiency that we're running, the higher cost of risk of this quarter—it’s not only explained by the slow growth and inflation. It has an important factor coming from the first quarter dislocations that were mentioned. That should pass, and hopefully, let's say, I'm not trying to project, but certainly for the last quarter of this year, that should be water under the bridge regarding the impacts that happened in the first quarter, very, very partially because we closed the quarter very soon due to the events in the first quarter. It has captured a significant portion. This quarter probably there's something that for the next quarter, but we expect normalization for the latter part of the year and hopefully, next year, we'll see probably not as good as pre-COVID levels, but obviously not as much as we've seen in the first semester of this year.

The next question comes from Juan Recalde with Scotiabank.

So the economic growth expectations have weakened and cost of risk has been higher than anticipated. However, we are still seeing the consumer loan book expanding almost 4% quarter-on-quarter. So can you talk about how you are balancing the cost of risk with growth in the consumer portfolio? And what type of products and clients are driving the growth in the consumer portfolio?

Sure. Thank you very much. Well, as you know, our portfolio is very geared towards the consumer; that's not a surprise. So we're not afraid or we are familiar with the credit cycle. We know this happens—the credit cycle is as it is. As mentioned, it's been exacerbated by certain external factors, but our group reflects our strategy, and we're leaders in consumer. We want to continue being focused on consumers, and we're building all our strategic pillars to ensure that is sustainable. Obviously, we have to be very tactical depending on the situations. So what we're doing is we continue to grow, we're gearing towards lower risk segments, which presents some challenges of growth, and value proposition has to come there. To put the brakes on growth, it's not something automatic. You have the credit; your credit card customers have their lines. They use them in certain tough situations, and we have to be there for them. Obviously, we have to be very responsible in terms of what we do. But part of the growth is our existing customers using the lines they already had. Consumer loans are easier to moderate. So that's what we've seen. The collateral structure of our portfolio is still growing during the second half. It has already started to decelerate, and it will probably continue to do so, because again, we've been able to manage the portfolio we have, and we are gearing towards lower risk segments. We are also boosting our payroll deductible loans efforts. That will probably have an effect in terms of risk-reward profitability. But again, it's part of what we've been doing for the last 25 years. We've gone through these cycles. And what is good is that the drivers of the engagement and relationship with customers remain healthy. It's just a matter of helping them get through this tough situation, and we're ready to do that, moderating our risk appetite in the quarters to come.

The next question comes from Alonso Aramburú with BTG.

I have three questions. The first one is on your holding expenses, which were a little bit larger than usual. Can you just comment as to what exactly happened there? Second, also, when it comes to Inteligo, which reported better numbers, but it continues to show some mark-to-market losses. Can you just comment as to what exactly is being marked down—I mean, that has been already fully marked down so we can see better numbers in the next couple of quarters? And finally, regarding your margins, which have continued to move higher, which is good news. But now as the rate cycle likely continues—rates continue to—or will start to decline in a couple of months or so, can you expect a similar sensitivity on the way down? Or do you think your margins can be more resilient as rates decline?

Thank you, Alonso. Regarding the holding expenses, this month has been unique. The structure is straightforward; we don't incur many overhead costs. The impact stems from a small portfolio we maintain. As we've discussed previously, our strategy isn't solely to invest in local fintechs or related companies, but we do have a modest portfolio at the Holdco level. We have invested approximately $30 million out of a total asset base of $34.5 million. Although small, recent adjustments in some of those investments, particularly in payment companies and credit-related fintechs in the U.S., have affected valuations. Our portfolio consisted of capital deployed of $25 million at the beginning of last year, and while we marked it up at that time, recent valuations have reflected the current worth of tech and fintech firms. This situation resulted in a hit of around PEN 30 million. All valuations remain above the capital deployed, but they had previously surged due to optimistic valuation trends and have now decreased this quarter in response to market conditions. We hope this trend won't continue, and if any significant changes occur, we will communicate them as in the past. Now, I'll hand it over to Bruno for insights on Inteligo, and then I'll return to discuss the margin question with Michela.

Yes. So in terms of Inteligo's portfolio, there's one effect that is similar or the same as Mr. Felipe just mentioned. We have a portion of the portfolio that is invested in some funds, private equity funds, and the effects that we've seen this year, which we would expect to be completely marked are, in some sense, due to some of the effects that were felt last year. Now the majority of the portfolio is marked to market. And so on the fixed income and equity side, it’s very hard to predict whether this is going to move a lot up or down. It depends on the market because, again, it's marked to market, and so it would be largely dependent on what the market prices are going to do. The fixed income portfolio has been rebalanced. There is a good portion now that is going through equity as opposed to P&L. But then the equity portion—the stocks that we hold in the portfolio—are going to fluctuate as market valuations go for the rest of the year. So it's hard to say how much more, but we have seen much better performance this year, and we would expect that to be much more stable going forward for us in the portfolio.

