Intercorp Financial Services Inc. Q3 FY2024 Earnings Call

Good morning, and welcome to the Intercorp Financial Services Third Quarter 2024 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. It is now my pleasure to turn the call over to Mr. Ivan Peill from InspIR Group. Sir, you may begin.

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its third quarter 2024 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. Carlos Tori, Chief Executive Officer, Interbank; Mr. Gonzalo Basadre, Chief Executive Officer, Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo. 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 did not receive a copy of the presentation or the earnings report, they are now available on the Company's website, ifs.com.pe. Otherwise, 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 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. Good morning all, and welcome to our third quarter 2024 earnings call. I want to thank you for attending our call today. I would like to start by addressing the macro situation in our country. In the first eight months of 2024, economic growth performed positively with 3.5% growth in August, accumulating at 2.9% year-to-date GDP growth, mainly due to the recovery in consumption. A slightly improved market sentiment for consumers and businesses leads us to expect GDP growth of about 3% for this year, making Peru the country with the highest growth in the region. This week, the Asia-Pacific Economic Cooperation, APEC CEO Conference is taking place in Lima, highlighting the relevance of Peru within this important forum. It is a great chance to showcase Peru and its investment opportunities. Looking ahead to 2025, we are cautiously optimistic about the future growth of Peru as we expect private investments in infrastructure and mining activity to reactivate. Business activity will continue to generate employment with a positive impact on the economy. This quarter's results for IFS confirm that we are emerging from the most challenging phase of the credit cycle. On top of the liquidity events of the previous quarter, such as the release of pension plans and the availability of severance indemnity deposits, which accelerated the recovery, our results were supported by effective risk management, diversification of our income, and the ability to make quick decisions with flexibility and efficiency. This is why we believe that in line with improved expectations of Peru, the positive trend should continue. As mentioned, IFS has demonstrated resilience during this credit cycle. At Interbank, we have been able to grow our market share in loans and deposits, growing in Commercial Banking and now starting to grow again in the consumer portfolio. The cost of risk is converging to normalized levels as we see an improvement in our customers' ability to pay, paired with enhanced internal models and improved underwriting standards that should allow us to continue growing profitably. Finally, Interbank and Izipay continued to capture business opportunities together, while Plin continues to engage users, generating more primacy from our customers. At Interseguro, we have seen relevant growth in premiums, mainly in private annuities and individual life. We continue to be the market leader in annuities. Our Wealth Management business had a positive quarter in its core business, as assets under management reached another all-time high, and the investment portfolio had a good quarter. Now I wanted to take the opportunity to address two independent events that occurred concurrently at the end of last month as we communicated to our clients through our official channels. First, an operational issue in Interbank, which led to service interruptions between October 30 and 31. Normal service was restored within hours of such event. Second, and then related to the first, an event whereby a third unauthorized party illegally accessed and exposed certain data from a group of clients. Upon verification, we confirm that no data that allows transactions was exposed. We immediately reinforced security measures, including special monitoring of operations and client information, ensuring that both deposits and financial products are protected and customers could continue to operate normally and safely. As you know, our key strategic priority continues to be achieving digital excellence for our customers. We are focused on becoming the leading digital platform with profitable growth to create the best digital experience for our customers through the development of our analytical capabilities and always leveraging the best talent. Finally, I wanted to share some good news about sustainability. Our CSA score has seen a substantial improvement, reaching a score of 69 from 61. This is a reflection of our commitment to building a sustainable business. Going forward, we continue to be optimistic about IFS's outlook as we execute our long-term strategy. Now let me pass it on to Michela for further explanation of our quarter's results. Thank you.

