Earnings Call Transcript - IFS Q1 2021

Operator, Operator

Good morning and welcome to the Intercorp Financial Services First Quarter 2021 Conference Call. Please be advised that today's conference is being recorded. It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Rafael Borja, InspIR Group

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its first quarter 2021 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro and Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo. They will be discussing the results that were distributed by the company on Wednesday, May 12. The results of our 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 the copy. Otherwise, for any reason, if you need any assistance today, please call our group in New York at 212-710-9686.

Luis Felipe Castellanos, CEO

Thank you very much. Thank you. Good morning and welcome to our first quarter 2021 earnings call. First, I want to thank everyone for making the time to attend our call. I hope you and your families remain healthy and safe during these times, which continue to prove to be very challenging. Let me give you a brief overview of the health and macro situation in Peru. On the sanitary front, we continue to face pronounced lockdown measures across the country. The second wave has hit Peru very hard, with the number of cases and deaths going beyond those of the first wave. However, the implemented measures were not as strict as those enforced one year ago. In recent days, health alert levels have softened, and it looks like the second wave is starting to decrease. Most businesses in Lima and several regions of the country are now allowed to operate at increased capacity, although not yet at normal levels. COVID-19 cases have started to decline, and the vaccination plan is in its early stages. Today, around 5% of the population has been vaccinated so far, amounting to approximately 1.5 million people. However, we are seeing the speed of vaccination increase, which we view very positively. Economic activity in the country continues to recover and will start showing improved base effects from this moment onward. GDP figures for March will be released tomorrow, and growth is estimated to have reached almost 20% due to strong public investment, better terms of trade, and higher private consumption. We continue to foresee low double-digit growth in GDP for 2021. Supporting this view, the Central Bank held its monthly monetary policy meeting last night and kept its policy rate unchanged at 125%, in consideration of the limited underlying inflationary pressures.

Michela Casassa, CFO

Good morning, and welcome again to Intercorp Financial Services' first quarter 2021 earnings call. This time we have divided the presentation into four parts: financial highlights, key messages, results by segments, and trends along with takeaways at the end. I will start with a brief summary of financial highlights on Slides 3 to 5. Main highlights are that Intercorp Financial Services has recorded earnings of PEN 528.7 million in the first quarter with a return on adjusted equity of 23.7%. Earnings grew in all subsidiaries, supported by lower provisions and solid results in investments. We saw a strong recovery in revenues mainly due to the insurance business. Our digital trends continue to support IFS strategy, and we have continued with a disciplined approach to cost control, which has helped enhance efficiency. There are solid capital ratios in all business segments. At Interbank, there has been a strong recovery in earnings, thanks to lower provisions and higher results from investments.

Operator, Operator

First, we will take questions from the conference call and then from the webcast. Our first question will come from Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo, Analyst

Congratulations on your record high earnings for the quarter, thanks to verified earnings. My question is how to think about the earnings for the next quarters considering that this quarter was driven by high market-related revenues, which I think are unlikely to repeat? Additionally, OpEx should be trending up, but on the other hand, you are experiencing a very strong economic recovery, which should help to improve lending dynamics, your NII and improving loan NII, and utilizing the excess cash. Also, provisions seem to be below pre-COVID levels, and you mentioned that we should expect such a risk of 2% for the full year. So, would it be right to expect core revenues to improve in the next quarters while market-related income and other income normalize? Where do you see the upside risks on earnings? Lastly, how should we think about the evolution of ROE in the next quarters and the full year, and when do you expect ROE to reach pre-pandemic levels?

Luis Felipe Castellanos, CEO

I think you nailed it in your thoughts around the answer. We do think that the market-related results should normalize. Obviously, we will be closely paying attention to see if we have additional opportunities. As you know, we have a substantial investment portfolio in our businesses, which is what we do. So we will benefit from any opportunity. However, the offset to that potential increase in expenses, and depending on how macro factors affect risk, is that our retail portfolio has started growing again, which we expect will help us drive more revenues. It is a little bit difficult to predict everything, but that's the assumption under which we are executing our return to growth, especially in higher-margin products that we have already witnessed at the end of March and beginning of April. This should help offset other potential negative trends. Now for more details on the trends, let me pass it on to Michela, so she can provide more information on the numbers and the trends we're seeing.

