Earnings Call Transcript - IFS Q4 2023

Operator, Operator

Good morning, and welcome to the Intercorp Financial Services Fourth Quarter 2023 Conference Call. All lines have been muted to eliminate background noise. Please note that this conference is being recorded. Following the presentation, we will invite questions from participants. It is now my pleasure to turn the call over to Ms. Valentina Porto of InspIR Group. Ma'am, you may begin.

Valentina Porto, Moderator

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its fourth quarter 2023 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer, Deseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo; Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They'll be discussing the results that were distributed by the company yesterday. There is also a webcast video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website, ifs.com.pe to download a copy. Otherwise for any reason, if you need any assistance today, please call InspIR Group in New York at 646-940-8843. I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance, or financial results. As such, statements are made based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir.

Luis Felipe Castellanos, CEO

Thank you. Good morning all and welcome to our fourth quarter and full year 2023 earnings call. I want to thank you very much for attending. I want to start by making a brief summary of our strategy at IFS. You know that our aspiration includes becoming the leading digital financial services solution for clients, providing profitable products and services in our key businesses with the best digital experience for our customers, based on operational excellence and levered on advanced analytics and the best talents are our competitive advantage. This is the strategy we are employing and we continue to execute it with a long-term vision. Regarding the economic environment, 2023 was a challenging year in Peru with virtually no GDP growth, and a contraction in domestic demand which translated into a deterioration of the payment capabilities of our retail customers. On the positive side, inflation decreased consistently during the second half of 2023 and the central bank has reduced the soles reference rate by 100 basis points during the year to 6.25%. Also, expectations of a strong El Nino phenomenon have decreased, and for 2024, GDP growth of around 3% is now expected, which is a good recovery versus last year. Despite this challenging environment, IFS continues to show resilience in its core operations. In 2023, we grew our customer base and revenues and we continue to consolidate our results of our digitalization efforts. At Interbank, market shares across key business lines remain strong despite moderation in consumer loans, as we are still digesting increased levels of cost of risk, mainly in the consumer finance segments. Despite the challenging conditions, Interbank remains well-provisioned and well-capitalized. At Interseguro in 2023, we continued growing in premiums of individual life and retail insurance while consolidating market leadership in annuities. Investment results continued to be solid in the company. Although global market conditions impacted negatively our investment results in our wealth management business, in 2023, Inteligo's results recovered from the negative profit posted in 2022. Finally, on payments, despite growth in merchants, volumes have moderated in 2023, and this has taken a toll on anticipated results. However, Interbank and Izipay continued working on creating synergies, while PLIN continues to accelerate within a fully interoperable B2B system. We remain confident that IFS will continue generating sustainable returns in the coming years as we are being cautious with our operations. Given the scenario we're facing today, we continue working on our long-term strategy, which is to ultimately empower all Peruvians to achieve their financial well-being. Now let me pass it on to Michela so she can give you a detailed review of our results. Thank you.