Thank you, Luis Felipe. Good morning, and welcome, everyone, to Intercorp Financial Services 2024 third quarter earnings call. To begin, we would like to review the macro outlook for Peru. Continuous improvement in economic indicators. GDP for the third quarter grew around 4%, with August alone showing 3.5% growth. This result brings the first eight months of the year to accumulated growth of 2.9%, close to full-year market expectations of 3%. Primary sectors drove the growth, accumulating 3.8% for the year, driven by improvements in the performance of several mining units. The non-primary sector also accumulated 2.7% in the same period, reflecting increased consumption of both goods and services. We also wanted to mention that the IMF has updated its growth estimates for both 2024 and 2025. They have adjusted the estimates for LatAm countries upward for 2024, but downward for 2025. Peru is expected to lead the region with a 3% GDP growth in 2024. For 2025, the IMF projects a 2.6% growth with a stronger first half due to the pre-electoral year, which typically reduces dynamism in the second half. Furthermore, monetary policy remains one of Peru's main highlights. We were among the first in the region to control inflation; hence, one of the first to cut the reference rate, reducing it by 275 basis points from the peak of 7.75% to the current 5%. We believe the Central Bank still has room to continue reducing rates as long as the Fed continues to cut as expected. Finally, we continue to see a stable currency as the depreciation of the sole for the year was only 2%, while the rest of the region was over 10%. We observe optimistic leading indicators. We see business confidence improving during the year. The Central Bank, in its latest report, is expecting private investment to grow 2.3% this year and has increased its expectations for 2025 from 3% growth to 4.1%, in line with a more optimistic view of the Peruvian economy. This is good news, as the expectation for the level of investments for the following years is increasing. First, due to the reactivation of infrastructure projects, which are expected to remain at high levels over the next three years; and second, due to mining projects, both in existing mines to optimize and extend their remaining life into new projects and expansions. Some examples include Tia Maria, Toquepala, Cuajone, and Yanacocha, and for infrastructure, we also have several key projects. On the other hand, consumer confidence remains on the positive side. As of August, we have seen a gradual recovery in formal employment and a year-over-year growth in real formal wages. This trend is positively impacting private consumption as one of the factors driving internal demand. It is important to mention that part of the recovery in consumption was also accelerated by the pension fund withdrawals and the availability of severance indemnity deposits. Consequently, there has been a recovery in the purchasing power of people, still slow but already improving consumption levels. Finally, continuing on a positive note, Moody's and Fitch have changed their outlook for Peru from negative to stable this quarter. Moving on. In this context, we continue to build on our three key strategic priorities, which are: first, we aim for profitable growth to become a leading digital platform. We continue to grow our customer base double-digit across all segments, consistent with macroeconomic recovery. IFS has continued with its solid recovery, registering a net income that more than doubled in the third quarter compared to the same period last year and already achieving over 15% ROE in the third quarter. Second, we strive to create the best digital experience, with more than 81% of our retail banking customers being digital and improving NPS for retail banking to 66 points as of the end of September. Third, we continue to focus on our core businesses, maintaining a significant market share in consumer banking loans at 22%, ranking second in the market. Our retail deposit market share exceeds 15%, and we lead the market in annuities, with over 31% market share. Finally, in Wealth Management, assets under management continued to grow at double digits, reaching 19% year-over-year and surpassing previous matching. Moving on, we will review four sections of our earnings presentation: sustainable growth, digital update, key businesses, and finally, some takeaways. Let us start with the first section, which focuses on sustainable growth. Improving banking and investment results drive quarterly earnings recovery, growing by twofold year-over-year, reaching S/ 390 million net income at IFS level. This results in an ROE that is now above 15%, an improvement from the previous quarter and in our path to our medium-term ROE growth. Second, lower cost of risk translates into better results for Interbank, with a decrease of 90 basis points for the quarter and 210 basis points from the peak in the fourth quarter of 2023. Sustained growth in insurance premiums generates improvement in the insurance core business as life insurance and private annuities grow nicely on a year-over-year basis. In Wealth Management, assets under management continue to grow nicely, reaching a historical maximum. Overall, we have seen a strong recovery across all platforms and a positive trajectory towards continued success.

In this quarter, we observed a moderation in loan growth, but we experienced positive news in the cash loan market, as we had an 8% improvement in disbursements from the previous quarter. Overall, results continue to reflect our strategic focus on stability and growth in a resilient environment. Our loan portfolio is showing signs of improvement, and preliminary assessments indicate that we are headed in the right direction. Thank you for your attention here, and I look forward to discussing this further.

