Earnings Call Transcript - IFS Q2 2022

Operator, Conference Operator

Good morning, and welcome to Intercorp Financial Services' Second Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded. After the presentation, we will open the floor for questions. 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, operator. Good morning, everyone. On today's call, Intercorp Financial Services, we will discuss its second quarter 2022 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo; Mr. Carlos Tori, Executive Vice President of Payment at Intercorp Financial Services. They will be discussing the results that were distributed by the company yesterday, August 15th. There is also a webcast, video presentation to accompany the discussion during this call. If you didn't receive a copy of a presentation or the earnings report, they are now available on the company's website ifs.com.pe to download a copy. Otherwise for any reason if you need any assistance today, please call InspIR Group in New York at 212-710-9686. I would like to remind you that today's call is for investors and analysts only, therefore, questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir.

Luis Felipe Castellanos, CEO

Thank you. Good morning and welcome to our second quarter 2022 earnings call. We appreciate you taking the time to attend this call. I wanted to start by thanking all of you who participated in our first Investor Day on June 22nd. We're very happy to share with you in detail our strategic priorities and progress including our two-tier digital strategy, the review of our main businesses, our sustainability initiatives, and the key pillars that we are executing to achieve our objectives in the short-term and the medium term, and also to achieve our purpose, which is to make sure that Peruvians achieve their dreams. Focusing on the recent developments affecting our country, we continue to see an uncertain political environment where the confrontational relationship between the executive and legislative branches continues. Unfortunately, we are getting used to the frequent rotation of cabinet members, as well as hearing about many corruption accusations targeting senior members of the executive branch, including the President and close members of his family and his team. The economic front also continues to be challenging, pressured by the international environment, high inflation numbers, and a slowing economy affected by a reduction of public and private investments and reduced consumer confidence. The new Economy Minister has initially cut the official GDP growth forecast to 2.2% for this year, from the prevailing 3.6%. He has announced a plan to boost public investment and implement an economic reactivation plan which is expected to be announced soon. The latest GDP growth print for June was held yesterday. The economy accelerated to grow about 3.4% for the month when compared to May's 2.3%. As a result, growth for the last 12 months now stands at 5.5% and continues its soft landing towards the range of between 2% and 3% of GDP growth that most economic agents expect for the year. The inflation rate receded a bit in July, decreasing to 8.7% from 8.8% a month earlier, but this does not prevent the Central Bank from continuing to hike rates. In its meeting last week, the Central Bank increased the policy rate by 50 basis points to 6.5%. The Central Bank now expects annual inflation to return within its target range of 1% to 3% in the second half of 2023. Nevertheless, under this challenging scenario, IFS continues to show resilience in its core operations. However, it is important to note that the investment portfolio in our wealth management business has not been immune to the significant volatility witnessed in the global financial markets, strongly affecting our investments and overall results during this quarter. We have seen a recovery of our investments during July and August. However, we are very conscious that global financial markets remain challenging. Our core banking franchise continues its recovery pattern with strong growth in consumer financing and commercial banking with increased activity and sound risk indicators. Our insurance segment also had a good performance during the quarter, as well as adequate evolution of the core activity of our wealth management franchise. As you will see later, our newly created segment, our payments pillar, based on Izipay and related initiatives, also had good results. Our data traction continues to be strong, as well as our growth in total number of customers and our core revenues. We strongly believe that our culture, our people, our efficient operations, our sound capitalization, and our ability to adapt to changes through our two-tier digital strategy are our strengths and are the pillars that will allow us to continue growing profitably in the future and in a sustainable way. Now, I will pass it on to Michela to update you on the detailed results of this quarter and give you a review of our operations. Thank you very much.