Michela Casassa, CFO

Thanks, Luis Felipe. Good morning and welcome everyone to Intercorp Financial Services year end 2023 earnings call. Today, we will review five sections of our earnings presentation, starting with the macro outlook for Peru. On Slide 3, complementing what Luis Felipe mentioned, the decrease in GDP and inflation for four quarters in a row has triggered the first cuts in the soles rate, driving it down from the peak of 7.75% to 6.25% as of today. Inflation has decreased from a yearly 8.8% at the peak of June '23 to 3% as of January, already within the central bank's target. And the exchange rate has remained relatively stable. 2024 is expected to be a year of recovery for the Peruvian economy due to several reasons. First, the base effect versus the first quarter of 2023, as no major disruption is expected now that El Nino seems to be cooling down. Recovery on public investment after the first year of the newly elected regional government, and lastly, more political stability which should positively impact private investment. On Slide 4, we wanted to point out your attention on the latest news on El Nino. After an inflection point in the probabilities of a strong to moderate El Nino as of the end of 2023, we have started the year with very high probabilities for a non-to-weak Nino. This is very good news for the country as the economic recovery could speed up if no further disruption takes place in the coming months. On Slide 5, we are providing the main operating trends for the year ending 2023 which are all within the latest guidance provided during September. First, we continue to register sound capital levels with Core Equity Tier 1 ratio closing the year at 11.8% and total capital ratio at 15.5%. There has been further moderation in the yearly total loan growth to 6% as of December and 7% in consumer loans and a stabilization of NIM at 5.5%. We continue to see good efficiency levels both at IFS and at the bank level as we are strictly monitoring and managing costs, especially at the bank which has reached a cost-income ratio around 37% as of year-end, a strong improvement versus last year mainly due to the good operating leverage. Cost of risk continues to be high in consumer lending, pushing the bank's year-end cost of risk to 4.3% in the lower range of the latest guidance. IFS ROE for the full year 2023 stands at 11.3%, impacted by cost of risk at Interbank and soft investment results at Inteligo slightly above the latest guidance. Now let's move to the second section of the presentation which focuses on profitable growth. On Page 7, we see a continuous growth of customer base at IFS or 11% year-over-year in banking, 6% in insurance, 9% in wealth management, and 25% in payment merchants. On Slide 8, in line with a previously mentioned macro scenario in the previous quarter, we have further moderated banking activity by tightening credit standards which had an impact on credit and debit card purchases as well as in retail and SME loan disbursements. Reduced activity in banking and increased costs of risk in the consumer portfolio had impacted the banking earnings and ROE, while investment returns impacted wealth management results. This quarter though, we have positive news in the insurance business which posted solid investment results. With this, IFS earnings are at PEN286 million and ROE at 11.6% for the fourth quarter, driving the full-year earnings to PEN1,080 million and ROE to 11.3% as shown in Slides 9 and 10. On Slides 11 and 12, good news in the top line as total revenues continued to grow, 4% in the quarter and 10% for the full year, thanks to the growth registered in banking of 10%, wealth management growing more than 8 times from a low base in 2022, insurance growing 1%, and payments 5%. On Slides 13 and 14, we wanted to give you more details on the risk profile of the portfolio. First of all, we wanted to mention that 44% of Interbank's portfolio is focused on commercial banking, which continues to behave nicely mainly due to our conservative approach which has always focused on low-risk clients and has had a small participation in small and micro companies. This conservative approach has allowed us to maintain a lower PDL versus our peers to balance our higher focus in the riskier consumer portfolio. On the consumer portfolio, we have three different risks. First, the unsecured consumer portfolio, which is the one being impacted by the macro scenario and which represents 22% of the total loan book. Second, mortgages, which are also 22% of the loan book, and third, payroll deductible loans to public sector employees, a low-risk segment which represents 12% of the total loan book. This quarter, the cost of risk of the bank remains high at 5.2% with retail cost of risk at 8.3%. Coverage ratio for the retail portfolio remains strong at 194% and above pre-COVID levels. Commercial banking cost of risk has seen a slight increase with an improvement in coverage ratio. On Slide 14, we are giving you an update of the reschedulings in the consumer loan book. During the last quarter of 2023, these reschedulings represent 20% of the unsecured consumer loans and have increased only PEN100 million. Payment behavior for performing loans is different for customers with reschedulings. The unpaid portion for regular clients is only 2%, while it is around 14% for rescheduled clients for installments matured as of December. Finally, on this section on Slide 15, we wanted to highlight the tight management of costs we continue to pursue, which shows a 5% decrease in total expenses at IFS for the fourth quarter of 2023 and 6% reduction at Interbank versus the previous year. With this, total expenses for the full year have only increased 2% at IFS, maintaining the efficiency ratio below 37%, and has increased only 1% at Interbank, driving the cost-income ratio down more than 300 basis points to 37.3%. Moving on to the digital performance section of the presentation on Slide 17 and 18, we are continuously building 100% digital solutions for our customer journey across our businesses. We have positive news in our digital indicators, which continued to show nice trends when compared to the previous year. As of December '23, digital customers reached 75% of retail customers who interacted with the bank during the last 30 days, up 4 points in the past year. Digital sales reached 63%, and our digital self-service indicator has improved sharply from 77% to 82%. MPS has seen a deterioration for the first time in many quarters, mainly impacted by the actions related to risk profiling. The insurance and wealth management digital indicators show positive developments as well, with digital self-service reaching 59% at Interseguro, so our sales reaching 82% and digital premiums still small, but reaching 10% at Interseguro, and digital transactions for fund management reaching 48% at Interfondos. Now let's move to some more details on the performance of our four key businesses on Slides 20 to 30. On Slide 21, we have seen a year-over-year growth at the bank this quarter with net interest income growing 13%. Let me go back, sorry. On Slide 20, started with banking, and in line with our focus strategy, we continue increasing market shares reaching 15.1% in retail deposits, 9.6% in commercial loans, and retail loans at 19.1% as of December 2023. There are a couple of things that we have been working hard in the past month and that are bringing nice results as shown in the market share increase to 14.7% in payroll inflows from 13.6% one year ago and the 17.7% market share in sales