Michela Casassa, CFO

Thank you, Luis Felipe. As we mentioned, this first quarter has seen a significant contribution from other income revenue. The guidance we have provided for the full year indicates soft top-line recovery. We are anticipating marginal growth this year. We saw an increase of 0.8% this quarter. As Luis Felipe mentioned, it is possible that in the following quarter we may not have such a big contribution from other income; however, we expect net interest income and other income to help offset the lower revenues from other income. This should come from the recovery in growth of the retail portfolio. This quarter marks the first in which our total retail portfolio is increasing, and moreover, April has seen an inflection point in credit cards. Summing up these two trends, we should see better recovery in retail volumes in the second quarter, which should drive interest income and fee income as well.

Operator, Operator

And our next question will come from Sebastian Gallego with Credicorp Capital.

Sebastián Gallego, Analyst

Yes, hi, good morning everyone, and thanks for the presentation. As my colleague said, congratulations as well on the strong quarter. I have several questions. The first one is a follow-up on the recovery of credit cards. Can you elaborate a little bit more on that topic, particularly considering potential withdrawals of pension funds? We have seen this liquidity effect, particularly in Chile, and I'm just wondering how fast or what you're expecting for the credit card business to pick up in the upcoming months, and how should we think about actual growth in that portfolio? The second question is about margins; you mentioned that some Reactiva Peru loans will mature, but I understand that the term of Reactiva loans is at least 36 months. I'm just wondering if you could provide more color on how you're seeing the evolution of Reactiva Peru loans? Finally, I'd like to ask about net fees. When we look at operating trends, it seems like the actual operating trend with the lowest or the slowest pace of recovery, currently at 80% as you mentioned in the presentation. I'm just wondering how we should think about net fees going forward. Should we expect to see further recovery, or could this be a new normal for net fees?

Luis Felipe Castellanos, CEO

Let me walk through your first question, and then I'll pass it to Michela for the numbers. What we're seeing in credit cards is a recovery, which relates partly to the macroeconomic activity and partly to our risk appetite. As you know, we changed our underwriting standards last year to be more conservative. This, alongside the increased liquidity and some of our customers taking more credit card loans, has resulted in our credit card portfolio reducing by more than 30%. It is very important for us as a revenue generator. We've worked in our models and rebuilt our value proposition to customers, and we now feel we can return to growth, not only due to activity but because we have more elements to assess risk properly and are increasing our risk appetite. So that's the main driver of our credit card portfolio recovery. As for the pace of growth, we will gradually start increasing our activity, monitoring the impact of our strategies. The behavior of our customers and the profitability they generate, combined with lower provision expenses, will also benefit net income.

Michela Casassa, CFO

Let me add a couple of things to Luis Felipe's response on credit card recovery. Despite the increase in cash available to clients now because of pension fund withdrawals, we have also started to see an acceleration in new client acquisition for credit cards. This helps build up more credit turnover, aiding in growth. While existing clients are consuming more, new clients are contributing positively as well. The current risk profile of the credit card portfolio is very low, even lower than pre-COVID levels, leaving ample room for growth now that everything is set in place, as Luis Felipe mentioned. Regarding margins on Reactiva loans, we reached almost PEN 7 billion in Reactiva loans at the peak last year. We have observed prepayments mainly from the corporate segment, while small businesses have not shown much in terms of prepayments. Some installments are starting to mature now, which will decrease the outstanding Reactiva loans. We expect a reduction in these loans on our balance sheet, which will also help. Finally, on fees, we have seen a recovery, but it has slowed compared to other trends. We expect further recovery in fees as credit card activity continues to improve.

Operator, Operator

And our next question will come from Jason Mollin with Scotiabank.

Jason Mollin, Analyst

I thought maybe a more general question on how the group is preparing itself with this uncertainty. It seems like the market has rebounded from some recent lows with some expectations of a more market-friendly candidate winning. How is the bank positioning itself in terms of liquidity and risk-taking during this period of uncertainty?

Luis Felipe Castellanos, CEO

Yes, we've been here before in similar situations and we have a playbook for this. In times of uncertainty, we always reinforce our liquidity position. We maintain a strong capital position and have tightened our underwriting standards throughout the past year. While we are starting to relax those standards, we continue to do so cautiously. We also manage our business to be currency-neutral, maintaining hedged operations in terms of our dollar-sol exposure.

Operator, Operator

And our next question will come from Geoffrey Elliott with Autonomous.