Michela Casassa, CFO

Thank you, Luis Felipe. Good morning, everybody and welcome again to the Intercorp Financial Services' second quarter 2022 earnings call. This time I will focus on two items of the agenda which includes financial highlights and then our key messages and takeaways. I will start with a brief summary of financial highlights. The main highlights are that IFS had strong results in banking, insurance, and newly added payments but had a negative impact from the investment in wealth management. Earnings are $251 million in the quarter and $655 million in the first half of the year, reflecting a loss in the investment portfolio and in Inteligo of $147 million this quarter, and $171 million in the first half of the year. This is impacting the quarterly ROE of IFS, which stands at 11% and driving down the ROE of the first semester to 14.2%. Banking, insurance, and payments had very strong results in the quarter with 19.4%, 31.6%, and 26.9% ROE respectively. The same is true for the first half results of the three subsidiaries with first half ROEs of 19.1% for banking, 24.6% for insurance, and 30.9% in payments. On banking, we had a strong quarter in activity with double-digit growth in net interest income and fees, and the client base continues to grow almost 20% per year. The shift in loan mix and repricing of new loan disbursement has boosted in this quarter up to 4.9% and in line with the portfolio mix, cost of risk has reached 1.8%. On insurance profits almost double quarter-over-quarter driving ROE up to 31.6% thanks to a strong growth in interest income of 27% quarter-over-quarter and 30% on a yearly basis. It was a strong investment income with a return on the investment portfolio of 7.7% this quarter. Our wealth management results continue to be affected by a negative impact on the investment portfolio with a good recovery in fees of 9% quarter-on-quarter and a slow light recovery in assets under management. Finally, on our new payment business, we have started to show the profitability of the newly acquired Izipay with continuous strong growth in business and 27% ROE in the quarter. Among the key performance indicators for the quarter and semester, I would like to highlight the strong growth in quarterly and yearly NIM of IFS. There has been a 50 basis points improvement in quarterly NIM of IFS driving it up to 5% and the semester to 4.7% already above our guidance. On slide eight, total revenues for IFS grew 3% on a quarterly basis, thanks to the growth registered in banking of 5% in the quarter, insurance with 20%, and the contribution of revenues to the consolidated figures from payments, which grew 1% on a pro forma basis despite the negative revenues registered in wealth management. On a yearly basis, IFS registers a 3% decrease in revenues with very positive results in banking growing 30% year-over-year, in payments growing 33% year-over-year and decreases in insurance mainly due to the extraordinary revenues registered during the second quarter of 2021 together with the negative revenues of wealth management of this quarter. On slide nine, the reported efficiency ratio of IFS was 40%, above our 35% to 37% guidance provided at the beginning of the year, but it is 36.6% within our guidance when excluding the investment loss at the wealth management business. It is important to note that there is an impact in the reported figures of IFS due to the consolidation of Izipay few months starting April, which reflects a higher increase in expenses this year, as they are not considering the base of 2021. Normalizing Izipay, expenses of IFS grew 4% on a quarterly basis and 16% on a yearly basis. At Interbank, the efficiency ratio remains relatively stable year-over-year at 42.3% in the quarter, as expenses during the first half of the year have increased 14% mainly due to three reasons; a 17% increase in technology costs and new ventures which include the technology expenses for our digital transformation, as well as new investments in payments. A 14% increase in personnel costs which is mainly coming from the increase in mandatory employee profit sharing, in line with the improvement of the local GAAP earnings. And a 24% increase in variable costs mostly related to credit cards and in line with the percentage increase in credit and debit card turnover which generates fees and financing volumes. Other expenses have grown single-digit reflecting our continuous cost efficiency efforts. Moreover, we have continued with our branch optimization program, reaching a total reduction in the number of branches of almost 40% or more than 110 branches from the peak in 2016. Increase in costs for the rest of the year at the bank will be lower compared to the previous year, reflecting the base effects of the recovery of activity which started in the third quarter of 2021. On slide 10, we continue to have a solid capital position as evidenced by the ratios at Interbank, but also in Interseguro and Inteligo. Core Tier 1 ratio at Interbank recovered after the distribution of dividends in the first quarter and is at 11.1% as of June 2022, and the total capital ratio stands at 15.2%, well above the industry average despite the strong growth registered this year. Now, I will focus on the six key messages we would like you to take home from this call on slide number 12. First, we are operating in a very challenging macro scenario. Second, investment results have recovered in insurance but are still impacted in wealth management. Third, we had a strong quarter in our core banking business which is driving topline growth. Fourth, we continue to work on our two-tier digital strategy showing positive developments in our digital indicators to foster growth at IFS. Fifth, we are showing key initial figures on our payment business that shows strong growth. And finally, we will show you a little bit of the progress we are making in our sustainability efforts. Moving to slide 13, we are showing the evolution of some of the key macro indicators. As already mentioned by Luis Felipe, the exchange rate has registered ups and downs in the past weeks reaching PEN 3.83 per dollar; inflation has picked up to 8.7% as of July, in line with high levels of inflation in other countries; and interest rates have continued to increase, as evidenced by last week's extra increase of 50 basis points of the Central Bank's reference rate, which stands now at 6.5%, as well as increases in the dollar rate, which stands now at 2.5%. We have seen a reduction of the extra solid liquidity that was present in the Peruvian market in the past months up to July, but we are also starting to see the positive liquidity impact of the flows coming especially from the private pension funds. On slide 15 and 16, we are showing first good news with the recovery of the return of the investment portfolio of insurance which reached 7.7% in the quarter and was 6.4% in the semester, more in line with past average performances. On the wealth management front, we have continued to see a strong negative impact of mark-to-market on the investment portfolio during this quarter, which adapts to the performance of the previous quarter and remains in negative territory, strongly impacting the first half results of Inteligo so far. As Luis Felipe mentioned, we have seen first positive developments during July and August, but cannot yet confirm a positive trend for year end, as these will depend on the continuous recovery of the markets. On slide 18. Moving to the good news on banking, we have continued to see a solid performance in activity in the quarter, yet some signs of slowing down in financing, as we have started to adjust our credit underwriting standards in specific sub-pockets of low-income clients, which start to see some impacts of the slowdown of the economy and sustained inflation. Credit cards and debit cards turnover have increased substantially year-over-year, 65% for credit cards and 38% for debit cards. Despite the slowdown in the economy, we continue to see important growth in turnovers as both credit and debit cards continue in their path of increased penetration in the country, which continues to be low. This growth has allowed us to increase market share almost 150 basis points in the past 12 months for the combined turnover, mainly thanks to our Interbank benefit program, our increased focus on e-commerce in high growth product categories, and finally, also thanks to our upselling strategy. Moreover, credit card sales have increased 50% year-over-year close to 2019 levels. New disbursement of personal loans have seen a slowdown when compared to the previous quarter that are 44% above the same quarter of last year. As of the end of June, credit cards and personal loans were up 46% when compared to last year and are up 21% when compared to 2019. On the SMEs front, we have continued to see strong disbursement in the second quarter which are 72% above the level of last year and are helping this portfolio to grow nicely during this year. On slide 19, one of the very good news in this quarter is the sustained double-digit growth in net interest income and fee income. Net interest income at the bank grew 18%, with a strong contribution of net interest income coming from credit cards and personal loans. Fee income grew 17%, thanks to the strong growth of credit cards fee income due to the strong evolution of credit and debit cards turnover, but also to the sustained strong growth in fee income coming from cash management services in our commercial bank. Other income at the bank was down 14% year-over-year slowly recovering. All-in-all, total core revenues grew 13% year-over-year, a very strong recovery of banking revenues which continues with a positive operating leverage. On slide 20, we have seen a strong portfolio shift to higher yielding loans in the past 12 months. Retail loans represent 52% of the total portfolio versus 46% one year ago. Moreover, credit