financing, up from 11.7% just 12 months ago. Now on Slide 21, we have seen a 10% year-over-year growth at the bank this quarter, with net interest income growing 13%, coming mainly from increased volume and yield on loans, 2% growth in fee income and 4% in other income. On Slide 23, there has been a decrease in yield on loans of 30 basis points reaching 11.3%, and NIM decreased 10 basis points to 5.5%. Risk-adjusted NIM decreased in the quarter in line with the increase in the cost of risk of consumer loans. Good news this quarter is that cost of funds remain flat at 4.2% as shown in Slide 24 as we start to see the first impacts of a decrease in the soles rate. Cost of funds has been rising in the past at the market level, mainly due to two reasons. First, a continuous migration of retail deposits to more expensive term deposits, both in soles and dollars, and the higher remuneration to commercial and institutional, mainly in dollars as rates have continued to increase. Correction in overnight deposits rate in soles continues, though at a slow pace. Our loan-to-deposit ratio of 103% is in line with the industry's average. Positive news is that the deposits continue to increase their share in total funding and that retail deposit market share has continued to increase. Now moving to insurance. Premiums were down 4% in the quarter and market share of annuities was 26.4% as of November '23. Individual life and private annuities business lines continued to grow nicely quarter-over-quarter, or 6% and 40% respectively, increasing their contribution to total premiums. On Slide 25, the quarterly return of the investment of the portfolio came extraordinarily high at 7.2% compared to the previous quarter, mainly due to some dividends received from particular investments. The insurance portfolio is composed of 86% fixed income, 9% real estate, and 5% equity and mutual funds as of December '23. Let me move now to wealth management. Good news in wealth management with the yearly growth in asset under management and 4% growth on a quarterly basis. This quarter, we saw a negative impact from investment results, but the core business continues growing. On payments, we want to give you a summary of the developments of our payment ecosystem. Growth in merchants and volumes continues with some moderation. Izipay merchants increased 25% year-over-year, reaching 1.3 million while transactional volumes grew 3%. E-commerce transactions are growing at the same pace and represent 16% of our total transactional volumes as of the end of December. In the case of IzipayYa, our solution for micro-merchants growth in merchants was 35% and was very strong in transactional volumes or 70%, all of which are linked to an Interbank account. On Slide 28, Izipay represents a growing and profitable operation and is working on creating synergies with Interbank. Revenues continued to grow 1% on a yearly basis and 13% in the quarter, supported by the increase in transactional volumes and merchants with some pressures on MDRs coming from increased competition. We have seen a moderation in the transactional volume this quarter in line with the decreasing economic activity as market share continues to increase, reaching 57% in physical acquiring and almost 24% in virtual acquiring. EBITDA has seen a contraction in the quarterly figures due to margin compression in a more competitive landscape. We have been working to accelerate the growth of our payment ecosystem by having all of our assets work towards a common strategy. We are focusing on increasing transactional volumes, offering merchants additional services, 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. We are starting to see results from this strategy as evidenced by the following four key figures: 25% yearly increase in Izipay flow coming to Interbank accounts and 48% increase in average balances from merchants. A 1.5 times yearly increase in transactional volumes from micro-merchants, thanks to IzipayYa and more than 5,000 new credits disbursed in our test of the new lending model to merchants. On Slide 29, PLIN has been accelerated by the new landscape of the interoperable P2P system. PLIN reached more than 14 million users as of the end of December with Interbank participation at 46%. The volume of transactions has continued its strong growth, reaching 2.4 times the volume registered the same quarter one year ago. PLIN and Yape interoperability started in April and QR code interoperability was added in September. This has been an important development for financial inclusion in the country, which the central bank has encouraged and which should help to bring more Peruvians into the financial system, reducing the use of cash which continues to be high in the country. The number of transactions have increased 3.3 times since the interoperability started. On Slide 30, moving to our ESG update. We have reinforced our sustainability strategy. Our efforts in the last 12 months have allowed us to reach 61 points in the 2023 corporate sustainability assessment with an improvement of 11 points on the environmental dimension. Moreover, we have been included in the Standard & Poor's Global Sustainability Yearbook 2024 based on our 2023 CSA score. On the social front, IzipayYa in our financial services education platform Aprendemas are positively contributing to financial inclusion. On the environmental front, we are increasingly involved in green and sustainable financing by helping our customers grow their businesses in a sustainable way. Interbank has obtained a green certificate from Enel that certifies the consumption of renewable energy in 2023 at our main headquarters and has signed a contract to supply this cleaner energy until 2025. Now, let me move to the final part of the presentation where we provide the guidance for 2024 and some takeaways. On Slide 32, 2024 guidance goes as follows. First, capital ratios to remain at sound levels with total capital ratio above 14% and Core Equity Tier 1 ratio at around 11%. Second, a continued path to recovery towards our midterm target in core profitability with 2024 IFS ROE above 12%. In terms of loans growth for 2024, we expect mid-single digit growth in total loans. For 2024, we are focusing the NIM guidance on Interbank. We expect Interbank NIM to be stable and above 5.5%. Cost of risk is expected to remain high in 2024, above pre-COVID levels and reach a number below 4.3%, thus below 2023. It is important to remember that we included a moderate Nino phenomenon in our forward-looking variables during the second half of 2023. Lastly, we will continue to focus on efficiency, especially on positive operating leverage. IFS efficiency ratio is expected to be around 37%, one of the best in the region. On Slide 33, let me finalize the presentation with some key takeaways. First, after a weak 2023, macro sentiment for 2024 is relatively positive with minor disruption expected from El Nino. Second, good performance in the insurance business and positive investment results in wealth management. Third, retail and more specifically consumer finance cost of risk remains high, but with strong coverage ratios. Fourth, tight management of costs reflected in solid efficiency levels. Cost of funds stabilizing on soles rates outlook, and we are strengthening our digital positioning and presence in payments. Thank you very much. Now we welcome any questions you might have. Let me only just mention that we have recently been notified that IFS has been included again in the MSCI small-cap index. Now we welcome any questions you might have.