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

Thank you. Hi, good morning, Luis Felipe, Michela, Carlos, and good morning to all your team. Congrats on your results and the recovery on the Wealth Management business, and thanks for the opportunity to ask questions. My first question will be on your NIM expectations. As you mentioned, you're expecting that to be relatively flat this year. However, starting to think about next year, if we see that the economy is bouncing back, how should we think about the NIM trend? Especially if at some point, we have a more credit card appetite? And my second question will be on asset quality. You’re also wondering how you see the cost of risk evolving over the next years. As you have mentioned, the cost of risk was at 4% in the first nine months of this year, but at 3% this third quarter. And you have mentioned in previous calls that IFS cost of risk should be normalizing at the 3%, 3.5% levels. So just wanted to hear – double-check how you're seeing this trend going forward? And my last question will be on the fee income side, how do you see growth for this line? Especially considering that you will have Izipay revenues, higher assets under management and then we started to see a better performance in the wealth management business? Thank you.

Okay. Thank you, Ernesto, for your very detailed questions. I think there are some details that I'm going to go straight to Michela, so she can build upon those specific numbers. But thanks very much. Michela, please.

Good morning, Ernesto. Thank you for the questions. Let's start with NIM. As you have seen in the current numbers, NIM has improved 10 basis points. What we are expecting for 2025 is a recovery of NIM, mainly due to a couple of trends. First, cost of funds, which has already decreased substantially, now will have a full-year effect during 2025, which is very positive. And the second part is the portfolio mix. As you mentioned, the high-yield portion of the portfolio, which is not consumer loans, credit cards, and personal loans has decreased this year substantially. But we are starting to see slight growth. So we are expecting growth for 2025, and that should help yield on loans, thus, together with cost of funds, impacting positively NIM for 2025. On asset quality, I guess, this quarter is already a normalized level, now with 3%. Now have in mind that this 3% comes with a couple of things that are still not within our risk profile target. First, again, the consumer loan book is smaller than we would like it to be, and the second impact is that we have a portion of the commercial loan book which is guaranteed by the state. So going forward, what we expect is that there is still room for improvement in the specific cost of risk of the consumer loan book, which will push the cost of risk downwards, but the portfolio mix and the maturity of the guarantees from the state will push the cost of risk upwards. So basically, we are not yet giving guidance for next year. But what we are expecting is cost of risk to be around what we have seen – I mean, between what we have seen this quarter and slightly above that. The third part, fee income. I guess this quarter has been a good reflection of what we should expect for next year. And as you mentioned, the drivers of the recovery of fee income are the growth in the consumer loan book for sure, fees coming from Izipay and Inteligo. We are expecting a much nicer growth year-over-year during 2025 versus what we saw this year because this quarter, fee income is growing nicely, but still, when you look at the year-over-year accumulated numbers, there is still some negative impact there.

Yes, super helpful, Michela. Just a last question on your ROE expectations. So you are reiterating that you can expect an ROE around 12% or above 12% this year. But when do you expect to reach your sustainable ROE? I think you were expecting something around 18% at some point. When do you think we can get to those levels, 2026, 2027?

We are still closing numbers, Ernesto. But I guess that the question there is the bank, and specifically the recovery of the consumer loan book. I guess we should be close to the 18% ROE levels, maybe more like by year-end next year. But it is difficult to see yet the full year 2025 already at the midterm range. So maybe the last quarter of 2025, we still need to check. But I guess we are getting closer to that. And it's a matter of cost of risk continuing now in the trend that we have seen in this quarter and the recovery of the consumer loan book.

Thank you, Ernesto.

Thank you. Felipe, Michela, everybody and also, congrats on the ROE recovery here and the good set of results. I have a question regarding your credit card that, back in the day, was super important. And I think it remains super important but has been losing share on your total loan book. What should we see? And what do you need to have more appetite and start growing the credit card book again? Because this was another quarter of quarter-over-quarter decrease. I guess it was down maybe 5%. So just trying to understand where is the inflection point, what you need to see, what is the economic data, what has changed in the industry, whatever you can talk about this product? And then I can ask a second question? Thank you.

Okay. Yuri, thank you very much. Let me pass it on to Carlos Tori, who can build upon your question.

Thank you, Yuri, for your question. Yes, credit cards remain very important for us. We have seen, over the last couple of quarters, the whole market shrinking a little bit more due to the economic environment than anything else. So we follow that path. I believe we have reached or are very close to the inflection point, and we are looking to grow the portfolio. But we're going to be cautious about how we do. We don't want to rush into growing that. We want to keep our cost of risk controlled. So we are seeing some growth in some segments. Our value proposition on our credit cards remains very strong. We continue to look for that. So we expect probably the last quarter of the year will show higher consumption because of the holidays, and we'll try to maintain consistent but cautious growth in that portfolio. But yes, it continues to be our purpose.