cards and personal loans reached 21% of the total loan book versus 15% one year ago. This effect, together with increasing the SME loan book still small and the increase in rates, is pushing yields of loans upwards 80 basis points in the quarter and 140 basis points in the year, reaching 9.1% and NIM 40 basis points up in the quarter and 100 basis points in the year, reaching 4.9% for Interbank. Risk-adjusted NIM has improved by 10 basis points in the quarter and 90 basis points year-over-year, up to 3.7%. We expect the positive trending NIM to continue in the coming quarters, though at a more moderate pace. We have also seen rising cost of funds as we start to see the effects of the rising rates of dollar funds on top of the already existing increases in soles rate, as shown on slide 21. Cost of funds reached 2.2 in the quarter, up 40 basis points on a quarterly basis and 80 basis points on a yearly basis, still lower increases when compared to yield downloads. We continue to have the best loan-to-deposit ratio among peers at 101% as of June 2022, levels more aligned to pre-COVID. The system as a whole has seen a reduction in the extra liquidity that was present in the market in the past month due to the many government measures and has returned to pre-COVID levels at around 108%. On slide 22, we have a healthy risk profile with increasing levels of cost of risk in line with the shift in loan mix. Cost of risk in the quarter was 1.8%, getting closer to pre-COVID levels of around 2%, mainly due to the recovery in the retail portfolio, which has reached a cost of risk of 3.6% close to the 4% recovery. The NPL coverage ratio of stage three loans at 186% is still above pre-COVID levels of 158% and this is mainly related to the coverage ratio of the retail loans, which stands at almost 250%, well above the 179% pre-COVID levels. Now, let's move to the fourth key message on slide 24 of this presentation related to the positive development in our digital indicators. We continue to see strong progress in our digital indicators. As of June 2022, digital customers reached 68% of our customers who interact with the bank during the last 30 days, up five points in the past year. Digital acquisition reached 56%, up 13 points from last year and digital sales reached 67% in June, increasing nine points in the last year. We have continued to see a report of a number of new digital accounts being opened for both individual and businesses. As of the end of June, 66% of new retail savings accounts were opened digitally, while 92% of new business accounts were opened digitally, up eight points and 12 points respectively. NPS for digital customers continues its path to become a top NPS in the next years reaching 47 points this quarter, up seven points in the last year. Insurance digital indicators show positive developments as well with SOAT at 80% and Vida cash life premiums, our digital product reaching 34% of total life premiums. On slide 26, we continue to see an important growth in our customer base of around 20% in both retail and commercial banking customers, reaching 5 million as of the end of June. Starting this quarter and following what we already introduced to you during our first Investor Day on June 22 this year, we are starting to show separate information on our fourth business segment, payments, which for the time being includes information related to Izipay and which will, in time, start to add up the info related to the complete payment ecosystem. The information reported this quarter is still preliminary as we are in the process of determining the fair value of the acquired assets and liabilities, as well as the intangibles which we'll be reporting during next quarter within the payment segment. After the acquisition of the remaining 50% of Izipay and the creation of the segment, Carlos Tori has been appointed as EVP of Payments at IFS, formerly EVP of Retail Banking. Within the bank, César Andrade, formerly VP of Operations and Technology has been appointed the new VP of Retail; and Alfonso Díaz,former EVP of Digital Delivery is the new EVP of Operations and Technology. On slide 29, let me start reminding you of the three main lines of business of Izipay. First, the acquiring business where Izipay is the current market leader and a strong competitor in e-commerce acquisition, accepting all different cards and payment platforms including Visa, MasterCard, Amex, Diners, Apple Pay, Plin, Tunki, and Yape among others, in which fee income represents around 89% of the total fee income as of the end of June. Correspondent banking represents 7% of total fee income and credit card processing will represent 4% of total fee income. On slide 30, as we explained to you in our previous meeting, Izipay is a company that has been growing substantially in the past years, especially in the past month, as evidenced by the 53% growth in the number of merchants and 66% growth in the number of transactions in the past year. Moreover, it has monetized this growth as evidenced by the 33% growth in revenues in the past year, reaching PEN 81 million in the quarter. It is important to notice that there is still a big space for further growth given the low penetration of digital transactions in the country. Finally, on this session related to payments, we wanted to show you how the growth of Plin and Tunki has accelerated this year, reaching 8 million users for Plin and 2 million in Tunki, but especially how both payment platforms are picking up in number of merchants with two and three times the numbers registered last year respectively, and even more in number of transactions with three and four times the numbers registered last year. Moreover, we have seen a strong growth of more than 20% in the single month of July in the number of transactions. In the short-term, we are working on growing each initiative both independently and creating the synergies to accelerate the growth of our payment ecosystem by having our assets work towards a common strategy. We will focus on increasing transaction volumes, offering merchants additional services such as electronic bills, inventory management, and cash advances, continue to pilot loans to merchants, and use Izipay as a distribution network for Interbank products as well as a source of growth. Moving to slide 33 regarding our sustainability strategy, we continue to build upon our four focus areas. Inteligo finalized its first carbon footprint measurement, while Interbank and Interseguro obtained a third-party certification of their measurement results. Working towards our goal of promoting financial inclusion for all Peruvians, our digital financial education platform, Aprendemas, exceeded expectations in its first three months since its launch at the end of April. At a national and regional level, we received several new recognitions for our culture and talent management and furthering our commitment to comply with the highest international standards. Interbank is now a signatory of the UN Global Compact, and we have kicked off our first-ever platform-wide materiality assessment for IFS. Finally, we have launched an e-learning sustainability course for employees at all levels across all businesses to strengthen our sustainability culture. Before ending the presentation, let me now move to the comparison with guidance for this first half of the year. Capital ratios remain at sound levels with the total capital ratio above 15% and core equity Tier 1 ratio above 11%. The first-half total capital ratio stands at 15.2% and core equity Tier 1 ratio at 11.1%. This is in line with guidance. Second, our continued path to recovery in core profitability with IFS ROE above 16%. The first-half ROE was 14.2% below our guidance, mainly due to the negative impact on the investment portfolio and Inteligo as our ROE for banking, insurance, and payments were strong in the first half of the year. Year-end ROE will depend on the recovery of the investment portfolio, as we expect banking, insurance, and payments to continue to perform well throughout the year. Third, high single-digit growth in total loans led by double-digit growth in consumer loans together with the substitution of a portion of Reactiva loans in commercial banking. As of June, total loans grew 14%, above guidance and consumer loans are growing more than 20%. But we expect growth to moderate in the second half of the year and to be in line with guidance. Revenues continue to recover with a NIM expected between 4.2% and 4.6%. The recovery of NIM is taking place a little faster than we expected with first-half NIM already at 4.7%, which indicates that we will most likely end up the year with NIM above guidance. Cost of risk is expected to be around 1.8%. The first-half cost of risk is at 1.6% with the second-quarter cost of risk at 1.8%. We expect to be in line or close to guidance. Finally, we will continue with a focus on efficiency, and we expect the efficiency ratio to be between 35% and 37%. The first-half efficiency ratio at 38.7% is above guidance only due to the negative impact on revenue from the investment portfolio of the wealth management business. Excluding such effect, the efficiency ratio would be 36.9%, within our guidance. On slide 34, let me recap the six key messages of this presentation. First, we are operating in a very challenging macro scenario. Second, investment results have recovered in insurance but are still impacted in wealth management. Third, we had a strong quarter in our core banking business, and this is driving topline growth. Fourth, we continue to work on our two-tier digital strategy, showing positive developments in our digital indicators to foster growth at IFS. Fifth, the key initial figures on our payment business are promising and show strong growth. Finally, we continue making progress in our sustainability efforts. Thank you very much. Now, we welcome any questions you might have.