Operator, Operator

Thank you. We will now open the floor for questions. We will first take questions from the conference call, followed by questions from the webcast. The first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo, Analyst

Thank you. Hi, good morning, Luis Felipe and Michela, and good morning to all your team, and thanks for the opportunity to ask questions. I have three questions from my side. The first one is on your cost of risk guidance. So given that El Nino seems to have changed to a low non-impact, how should we think about the cost of risk in the first quarter of this year? You have a very strong reserve coverage ratio. So just wondering if there is a possibility that at some point in '24, we can have some reversal of provisions related to El Nino? And also, when do you expect the cost of risk to normalize to historical levels? Because the cost of risk for this year above 4.3, it continues to be high, your historical levels. Then my second question is on your NIM expectations. Want to double-check if I'm correct, can we expect NIM to behave between stable and NIM expansion of 20 basis points this year? And also would like to hear from you what should be the key drivers for NIMs in this year. I don't know if it will be the recovering loan growth, probably more appetite on the consumer segment after leaving behind the impact of El Nino and also lower funding costs now that we are going through this easing cycle. And my last question is on expenses, we have seen that IFS has been doing an important effort to maintain costs under control. So how should we think about OpEx growth this year? Should be in line with inflation, a little bit above inflation? Just wanted to understand if you will continue to do investments in technology or disruptive initiatives. I also wanted to break it down of how much of the OpEx will be related to that. And also related to this question, I will also appreciate if you can share with us in which part of the P&L should we start to see the results or the benefits of all these new investments? Thank you.