Geoffrey Elliott, Analyst

Can you help quantify what the recent proposals from the Central Bank on limits to interest rates and fees mean for IFS now that you've got a bit more detail?

Luis Felipe Castellanos, CEO

The proposal came out as mentioned in the introduction, but we don't believe it will significantly affect IFS. It will only impact a very small portion of our consumer book. The main concern arises from a restriction on late payment fees, which has been replaced by a higher interest rate for late payments. Overall, the impact will be minimal—less than PEN 40 million across IFS, which is fewer than 0.5% of revenues. However, what worries us is that it does not encourage good payment behavior among Peruvians.

Geoffrey Elliott, Analyst

Is there anything else bank-specific bubbling up either in Congress or in terms of proposals from the Presidential candidates that impact you down the line?

Luis Felipe Castellanos, CEO

As for banking-specific issues, nothing particularly comes to mind. We've not seen many proposals regarding the banking system from presidential plans yet. We've managed loan reprogramming due to the pandemic and interest rate issues, so nothing recent stands out, but we are vigilant.

Operator, Operator

And our next question will come from Yuri Fernandes with JP Morgan.

Yuri Fernandes, Analyst

I have a quick question regarding the other income. This quarter was strong, but I would like to know how sustainable these revenues are and if they will normalize back to 2020 levels or return to 2018 or 2019 levels?

Luis Felipe Castellanos, CEO

Yuri, it's somewhat challenging, but everything related to Interseguro should converge to historical levels for that segment. For the bank, as we are adopting a conservative investment approach, mostly involving government-related instruments, results will depend on market fluctuations. We in our first quarter identified opportunities, and while exact predictions are difficult, looking at previous years' results can guide expectations.

Michela Casassa, CFO

I don’t have much to add, but there could be opportunities in the coming quarters. However, we cannot guarantee extraordinary levels at this moment.

Operator, Operator

And our next question will come from Andres Soto with Santander.

Andres Soto, Analyst

I have a question regarding digital transformation. You presented impressive numbers regarding digital sales and customer growth. However, how does this translate into fees and other operating metrics? How do you see the journey for monetizing this impressive growth in users?

Luis Felipe Castellanos, CEO

We are executing our digital-first strategy effectively. We've been managing to maintain stable operating expenses while significantly increasing customer interactions and acquisitions. Despite increases in IT costs, we are keeping our efficiency ratio at reasonable levels. Our acquisition strategy is bringing in funds efficiently while rationalizing our branch network aggressively. We are currently focusing on capturing value from our new customer base moving forward.

Michela Casassa, CFO

Before COVID, we had great operating leverage, managing to grow revenues faster than costs. Currently, we see this in commercial banking, where new clients brought in through digital account openings linked to Reactiva are generating additional revenues. In retail, the top-line remains affected by external factors, but we are confident that as this stabilizes and our customer base expands, we will return to our previous positive operating leverage.

Operator, Operator

There are no more questions at this time. I will turn the call over to the entire group for any webcast questions.

Rafael Borja, InspIR Group

We have a question from Johanna Castro, Itau BBA. Could you share with us the reduction in onboarding costs? What was the cost in Q1 '20, and what is that cost today after onboarding 1 million new customers?

Luis Felipe Castellanos, CEO

I don't have that detail. Michela, can you assist, or will we need to provide that information later? We don’t have those numbers at this moment.

Michela Casassa, CFO

Yes, I’m sorry, we don’t have those numbers right now. We will have to get back to you later.

Luis Felipe Castellanos, CEO

Yes, so we will come back to you, Johanna, on that specific question.

Rafael Borja, InspIR Group

We have another question. What are your perspectives on the new operations with the guaranteed loan portfolio? Should we expect a significant contribution in the banking system?

Luis Felipe Castellanos, CEO

I can't speak for other banks, but I will share what we are doing. We are rebranding loans for our customers at lower rates. While we’re not actively pursuing the full program set up, our internal solution has been well accepted by our customers. Hence, we do not expect high adoption of the program among our users.

Rafael Borja, InspIR Group

At this time, I'm showing no further questions. I would like to turn the call back over to the operator.

Operator, Operator

And I am seeing no further questions on my end, so that will conclude the question-and-answer session. I'd like to turn the conference back over to Mrs. Casassa for any closing remarks.

Michela Casassa, CFO

Thank you very much again, everybody, for joining this call. We are very pleased with the results of this quarter, and I hope to see you all during our second conference call in August. Bye, everybody.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.