Operator, Conference Operator

Thank you. And at this time, we will open the floor for your questions. And our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo, Analyst

Hi, good morning Luis Felipe, Michela and good morning to all your team. Thank you for your presentation. I have three questions from my side. The first one is on the wealth management business. Can you elaborate on what was behind the loss? Was it related to fixed income, compositions or equities? And also if you can provide which sectors? And what would be the strategies that you will be implementing to have more stable numbers and to avoid too much volatility in the results, especially as the rest of the subsidiaries have ROEs above 19% and this is clearly the one affecting the consolidated number? Then the second question is on asset quality. We noticed that as your Stage 3 portfolio showed the lower MPL ratio for the quarter. However, when looking into Stage 2 and 3, there was an increase due to the low mix. So how should we think about the MPL in the next quarters? And when do you see them returning to the pre-pandemic levels? Finally, this is a question on your digital channels. If you can provide us some color on what is the level of profitability that you currently have at Ezipay, Plin, and Tunki? And when you expect them to become profitable, if that is not the case? Thank you.

Luis Felipe Castellanos, CEO

Okay, Ernesto, thanks very much for your questions. Let me give you a background answer and will pass it on to each of the members. On the wealth management investments, obviously, what has happened there, as mentioned during my introduction, it's very much market-related. Now, we've seen what has happened in the market during these three months, especially May and June have been very volatile. And, again, our portfolio, which is a mix, maybe we can get a little bit more detail later, is of some equity and fixed income, but even the fixed income indexes have come down significantly given what's happening in inflation. So, we track our investments against certain benchmarks and although we have outperformed our benchmarks, the results overall have been impacted. And if you remember, profitability for Inteligo year-in, year-out has been at around 25% ROE. So, this year is a particular one because of international market conditions. And obviously, again, it has not been immune to those strains. We are very confident in the investments we have. They are related to financial services, technology, very close to obviously what we do because the vision there is twofold. First, we do believe medium-term and long-term, there are good investments and we like the industry dynamics, but also, it allows us to have a foothold in order to be close to companies where we can learn about their operations in their own jurisdictions. And that brings an edge to our management teams in order to be close in certain instances by just following the companies or even having access to management or participating more actively in the understanding of their strategy, technology, and developments. So, basically, that's the overall concept. Hopefully, volatility will go down once the markets get a little bit more stable. We do see Inteligo returning medium to long-term to the levels of profitability that we have seen again, because we think those are sound names or sectors where we are looking at.

Bruno Ferreccio, CEO of Inteligo

Yes, I think you answered pretty much everything. But on the first part of what type of asset class has contributed to the mark-to-market losses. Like Luis Felipe was saying, it's both equity and fixed income. Basically, everything was down for the first six months in the market. So, those mark-to-market losses have affected the portfolio. The other thing I wanted to mention is we have about 80% of the results in our portfolio go through P&L and only 20% through other comprehensive income. So, what we're seeing here is most of the impact is going through our P&L. And that's why it seems a little bit large, but I think it's the way the accounting mandates and I think it's a little more transparent also because we are taking most of our results again, through P&L on a quarterly basis. So, I think that's it Luis Felipe.

Luis Felipe Castellanos, CEO

Yes, basically what you see there is what you get. Now on the second part, the asset quality, yes, I think, Ernesto, Michela mentioned there's a couple of things. So, first, there's a change in the asset mix; we're getting more heavy than previous weeks, basically returning to our previous levels, pre-pandemic of consumer loans and credit cards. And also we have been seen, given the high inflation levels or digital deterioration of the portfolio itself. And as Michela mentioned, we have already taken measures for the last three or four months to cut a little bit or improve our underwriting standards in certain segments. Hopefully, we will return to lower numbers I would say by year-end or early next year, but maybe Michela can help us a little bit more on that as well.