Luis Felipe Castellanos, CEO

Thank you, Ernesto. I'll begin addressing your question, and Michela can provide additional details. Regarding our guidance on the cost of risk, we do not anticipate a significant impact or damage to infrastructure from El Nino. Nonetheless, we are experiencing the effects of this phenomenon throughout most of 2023, which is expected to continue. As you've noticed, temperatures are elevated, particularly in the ocean. While we do not foresee major disruptions, we cannot entirely rule out the possibility of unexpected heavy rains. El Nino affects various sectors in Peru, such as fishing and agriculture, so we need to approach this carefully. Nonetheless, we expect the second half of the year to perform better than the first half, and Michela will provide more insights. When it comes to expenses, I would like to emphasize that controlling costs remains a priority for us, and we are committed to maintaining discipline in this area. Our strategy is founded on two key principles: austerity in our operations and continued investment for future growth. We won't compromise on building our future to cut costs, but we do maintain a strong focus on cost management, which is yielding positive results in terms of operational efficiency. Now, I'll turn it over to Michela, who will offer more detailed information on the topics you've raised. Thank you.

Michela Casassa, CFO

Thank you, Luis Felipe. Hi, Ernesto. I appreciate your questions. Let me start with your inquiry about the cost of risk. Our guidance suggests that we will remain below the cost of risk for 2023. If you look at the trend of the cost of risk throughout 2023, you'll notice it increased in the third quarter and slightly in the fourth quarter. The primary reason for this, which we discussed in our last conference call, relates to the unsecured portion of our consumer lending portfolio. With stagnant GDP growth and ongoing inflation, we've seen a decline in the payment capabilities of Peruvian families. In the latter half of 2023, we've also taken into account a moderate Niño in our future provisions, estimating it at over PEN100 million. For next year, we anticipate a high first quarter, even without Niño, due to the culmination of reschedulings we've conducted throughout 2023, some of which will carry into the first quarter of 2024. After that, we expect a downward trend in the cost of risk. Regarding your question about historical levels, I don’t foresee us dropping below 3% like we did pre-COVID, due to our portfolio composition. We are optimistic about 2025 seeing significantly lower provisions than in 2024, but I don't expect that figure to fall below pre-COVID levels. Now, on to our NIM expectations: we expect a stable NIM above 5.5%. This stability is due to competing trends in NIM throughout 2024. We see some positive movement relating to the decrease in the cost of funds, particularly in soles, but there are also negative factors concerning loan yields. This is specifically tied to a higher proportion of commercial loans compared to a shrinking share of consumer loans, as we have been reducing that portfolio in recent months and plan to continue that trend into 2024. In terms of expenses, we anticipate a stable efficiency ratio at IFS, which currently stands at a low 37%. We expect mid-single-digit growth in expenses for both IFS and the bank. When it comes to investments and operational expenditures related to digital and financial disruption, I can say that our technology investment has increased significantly—about five times what it was five to seven years ago—and it is likely to continue growing. In terms of the financial impact of our digital strategies, I believe the benefits will be reflected across all lines of the P&L. Our digital initiatives have not only increased our client base but also enhanced digital sales and loan capabilities, yielding more income and fees from a wider range of transactions. We’ve witnessed a rise in product penetration across most customer segments, pointing to positive operating leverage from our digital efforts. Importantly, while we have expanded our digital investments, we've also reduced our physical presence by over 40%. This illustrates how we have successfully utilized our digital strategies to adapt and grow. Additionally, with regard to our latest investments in payments, we are closely monitoring and fostering synergies with Interbank. This effort goes beyond the fees from Izipay and aims to strengthen the Interbank ecosystem to attract more inflows. Lastly, with IzipayYa, which targets micro-merchants, we not only anticipate capturing more inflows but also aim to introduce new services to enhance revenue. I'll stop there, Ernesto, and hope I addressed your four questions adequately.