Yes. Thank you, Bruno. And Alonso, I forgot to say something: the portfolio we have at the Holdco model created these expenses. It's not just investments different from what we do in the insurance company or the group. These are fintechs where we get access to know-how; we get access to observer rights in their boards. We get access to their management to learn what they're doing in terms of credit underwriting, in terms of the building of their payment solutions. So it's very strategic for us to have them. Again, it's the way we're learning instead of building something local in Peru, which we believe the market is very limited. We have our digital solutions coming from the bank; we do those investments again in the order of PEN 5 million each, but we do them only if we get access to special know-how that we feel we can then transfer to put to work into our strategic deployment of our initiatives, okay? So that's the rationale behind those investments there. And then your last question was in terms of margins. Let me pass it on to Michela so she can address it.

In terms of rates, I'd like to go a little bit on the different lines because I mean, it's not evident yet what is going to be the net impact. Did you see what has happened in contexts where rates have been increasing both in soles and in dollars at a very high pace? We saw a significant increase in yield on loans. And then we have also seen that in terms of cost of funds. So if you see like the last 18 months, cost of funds has caught up yield on loans, and that is why NIM has continued to increase by this quarter only 10 basis points. So going forward, we have different trends actually for soles and dollars because at some point, before year-end, we should start to see soles rates decreasing, which should have some positive impacts in terms of our cost of funding, especially the short-term and overnight institutional deposits, which are still an important part of funding. So those should decrease sharply. And actually, in July, I mentioned a little bit about that. We have already started to see an inflection point there, okay? And our asset book more focused on retail should be a little bit less sensitive and also we should try to stick as much as we can with the higher rates. In the commercial book, it's a little different because there are no reasons in terms of the interest margins, so we should see rates decreasing there even in soles. Now when we talk about dollar rates, the dollar rate has continued to increase even recently, and we still need to see what happens until year-end. So in terms of dollars, next year, we could still see an increase in cost of funds because the full effect of the increasing rates of this year now still will impact the cost of funds next year. If then there is an inflection point next year and the rates in dollars start to decrease in the commercial loan book, where we have the biggest part of dollar loans, we could see there also a decrease in yields. So putting everything together, I am not yet completely sure what is going to happen with NIM. We are just running the estimates now, and it will depend also on our third component, which is the portfolio mix, because this year, the portfolio mix has also helped improve the yield on loans, depending on the growth of next year that could continue to be the case. So I'm sorry, it is not a straightforward answer, but I think there are different trends moving in different directions now.

The next question comes from Marlon Medina with JPMorgan.

Actually, most of my questions have been answered, but just a quick follow-up on margins. And I understand it is different for the dollar portion than for the soles portion. But can you provide the sensitivity for every 100 basis points that rates move?

Yes. Listen, I—we have provided this sensitivity in the past, okay? And the sensitivity has been neutral to positive when the rates were going up, okay? The—and that was the theoretical sensitivity of a 100 basis points move. But what has happened in reality has been a little different from that because of the cumulative effects of many increases in rates. So at the end of the day, it ended up being more positive than when we estimated at the time. So let me come back to you now for the sensitivity now with the decreasing rates for soles in dollars because we are still working on that one.

Yes, and I think that Michela mentioned it before; the consumer book should be less sensitive, especially since it's mainly soles, and pricing there does not correlate to the cost of funds really, it's more related to risk appetite actually. So shouldn’t be on the downturn of the rates as sensitive as the commercial book.

Yes. And maybe one additional point is that the speed of the movements in rates has also been impacted by competitive dynamics and liquidity. So, for example, this year, we've seen soles rates in the market being higher than the reference rate because of a decrease in liquidity in the financial system overall. So we will have to see also what happens with the liquidity in the market.

The next question comes from Andres Soto with Santander.

I have two questions. The first one is related to the payments business. We see results still under pressure due to the customer acquisition cost. And I would like to understand based on what you have seen so far, have your expectations for the ROE in this business changed in any way, positive or negative? And when do you expect this business to be accretive in terms of ROE for the overall portfolio?