Yes. I guess, Yuri, we're all anxious about growth, obviously, but as Carlos mentioned, we are just emerging from a very hard part of the credit cycle for the country as a whole. So as he mentioned, the economy needs to continue its recovery path and the consumer purchasing power and ability to pay should show us more strength so we can become less conservative. And obviously, we've been working on our models. So that strategically will help, but we're going to be cautious. Because, again, the economy in Peru is in its recovery phase, but we need to remember that 2025 is a pre-electoral year; there's usually some volatility there. And I think that we're constantly optimistic but cautious as well.

Super clear. If I may, just on the card product, how should we think about the margins and the risk-adjusted margin of the card products? Is this accretive for your total NIM and risk-adjusted NIM? Once we start to feel more comfortable with this product, should this be a tailwind for your margins?

If I can, Yuri. It is accretive. Yes, for sure. Credit cards now mean the new level of rates in risk-adjusted yields; that is for sure one of the highest. And this is one of the reasons why NIM is a little bit impacted. So in line with what Carlos and Luis Felipe had just mentioned, the importance of the recovery of that portfolio is vital for their recovery in the yield of loans of the bank.

No. Thank you, Michela. And for 2025, how should we think about margins for you? I remember in the past call, they were somewhat positive on funding costs and being a tailwind for NIM. Is that the case? Could we see NIM keep expanding from here as we are seeing this quarter?

Yes. Yes, Yuri, for sure. Yes, as cost of funds is already at a lower level. And as long as the portfolio mix starts to shift, NIM should recover during 2025.

Good morning to all. And thank you for the presentation. I have two questions. The first one, also in terms of loan growth. You have been able to outpace – gain market share, this year, basically, you're outpacing the system. Is this a trend that should continue next year, or next year, should we see IFS growing more in tandem with the rise of the Peruvian financial system? Or even below that, considering you have hard comps in your commercial portfolio? The second question is related to the data breach that we saw at the end of last month. I would like to understand if there was any short-term impact with that in terms of deposit outflows or clients shutting down accounts or something like that. Anything of that that we would anticipate for the fourth-quarter results?

Okay. Thank you, Andres, for your questions. First on the second one, that's been very recent. We have not seen any material change in our operations. Customers continue to operate normally. So we don't anticipate anything so far. And then in your first question, as we've always mentioned, our aim is to outpace the market. It's like, on a sustainable way, we, year in, year out, like to scratch a little bit more market share, and that's our objective for 2025. Obviously, it will depend on many factors. I think we have ample room for growth in our commercial book, given our market shares are not that high on that segment. And it will depend on the recovery of the consumer portfolio. Obviously, we're very focused on that, but that should also happen. So if you ask me, a big strategic view is to continue growing faster than the market as we've been doing in the recent years for 2025, and the years onwards will continue to be the same.

Thank you, Luis Felipe. Very clear. So based on your previous comments regarding loan growth in the fourth quarter, can we expect sort of this year end at mid-single digits? And for next year, it would make sense to – for you to grow at high single digits? Or is that too optimistic?

I think it's too early to tell right now, Andres. We are not providing guidance, obviously, at this time of the year. We're all setting down in our budgeting process and working on that front. So as soon as we have more clarity on that, we will communicate it to the market through the appropriate channels. But I wouldn't anticipate, hopefully, like overall, the trend for Peru's GDP should continue to be positive with the caveat of the pre-electoral year coming on. That system should grow faster, obviously, than GDP, as it has been the case. If we scratch a little bit of market share, you can kind of infer what we will expect, but as soon as we complete our work, we will surely communicate it.

Thank you, operator. The first question comes from Juan Nicolás Pardo Ayala from Credicorp Capital Asset Management. Any sanctions are expected from the regulator coming from the data breach event?

Hi. Thanks very much for the question. We don't know yet. Obviously, this is – we are collaborating with the authorities in all their requirements. We'll go through the process. We are not anticipating anything yet.

Okay. Thank you very much, and thank you, everybody, for joining IFS third quarter conference call. We will see everybody back again next year. Thanks. Bye-bye.

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