Ernesto Gabilondo, Analyst

Yes. Thank you very much, Michela and Luis Felipe. Just a last question. In your ROE, you are guiding an ROE above 12% this year, but when should we think about your medium-term ROE? I think in the past you were saying that IFS sustainable ROE is around 18%. So just wanted to hear from you, how are you seeing the ROE evolution in the next years? I understand this year will continue to be high in terms of cost of risk. But as you said, it could be normalizing to a cost of risk of 3% in the next years. That could be a driver. So just wondering, how should we think about the ROE evolution over the next couple of years?

Luis Felipe Castellanos, CEO

Sure. I think. Ernesto, thanks for your question. ROE should start normalizing after 2024. So I'm not pretty sure. Maybe Michela can tell us, according to our models, 2025 will already be there, but we'll be targeting that 18% medium term. So hopefully we'll be able to reach it. And it's all related to the performance of the economy. And we have done our work in terms of changing the profile of our new customer acquisition in terms of credit cards and consumer loans. However, it has to react according to how the economy goes in the future. So our base case is that starting 2025 will be returning to higher profitability levels, and obviously, we have to pay close attention to the investment results, and that will be subject to the evolution of the international capital markets. I don't know, Michela, if you want to complement something else.

Michela Casassa, CFO

Ernesto, I mean, the cost of risk is not necessarily going down to 3%. It will go down to below 4%, but not necessarily 3.0%. Somewhere between 3% and 3.5%, I don't know exactly. In 2025, I mean, we could get back to the midterm ROE in 2025. Actually, the uncertainty there is if the bank goes back to the 17% to 18% ROE, that will depend on the speed of the recovery of the Peruvian economy, which directly impacts the consumer portfolio.

Ernesto Gabilondo, Analyst

Okay. Excellent. Thank you very much.

Operator, Operator

Our next question will come from Nicolas Riva with Bank of America. Please go ahead.

Nicolas Riva, Analyst

Thank you, Michela and Luis Felipe, for addressing my question. I would like to ask about your Tier 2 bonds, particularly those issued at the Interbank and bank levels. The bank has already announced plans to call the outstanding 2029 Tier 2s in March, which amounts to just over $100 million. Additionally, there is another Tier 2 bond eligible for call next year, with different economics compared to the 2029s, including a lower coupon and reset. Could you please share what we should anticipate regarding the call option for the 2030 Tier 2s next year? Earlier this year, to finance the call on the 2029s, you issued a Tier 2 bond that resembles a legacy Tier 2 bond because it lacks a coupon deferral and there is no CET1 trigger for principal write-down. My question is, why does the banking regulator in Peru permit banks to issue these legacy Tier 2 bonds instead of Basel 3 Tier 2s? Thank you.

Luis Felipe Castellanos, CEO

Thanks, Nicolas. That's a perfect question to be answered by Michela. Go ahead, Ms. Michela.

Michela Casassa, CFO

Hi, Nicolas. Thank you for your question. Listen, first, related to the Tier 2 that will mature or will be callable during next year, it's something that we are expecting to renew for sure. We do need the additional $300 million of debt for our total capital ratio. And as to why the superintendency allows banks to issue old style bonds, that I wouldn't know the exact reason, but what I can tell you is that, you know, Peru has been for a long period of time in a stage that we always describe as Basel 2.5. The latest regulation that was issued during last year brought us to Basel 2.95 to say it in some way. And the only feature that has not been implemented is the one that you're asking. So everything else has been aligned to Basel 3. But the Tier 2 bonds have remained with those characteristics. So basically, the one that we issued in January is an old style which at the end is pretty liked by the investors. And we are not sure really whether or not there is going to be additional regulation going forward. But if not, most likely the new that we will issue next year will also be in this way unless there are news in the regulation.