Michela Casassa, CFO

Good morning, Ernesto. As I mentioned in the slide, the cost of risk for this quarter has risen to 1.8%, which is still slightly below pre-COVID levels. This increase is driven, as Luis Felipe pointed out, by a change in our portfolio mix and the recovery of balances, particularly in credit cards and personal loans. The total cost of risk is now at 3.6%, approaching the 4% from pre-COVID periods. I believe we will be close to these levels by the end of the year. Credit cards are already near pre-COVID levels, and while the portfolio mix has changed slightly with more mortgages, the overall cost of risk remains below pre-COVID levels, especially in the consumer loan segment. Therefore, next year we will likely see the effects of this new portfolio, potentially bringing us slightly above the pre-COVID level of 2.2%.

Luis Felipe Castellanos, CEO

Okay, and then the third part, the digital channels, let's see, these. Izipay is already a profitable company. We've again, we're taking a cut and showing the numbers as 50% of Izipay always went through Interbank's financials and now that we acquired the other 50%, we have been able to isolate that to try to illuminate a little bit more the value of that platform or franchise. As Michela mentioned, this is still preliminary because we're doing the accounting work. However, we do expect that for next quarter, we'll have the complete view of the fair value of the assets, the accounting treatment, goodwill or whatever gets created there. That's on the works. So, we'll be updating on the numbers. On the other solutions, again, just to remember when we explained this vastly in our Investor Day, it's basically a network that facilitates B2B and B2M transfers for our customers. So, it is that a network and Tunki, it is a digital wallet itself and we have some numbers there that are very interesting in terms of acquisition costs and operating costs much lower obviously than the traditional channels.

Carlos Tori Grande, EVP of Payments

So, as you mentioned first, regarding Izipay, it is profitable; the income before taxes for the first half has been PEN 45 million for this period. After-tax has been PEN 28 million. EBITDA is strong and we continue to grow in that business, which is encouraging. We expect to continue to grow in Izipay; it's solid. As for Tunki, it likely has the lowest acquisition cost we have at IFS. We continue to see growth, with an increase of about 8% or 9% per month in the last quarter. While it is still not profitable in terms of income, the expenses are very low and it's quite organic. We are working on consolidating statements for the entire payments vertical and aim to present that in the future. For now, our focus remains on growing Tunki, its revenue, and increasing the number of merchants and transactions.

Luis Felipe Castellanos, CEO

Okay, thank you, Carlos.

Ernesto Gabilondo, Analyst

It was super helpful. Thank you so much.

Luis Felipe Castellanos, CEO

Thank you, Ernesto.

Operator, Conference Operator

And our next question will come from Juan with Scotiabank. Please go ahead.

Unidentified Analyst, Analyst

Hi, thank you for taking the question. I had a follow-up on the payments business. So, I think I want to know more about the profitability and growth expectations. So, in particular, you showed that Izipay had about 10% ROE in the first half of last year, 31% ROE in the first half of this year. So, how should we think about the sustainable or long-term ROE for these parts of the business? And in terms of growth expectations, what are your growth expectations for this business?

Luis Felipe Castellanos, CEO

Thank you for your question. I'll give it a try, and then Carlos can add more. I want to emphasize that we accounted for 50% of Izipay's figures in Interbank. We have removed that portion and replaced it with the performance of the other 50%. We're still finalizing the accounting for this, and once we have complete numbers, we will be able to provide a clearer picture of the overall transaction after the purchase. This operation is very profitable and continues to grow due to significant opportunities. We're not ready to offer guidance at this point, as this is a recent acquisition. However, the outlook remains positive, and we expect growth to be crucial. With a new strategy in place, we plan to increase our investment levels. Once we delve deeper into this, we will share more information with you and the market. For now, this is still a work in progress. Let me pass it to Carlos to see if he has anything to add. Nonetheless, we are not prepared to provide guidance on Izipay at this time.

Carlos Tori Grande, EVP of Payments

Yes. No, I agree with Luis Felipe. Just to make it clear on the accounting numbers, what may change because of the goodwill is how you calculate the ROE or the equity within IFS, but the income is there and it won't change. So, that's something that's good. In terms of growth, obviously, we cannot give specific guidance. We've been growing over the past couple of quarters. We have been gaining share in physical POS. We believe we reached around 50% coming from 15% four years ago. We expect to continue growing that but probably not so much in market share, but the market continues to grow. There are more payments. So, probably the growth in the number of merchants might slow down but we see more payments every month as people are changing their habits. The additional opportunity for growth is e-commerce. We continue to grow as we showed in the presentation, right now e-commerce represents 16% of the fees that we charge. We expect to grow that. It has been growing from 12% to 15% to 16%. So, that's another avenue of growth. And then we will look for avenues of additional income as Michela mentioned, aggregated services, cash advances, and stuff like that should come in the next few quarters as we develop, we try it, and start to penetrate our customers. We have 800,000 merchants. So, it's a lot of opportunities for additional services and processes. So, that's kind of the plan. No specific guidance, but those are the avenues of growth for the next couple of quarters.

Luis Felipe Castellanos, CEO

There is still a lot of work to be done to take advantage of those opportunities.

Carlos Tori Grande, EVP of Payments

Yes.

Unidentified Analyst, Analyst

Thank you. That's helpful. And one more question, if I may. This one is related to the consumer loans. So, I saw that the payroll loans are growing at a slower pace versus credit cards and other types of consumer loans. So, I was wondering if you can comment on what's driving the differences and where you expect it to continue to be the case?

Luis Felipe Castellanos, CEO

Sure, I believe the main factor driving this is our discipline regarding rates. We've observed competitors taking some extreme actions in the market, while we remain very disciplined in our pricing, especially with the rising cost of funds and some decline in the overall economy. We are focused on sustainable growth and feel that some of the rates we are encountering in the market are not ones we want to pursue aggressively. This approach is likely to persist for several months. Once the specific funding costs are reflected in the profit and loss statements of our competitors, we anticipate a slight reduction in their aggressiveness as well. Our approach is closely tied to the market and our desire for profitability in this sector. Michela or Carlos, do you have anything to add?