Okay. Thanks, Andres. I'm going to pass it on to Carlos Tori so he can help me with the question. But basically, here, like this business, the payments business, specifically is—we don't see that as opposed to like the universal banking or even insurance company. ROE is not an obsession for us in the payments or Izipay. It's more like EBITDA where we're looking at because we're growing, and we're depleting lots of CapEx there in order to do the expansion. But Carlos will probably provide a little bit more clarity on the specifics of the numbers.

Okay. So hello, Andres. As Felipe said, some of the work pressure that you've seen comes from the growth that we've had in the last couple of quarters. We will continue to look for that growth and—sorry, can you hear me? I think I've lost connection.

No, it's okay.

It's okay, Carlos.

Yes, Carlos, we can hear you.

Okay, okay. So you're seeing that—we will continue to follow that growth. There has been some pressure on the margins due to increased competition, but we expected that. What we are trying to do is to maintain our share in physical POSs, increase the float or the flow to Interbank, and add services to those clients that will increase fees, both at the bank and at Izipay. And we would like to increase our share in the e-commerce business, where we have somewhere around 50%, probably a little bit higher than 50%. And then in e-commerce, we have probably somewhere around 25%, 26% of market share. So we will focus on growing in e-commerce. We will continue to follow that growth and build the aggregated services that are starting to bring in more income. So that's kind of how we look at it. I don't know if that answers your question, Andres.

My second question is related to probably a follow-up on the El Nino question and your cost of risk outlook. I would like to understand to what extent your new guidance for cost of risk already incorporates the risk of El Nino or if indeed El Nino materializes, we should see additional cost of risk pressure this year? Or is this more of an event for 2024?

Yes. No, I would say that the cost of risk for 2023, as I mentioned in the guidance, the effects of El Nino will probably—we probably can—if they come early next year, as we've seen in the past, usually late January, February. However, part of the growth outlook that we are providing incorporates some restrictions in some areas that could be heavily affected by El Nino. So we're preparing the portfolio for that, but in terms of growth. One thing that has not come across is that our enterprises and commercial portfolio is behaving very well despite some of the temperature issues that we're seeing. As you know, we have good exposure in fishing and agriculture, and that's behaving very well. Our PDLs there and the relationships we have with the companies would help us. We work with the most solid companies. So we are also working with them to ensure they are ready for El Nino as they've done in the past, and we are confident that we will be able to go through that process with no issues or limited issues. So whatever comes from El Nino will be mostly hoping related to any impact on the consumers around the area impacted by El Nino, but our commercial book exposure is very happy with it. Even in this downturn of the economy, it has proven to be very resilient. Our delinquency rates are very low, and that's the way we manage the bank— a little more aggressive on the retail loan book and more conservative in the commercial book. So we have a more balanced portfolio.

Sorry, if I understood correctly, you are including the effect of El Nino in your guidance, mostly in terms of loan growth, not as much in terms of cost of risk. But if we look to our past incidences five years ago or so, what was the historical impact of this type of event on your cost of risk? And when should we see that being reflected—in terms of provisions or it's going to be once the event is in full swing?

Yes, it should be between the first but mostly in the second quarter of next year, similar to what we've seen in Yaku, which is very different because it was a very different phenomenon that we have not seen for many years. So yes, it's not included this year. It's probably—if it hits, it's going to be incorporated in the first quarter or second quarter of next year, and that should be it basically because the phenomenon does not last the whole year. What we've seen in the past is similar things. In 2017, there was a very strong impact in the north of Peru and some portions of Lima. I would say that you'll see probably a 1% increase in PDLs related specifically to El Nino and very specific in certain areas. It does not affect the whole country in the same way.

At this time, we will take the webcast question. I will now turn the call over to Natalia from the InspIR Group.

Thank you. The first question comes from Daniel Mora from CrediCorp Capital. The question is, what is the expectation for asset quality indicators considering the growth in the consumer segment and the challenging outlook ahead? When do you think the bank will reach the peak of NPLs? Can this change the appetite for growing in the consumer segment?