Nicolas Riva, Analyst

Okay. Understood. Michela, I have a follow-up on your earlier comment. When you mentioned needing the $300 million Tier 2 capital from the 2030s, do you mean that you expect to call that bond and replace it with a new legacy Tier 2 issuance?

Michela Casassa, CFO

We will need to evaluate all the economics as we get closer to the call date of the bond.

Nicolas Riva, Analyst

Okay. And just one last question on that. If you were not to call that bond, does it start losing capital treatment?

Michela Casassa, CFO

Yes, it does. 20% per year.

Nicolas Riva, Analyst

Okay. Thanks very much, Michela.

Michela Casassa, CFO

Thank you.

Operator, Operator

The next question will come from Carlos Gomez with HSBC. Please go ahead.

Carlos Gomez, Analyst

Thank you for taking my call, and thank you, Michela and Luis Felipe. I joined late and may have missed this, but could you share your thoughts on the level of indebtedness among SMEs and consumers in Peru? What is a realistic outlook for credit growth this year and in the next two to three years? Additionally, during the COVID pandemic, you aimed to support SMEs through the Reactiva program. What is your current position on that, and do you have plans to further pursue that segment? Thank you.

Luis Felipe Castellanos, CEO

Thank you, Carlos, for your question. Let me address your inquiry from two angles. Firstly, there is still significant potential for increasing bank capitalization in Peru, particularly on the debt side. Currently, we stand at 40% total loans relative to GDP, and consumer loans are even lower than that. Therefore, the growth potential for the Peruvian financial system is robust, as it has been in recent years. While we are currently experiencing a negative credit cycle due to economic conditions, we are confident that this will eventually pass, and growth will resume. With a recovering economy, we anticipate that growth will be even more substantial. This situation also applies to SMEs. One challenge we face is the issue of informality within the SME sector in Peru, which hinders aggressive expansion. To tackle this, we are focusing on enhancing our digital and analytical capabilities to better reach these clients. Our efforts during the pandemic, particularly with the Reactiva program, yielded positive results and helped us better understand a client segment where we were previously less prominent. However, given the current macroeconomic climate, we are cautious about taking on additional risk. We are quite proactive in our retail portfolio, but do not feel the need to extend that same approach to our commercial portfolio, which includes SMEs. We currently have a solid 3% market share and are developing the necessary capabilities to serve this market effectively. We have gained valuable insights into what works well with our SME clients. Nevertheless, until the economic cycle improves, we will likely maintain a conservative stance towards SMEs. The acquisition of Izipay has brought us closer to merchants, creating new growth opportunities in a customer segment that the company understands well. As Michela mentioned, we are already noticing positive developments in that area. We possess strong assets to engage in this segment without significantly elevating risk levels. That concludes my remarks, and I don’t know if Michela would like to add anything.

Michela Casassa, CFO

The only thing I would add is that from all the new clients that we started working with during the Reactiva loans in the small business segment, we were not able to lend to many of them. I think it's somewhere below 15%, the percentage of loans that we were able to renew without the guarantee of Reactiva. But what was really positive news from that was that the number of clients increased substantially in that segment, and also the float with that segment, so deposits. And together with those deposits, fees coming from transfers and also trading income. So there was a side business coming from that segment with the Reactiva program. And when we move upwards to the mid-size company there, the impact was even higher. We were able to replace Reactiva loans there. I think it was around 40% or something like that. And also the collateral business, trading income and fees, was very important. And I think that that, together with some other things that we have been doing in the mid-corporate segment, has allowed us to reach the number three position in the market as of year-end. We used to be number four. Now we are number three in the market.

Carlos Gomez, Analyst

Thank you. And you said your market share is, did I understand 3% or 13%?

Michela Casassa, CFO

No, in the small business it's only 3%.

Carlos Gomez, Analyst

In the small business segment, we're not referring to SMEs.

Michela Casassa, CFO

A proportion of both, mid corporates plus small business, yes.