Michela Casassa, CFO

No, I think you're right. We've been very disciplined in the payroll loans which are the ones that are growing slowly because we are market leaders there. Basically, we are trying not to contaminate, if you want, the overall rates. In a market of growing rates, we've been seeing a decrease in rates on new disbursement from competitors. So that was the reason why we have tried to be as conservative as possible to try to preserve the profitability of that business.

Unidentified Analyst, Analyst

Yes, that's very helpful. Thank you for the comments.

Luis Felipe Castellanos, CEO

You're welcome.

Operator, Conference Operator

And our next question will come from Jorge Henderson with Santander. Please go ahead.

Jorge Henderson, Analyst

Hi, thanks for the Q&A space and presentation. I have two questions. I'd like to understand your expectations on risk-adjusted NIM for the rest of the year? Do you see appetite for your first half 4% level? Or do you expect a more balanced mix of higher cost risk and net interest margin containing risk-adjusted NIM at current levels? Also, I wanted to ask you about the effective tax rate. What's the reason behind the higher than 30% effective tax rate on this quarter, and what is the effective tax rate that is implied for your guidance of the year of above 16% ROE?

Luis Felipe Castellanos, CEO

Okay. Number one, I'm going to pass it straight to Michela. Number two, I'm going to venture to answer it and maybe Michela can correct me or complement it, but I think particularly this quarter, the high effective tax rate is related to the Inteligo results, basically it's a loss that normally it's tax exempt. So, probably that hitting it, but Michela will be able again to answer number one and correct me on number two.

Michela Casassa, CFO

Yes. On the tax rate, you are right, just adding that there is a slightly higher rate on Interbank. I mean, the taxes are calculated on local accounts and the tax base has been a little bit higher in local accounting standards. That's also to add to the tax rate. On the first question related to the expectation of risk-adjusted NIM, I mean, we expect NIM to continue to improve throughout the year, though at a more moderate pace. Now, you've seen at the bank, we've had 40 basis points improvement in NIM in one quarter. We don't expect to see that in the next of the year, but it should continue to slightly recover. Also, the cost of risk is slightly moving upward due to mix. Most likely, when we put the two things together, the risk-adjusted NIM is either going to be stable most likely. I don't see it going upward any further because of the two opposite effects driving it. I think the last question was related to the ROE guidance for the year-end.

Luis Felipe Castellanos, CEO

The implied tax rate for the ROE guidance.

Michela Casassa, CFO

On the effective tax rate to be sincere, it will all depend on the impacts of the investment portfolio. I mean with normal conditions, it should be around the levels that we have seen in the past year. So, below that 29% but we need to check with the investment portfolio because normally we see numbers more close to 25% or 27% effective tax rates. So, if we have positive results in Inteligo, we should see numbers normalizing to those levels. And related to ROE, as I previously mentioned, I mean banking, insurance, and payments have shown strong ROEs in the first half and we expect that to continue to happen in the rest of the year. The question mark is the recovery of the investment portfolio and how it all adapts to the IFS ROE.

Jorge Henderson, Analyst

Okay, great. Very good. Thank you very much for the color.

Michela Casassa, CFO

Thank you for the question.

Operator, Conference Operator

And our next question will come from Daniel Mora with Credicorp Capital. Please go ahead.

Daniel Mora, Analyst

Hi, good morning, Luis Felipe, Michela and thank you so much for the presentation. I have a couple of questions. The first one is regarding the loan growth. Even so, as you mentioned that you split a single-digit loan growth in 2022, what could be the expectations going forward considering the high inflation, the higher interest rates, and the economic deceleration? Do you feel that you're going to see strong deceleration for example, in consumer demand given the challenge in a macro scenario? And considering this scenario, my second question is regarding NIM in the coming quarters by considering also the loan growth and the performance of the higher interest rates. When do you feel that we can see the peak of the NIM and what should be like the normal figure of NIM in the long-term for the company? Thank you so much.

Luis Felipe Castellanos, CEO

Okay, let me pass it on to Michela to elaborate on those questions. Thanks a lot.

Michela Casassa, CFO

Good morning, Daniel. Thank you for your questions. Regarding loan growth, as you may have noticed, total loan growth excluding Reactiva has been quite strong at 14% as of June. We expect it to return to single-digit levels by year-end. Since July, we have observed a decrease in consumer financing growth, and there has been a slight slowdown in mortgage growth due to significant increases in rates impacting new disbursements. However, commercial banking had a robust second quarter, driven by the recovery of SMEs and our cautious approach to rates in the first quarter. Now that most rate increases are in the market, we have begun offering short-term working capital loans to larger and medium-sized companies. Investment from businesses is currently lacking due to the economic climate, so we anticipate a slight deceleration in commercial banking. Nevertheless, repayments of Reactiva loans are positively influencing commercial loan growth, as companies are replacing Reactiva loans with traditional loans. While we expect year-end growth to return to single digits, particularly in retail, consumer lending will likely remain in double digits. Although we are not providing guidance for 2023 yet, we foresee lower growth levels next year compared to this year due to the ongoing recovery effects from COVID-19. Regarding net interest margin (NIM), the yield on loans is expected to increase over the next few quarters. While I don't have the specifics for all quarters of 2023, the portfolio mix has changed, which will reflect in the upcoming NIM figures. The rate increases have been sharp and consistent, with additional hikes observed in July and August, leading to further improvements in yield. Overall, we anticipate that the yield on loans will continue to rise in the coming quarters, contributing to an upward trend in NIM throughout the remainder of this year and into part of 2023.