Hi Daniel, thanks again for your question. Let's see. What is the expectation for growth when you mentioned the bank would reach today? Well, we think we've reached the peak this quarter. It's probably—some leftovers for next quarter. But based on what we see going through the book, we're going through the peak. It all depends—like in terms of what we already have in, okay? And again, a big portion is what's happened with Yaku and the social unrest of early in the year and the reprogramming of those that have been maturing in the last months. So that's, I would say, the most important portion of what we are seeing this quarter; it might be a cover for next quarter, but probably next quarter will be worse than this. I don't want to anticipate numbers. Obviously, we cannot predict exactly, but what I have seen is that. And the change in the appetite—we, again, we are different from our competitors like we have like 55% to 56% towards retail. This is what we've been doing in the last 25 years or 30 years, and we'll continue to do so. Obviously, very—we will go through the credit cycles. We will shine when things go all up, and we'll suffer a bit when the credit cycles are in the down period, which is what we're seeing right now. We are moderating growth. We're looking to go into lower risk segments based on what we're seeing in the economy; that change is not going to be radical, but you will see moderation, which already has started. We've seen some in this quarter. We've seen that in July and probably will continue during the latter part of that year. We're always looking for new pockets where we can grow. We are looking to reinforce our models. As you know, the model was messed up in the past due to what happened to COVID and the liquidity that was injected into the systems overall. So we're working to refine our models and be able to grow again, targeting a moderation in growth and lower risk segments. And once the situation stabilizes, obviously, we're going to go to the emerging middle class, as we've been doing in the past.

The following question comes from Alexandra Ramos from La Positiva. She would like to know more details about the insurances related to ROP IT and when it decreased during this quarter.

Okay. I think that's a great question, Alexandra from La Positiva. Let me pass it on to Gonzalo, who can help you with that answer. I'm sorry you are muted, I think. We cannot hear you. Let's do something. Let's go to the next question. And while Gonzalo solves his technical issues, we'll come back to him. So I don't know—moderator, do you have the third question?

Yes. Okay. The next question comes from Greg Mitchell from ABP Ventures. Can you please remind us how the digital strategy is improving cross-selling both within each IFS business, for example, multiple products within banking systems and across IFS business segments, for example, between banking and payments, and how significant will the impact be on overall performance?

Okay. Thanks, Greg, for the question. Let me pass it on to Michela so she can help me with that. I think she has already been looking at that.

Okay. Let me go a little bit into detail of the value that is being generated by the digital strategy, which is something that we try to reflect across the call presentation, but I would like to make it very clear. So the first point is that the digital strategy is helping us to increase customer base on an accelerated basis. You have seen that across all business lines, double-digit growth in banking, insurance, wealth management, and also payments. Now, how do we monetize this increased customer base? First of all, more float, and this is specifically happening already in the different customer segments. So in retail, we are seeing an increase in market share of the retail deposits, which is sustained in time. This is mainly thanks to digital, creating more engagement, which helps—they bring more volumes to us. The third point is more cross-selling. And here, we can see a lot of things being cross companies. So we are working very hard in bancassurance. So, for example, now we have all the Interseguro retail insurance products being cross-sold to our client base through the app. We also see the turnover of credit and debit cards, and this is also being used through the app growing double digits. We are also seeing the growth in market share and consumer lending, and this has a strong impact coming from digital. And the last point, which talks about what is the impact of the relevance of this on the numbers and also the synergies with payments. I think some of this is already showing in our numbers. First of all, fees are growing almost 10% for banking and for payments. This is related due to the specific focus on payments, both for customers and also for merchants. We also have seen the increase in net interest income coming from decreases in volumes, not only in yields. And another thing which I think is very important to consider coming from the digital strategy is that IFS has been able to grow client base and revenues while improving efficiency, so the marginal acquisition cost of digital for new clients is lower. What we are seeing is a growing client base in the top line, with an improving cost-income ratio. And now the improvement in cost-income doesn't come only because margins are high and net interest income is growing a lot, but because we're being able to manage this growth with little increase in costs. You have seen the numbers this quarter, less than 5% increase in costs. So I think this is something that differentiates us from our peers in the region. And I think it's something that constitutes the core of how we intend to continue extracting value from a digital strategy in the future.

Okay. And now I think Gonzalo is back, so we can go back to question number 2 from this section.

Yes. Thanks, Alexandra. Regarding your question, first of all, there's a small reduction in earned interest basically for two reasons. One is the exchange rate has come down, so our dollar holdings produce less interest in soles. The second is that the line also includes some dividends received. We received a smaller amount of dividends during the period. So that explains that part. The other line that has also reduced is we made a loss of PEN 30 million on real estate valuation, and those two lines explain most of the reduction.

Okay. Thank you, Gonzalo. I don't know if we have any more questions from the moderator.

As there are no further questions, I will return the call to the operator.

And there appear to be no further questions on the audio side at this time. I would like to turn the floor back over to Ms. Casassa for any closing remarks.

Okay. Thank you very much. Thank you, everybody, for all the questions and for attending our conference call. We'll see everybody again back when we report our third quarter results. Bye. Thanks.

This concludes today's conference call. You may now disconnect.