Carlos Gomez, Analyst

Okay. And I think my other question was in terms of, in actual numbers, well, yes, there is a lot of potential for growth. How much would you expect your portfolio to grow again, not only '24, but also '25, '26?

Michela Casassa, CFO

In that specific segment, sorry or overall?

Carlos Gomez, Analyst

Both.

Michela Casassa, CFO

Okay. No, I mean, the guidance that we are giving for total loan growth for next year is mid-single digit. Okay. Actually, we are expecting a little bit higher increase in loans in commercial banking and a little bit lower in retail banking, because still the consumer portfolio will grow marginally, we believe.

Operator, Operator

At this time, we'll take the webcast questions. I would now like to turn the call over to InspIR Group. Please go ahead.

Valentina Porto, Moderator

Thank you, operator. The first question comes from Daniel Mora of Credicorp. In 2024, can we expect a stable NIM given that with the increases in rates it remains stable at 5.5?

Michela Casassa, CFO

Let me take that. Daniel, thank you for your question. I guess we commented that before. Yes, we are providing guidance for a stable NIM which is the result of decreasing cost of funds from the cuts in soles rates, but also some pressure in the yield on loans due to the portfolio mix and its evolution.

Valentina Porto, Moderator

Thank you. And as a follow up to that, when do you expect to reach the peak in provisions and the peak in non-performing loans?

Michela Casassa, CFO

Peak in provisions? I mean, we believe that the high quarters have been already the third and fourth quarter, but the first quarter, 2024, is still going to be a high cost of risk for the consumer portfolio. After that, we expect cost of risk to start to go down and eventually normalize in the coming quarters.

Valentina Porto, Moderator

The next question comes from Nancy Lopez of UP. What was the main trigger of a change on retail loans to more expensive maintenance ones?

Michela Casassa, CFO

To more expensive maintenance ones? Is that the question?

Valentina Porto, Moderator

Yes.

Michela Casassa, CFO

I mean, maybe if I can comment on the portfolio mix. What has been happening in the past two quarters is that consumer loans, the unsecured portion, has been decreasing because of the risk profile. That is the main reason why, while we have seen a continuous growth in mortgages, in payroll deductible loans to the public sector employees, and also in commercial banking.

Valentina Porto, Moderator

The next question comes from Daniel Merida of PUCP. Good morning. Thanks for the presentation. Can you please give an update about your buyback program?

Michela Casassa, CFO

Sure. The buyback program was put on hold a few months ago. Actually, after the latest update that we gave during, I think it was three quarters ago, we have not pursued any additional purchases and it is in kind of a wait-and-see position, given that we are now focusing more on maintaining the capital levels, given the macro outlook that changed not dramatically during the last half of 2023.

Valentina Porto, Moderator

The next question comes from Ernesto Gabilondo of Bank of America. How should we think about the dividend payout ratio this year?

Luis Felipe Castellanos, CEO

Hi, Ernesto. I believe you can hear me now. I apologize for the microphone issues. Essentially, our policy requires you to consider 45% from the bank and approximately 50% from the insurance company, along with some contribution from Inteligo, although those results are not particularly significant. We also allocate some cash to the holding company to manage expenses and debt service. We should be announcing this shortly, so you can analyze the figures. I'm not sure if we can disclose the specific numbers now, as we still need to go through the IFS Board and shareholders meeting for approval. This is how we determine our dividends, which, remember, are based on local government. I've looked into the numbers, but it's still too early to provide specifics. However, it’s likely that we will have a dividend, which is positive news.

Valentina Porto, Moderator

At this time, there are no further questions. I'd like to turn the call over to the operator.

Operator, Operator

Thank you. There appear to be no further questions at this time as well on the audio side. I would like to turn the floor back over to Ms. Casassa for any closing remarks. Please go ahead.

Michela Casassa, CFO

Okay. Thank you very much. Thank you, everybody, again for attending our call and for the questions. And we'll see each other again for our first quarter results. Thanks again. Bye-bye.

Operator, Operator

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