Daniel Mora, Analyst

Perfect. Thank you so much for the answers.

Michela Casassa, CFO

Thank you.

Operator, Conference Operator

And our next question will come from Yuri Fernandes with JPMorgan. Please go ahead.

Yuri Fernandes, Analyst

Thanks, everyone. I had just a question regarding equity growth like your OCI impact. I guess Inteligo had some hits and you mentioned during the call that part of the losses were to P&L and part on the equity side. But when we look at the bank and insurance company, we also had some OCI hit. So, my question is, what should we expect to hear for the coming quarters? I guess the 10-year in Peru, it's more stable now. So, maybe is the worst behind for OCI? And how does OCI affect your capital ratios? Because we don't see a lot of things on Tier 1 ratio, but just checking how OCI losses could impact you there?

Luis Felipe Castellanos, CEO

Thank you, Yuri. I agree with you that some aspects of our portfolio, particularly within the insurance company and the bank, are as you mentioned. In Inteligo, most transactions primarily affect the profit and loss statement. For the bank, specifically with Interbank and Interseguro, the fixed income portfolio largely impacts other comprehensive income. I believe we are currently witnessing the most challenging conditions, although we have seen some recent improvement compared to what we experienced at the end of June or the beginning of July. We anticipate some positive developments in this area moving forward. However, it's important to closely monitor market changes. We are in a strong capital position, and the effects can vary significantly depending on the month, especially towards year-end. We likely won't see major changes until early next year. I will now pass it on to Michela to provide further detail on this.

Michela Casassa, CFO

Yes. Thank you, Luis Felipe. Yuri actually, we do have already an impact in the ratio, especially at the bank level. So, the unrealized losses, if you are not the ones that go through the OCI at the bank, because of the increase in rates in the impact on the sovereign bond portfolio, we already have an impact in the ratios that you see. So, basically, the total capital ratio that we show and also the core equity Tier 1 are already reflecting a negative impact of this. So, basically, what I'm trying to say is that the 15.2% total capital ratio and the 11.1% capital ratio actually would be much higher if the negative impact on unrealized gains was not there in the portfolio, and we're talking of numbers that could be even like 50 basis points above the ones that we are showing. So, actually, I mean, there is upside potential for the ratios, but let me also mention that as Felipe was pointing out, there is a seasonal effect with these impacts, especially in the first half of the year because those results are offset by the retained earnings that you have. So, basically, what happens is that at the beginning of the year, now, after you have capitalized and also distributed dividends, you see the negative impact altogether, and then once the retained earnings continue to build up throughout the year those impacts reverse in the second, third, and fourth quarter of the year. So, that was also one of the reasons why the core equity Tier 1 ratio in the first quarter was slightly below 11%, 10.9% because we had the two impacts together, the distribution of dividends, but also negative impact from the unrealized gains in equity. I don't know if that's clear.

Yuri Fernandes, Analyst

No, it does. Thank you, Luis Felipe and Michela. I guess that was my point. If you have some kind of upside on your capital, and hopefully rates become more stable in Peru. Thank you very much.

Luis Felipe Castellanos, CEO

I think it's worth mentioning that the portfolio is essentially global and related to global bonds, such as those regarding Peru risk. It's based on long-term data, so given their long tenure, the time effect on that portfolio should also play an important role in reducing those numbers.

Yuri Fernandes, Analyst

Perfect. Thank you.

Michela Casassa, CFO

Let me add one thing. I don't want to give the impression that our capital ratios will be significantly higher than what we're currently showing. Starting in January, we will be implementing some changes in the definitions that the superintendency has already disclosed. There are still a few aspects we are evaluating, including items related to risk-weighted assets that could directly affect equity reduction. This could impact our ratios. Once we have that clarified, as we are in the process of providing comments to the superintendency, we will be able to provide more insight on that.

Yuri Fernandes, Analyst

So just to clarify, Michela, the bottom line is that the risk density may increase slightly in Peru. Is that correct? In Peru, we can expect some changes.

Michela Casassa, CFO

No, no. No, increase in risk-weighted assets? No, there are a couple of things that were before in risk-weighted assets that could go to be deductions directly from equity. So, basically, it's a different impact. It's bigger the impact when you deduct from equity versus when you have them in risk-weighted assets.

Yuri Fernandes, Analyst

Got it. In some countries, like the VTAs you are using, or with certain risk factors on your risk-weighted assets, there is a direct deduction from the capital. Due to the base effect, this can influence the ratios, particularly when factoring assets as risk-weighted assets and some elements like equity deduction.

Michela Casassa, CFO

Yes, it's not. I mean, it's not big numbers we're talking about but there are some things that may impact, so that's why I wanted to make it clear.

Luis Felipe Castellanos, CEO

Overall, I think, where the markets go, Yuri, we will tell you quite happily.

Yuri Fernandes, Analyst

I wish I knew. Thank you guys.

Luis Felipe Castellanos, CEO

Thank you.

Operator, Conference Operator

This will conclude the audio questions. I'd like to turn the conference over to Rafael to read any webcast questions. Rafael?

Rafael Borja, InspIR Group

Thank you, operator. So, we have some questions via chat. The first one is coming from Greg Mitchell. Can you please discuss the challenges and opportunities for attracting and retaining talent, especially at the highest levels of the company and in the digital strategy?

Luis Felipe Castellanos, CEO

Sure. Thank you. Hi Greg. Great question. Obviously, one of the biggest challenges that we are facing strategically and in terms of building what we want to build is talent, not only for digital, but also for analytics and all the new skills that are required for that information of a company like ours and being able to compete in the current environment. However, I do feel comfortable that even though it's a challenge, we're taking the right steps. Our team has been reinforced in recent years with many talents and we're exploring different avenues. In fact, what we've seen through the pandemic and the way we have changed in terms of how we're working now with our newly deployed Interbank way of working, which is pretty much remote first and hybrid, is also helping us. First, we have a specific HR team targeting, attracting, monitoring, developing and retaining that talent. So, we're very focused on that. Then our way of working helps us very much because this talent is looking for flexibility, but not only that; it also allows us to expand the way we're looking for talent. Today, we have a setup where we have people working from Argentina, specifically for analytics from Colombia; our cybersecurity team is based there. From Chile. Peru is no longer the bottleneck because of that, and we are pursuing that strongly. We're making sure we have the right projects because as you know, this is all project-based. We think that the types of projects we are developing in terms of analytical things that we're doing and digital solutions that we are bringing to market and the way we are rebuilding the bank and the way we have we're approaching our digital transformation by one side and looking for new avenues of growth is providing us with projects that people with this type of skill are really being attracted to. Complement this with what we've built with our innovation lab and the types of support that we're getting from them. We just had a great event yesterday about internal entrepreneurship where we had more than 20 projects from the group and more than seven from IFS that are going through an incubation process. We're doing very different things to make sure those talents feel challenged and motivated. Lastly, we continue to focus on our culture. Interbank for instance has been named Number One Place to Work For according to the Great Place to Work. Number one, by Americo. We have recently been named number three in Latin America. So, that also helps us very much according to a Great Place to Work. Similar interests are similar to Izipay, similar to Inteligo. They've been ranked top in culture and climate in the region and in Peru. We think we have all the elements to make sure we continue to attract those talents. But definitely, one of the biggest challenges that every company is facing today is talent. The way to tackle that is to go beyond what we can find, input. I hope this answered your question.

Rafael Borja, InspIR Group

We have another question from Parag Jariwala from White Oak Capital. What is the split between equity and debt of the losses in the wealth management business? Are there any further losses in wealth management that have accrued and shall come through in upcoming quarters?

Luis Felipe Castellanos, CEO

Okay. Thanks very much for that question. Let me pass it on to Bruno so he can maybe give us a little bit more of specific, I think we talked plenty about this. But anyhow, Bruno, do you have anything to add?

Bruno Ferreccio, CEO of Inteligo

Yes. So, approximately I would say 40% of the mark-to-market is due to fixed income and 60% due to equity. So that will answer the first part of the question. With regards to what do we expect, I think it's early to tell. Certainly the second quarter, the markets have been behaving better. That should bode well for the portfolio. We're only 45 days into the quarter. There's a lot still to come for the second half of the year, but certainly we should, if the market behaves better, our portfolio should do the same. Most of the results from the portfolio are going through P&L. We should see that impact for the third quarter and the second half of the year.

Rafael Borja, InspIR Group

We have another question from Daniel is regarding capital allocation. Could you consider a share buyback program as a way to create value for shareholders considering that you are having good results and expect to reach an ROE over 16%? But the company is nowadays valued at around 1.2 times book value.

Michela Casassa, CFO

Yes, let me take that question Luis Felipe. I don't know if he's there, but let me just take it Luis Felipe. The question is related to share buyback opportunities given our more than 60% ROE in the low valuation?

Luis Felipe Castellanos, CEO

Yes. Sorry, I will just interrupt for a moment but I can take it. So, thanks very much for the question. We're always evaluating alternatives. Right now, we don't have that in plans. So, we will continue to monitor both capital requirements, performance, our prospects, own liquidity, other vehicles where we can do this but so far, although we do think there is an opportunity on that front, we have not yet proposed anything or taken that decision. It's obviously always on the table and being evaluated. We also look at the liquidity of the stock. We did our IPO in 2018 to boost liquidity and enable it to have more showing and trading. Those are balances that we need to take into account before actually taking a decision. We'll make sure every possible avenue through operations or through any of the different alternatives is taken into account to make sure that once the volatility and the dust settles on the international conditions, we can get back to where we think the value of our franchise should be.

Rafael Borja, InspIR Group

We have one more question from White Oak Capital. The commercial loans have contracted year-over-year with increasing commodity prices. It would seem that the demand for working capital loans will increase, but it does not seem to be the case. So, could you comment on the demand outlook and your approach to commercial and working capital loans?

Luis Felipe Castellanos, CEO

Yes, of course. The economic outlook for the country is not very encouraging. We are observing a slowdown in GDP. Consumer confidence and the overall business environment, including both private and public investment, have not improved. We are anticipating a second half of the year where there will be little demand for new loans or projects. Nevertheless, there are still opportunities; if we exclude the Reactiva aspect, we might witness some recovery in corporate and medium-sized enterprises, but it won't be significant. Perhaps Michela can provide further insights on this.

Michela Casassa, CFO

Yes, I just wanted to add to what Luis Felipe was mentioning that there is this positive effect of the replacement of the Reactiva loans which is healthy. Remember, there were almost PEN 60 billion injected in loans to the financial system for commercial loans in 2020 during COVID times, and those loans are being rebate but there is still we, for example, lent PEN 7 billion out of that and we still have 3 point something billion in our portfolio. Basically, what is happening is that as those loans which had low rates continue to mature, companies need to replace that cheap funding with new working capital. That's why when you look at the numbers excluding those repayments of Reactiva, commercial banking continues to grow, and it will continue to be the case for the rest of the year and part of 2023.

Rafael Borja, InspIR Group

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

Operator, Conference Operator

There appears to be no further questions at this time. I'd like to turn the floor back over to Ms. Casassa for any closing remarks.

Michela Casassa, CFO

Thank you very much. We appreciate everyone joining us for our first Investor Day. We anticipate less volatility in the upcoming quarters and look forward to seeing you in our third quarter conference call results. Goodbye, everyone.

Operator, Conference Operator

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