Earnings Call Transcript - IFS Q4 2024

Operator, Operator

Good morning, and welcome to the Intercorp Financial Services Fourth Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded. After the presentation, we will open the floor for questions. It is now my pleasure to turn the call over to Mr. Ivan Peill from InspIR Group. Sir, you may begin.

Ivan Peill, InspIR Group

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its fourth quarter 2024 earnings. We are very pleased to have with us, Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Carlos Tori, Chief Executive Officer, Interbank; Mr. Gonzalo Basadre, Chief Executive Officer, Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo. They will be discussing the results that were distributed by the Company yesterday. There is also a webcast video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the Company's website, ifs.com.pe. Otherwise, if you need any assistance today, please call InspIR Group in New York at (646) 940-8843. I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Please be advised that, forward-looking statements may be made during this conference call. These do not account for future economic circumstances, industry conditions, the Company's future performance or financial results. As such, statements made are based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir.

Luis Felipe Castellanos, CEO

Thank you. Good morning all, and welcome to our fourth quarter 2024 earnings call. I want to thank you for attending our call today. 2024 marked a period of recovery, both for our country and for IFS. On the macroeconomic front, we finished the year with an improved sentiment and outlook on the back of our rebound in manufacturing, construction, agriculture, and fishing. Inflation remained under control, and our currency threshold was stable. We're anticipating a GDP growth of 3.2% for the year 2024, primarily driven by the mentioned recovery in diverse sectors and improved drivers of private investment and consumption. Peru will probably be the country with the highest growth in the region for 2024. Looking ahead to 2025, we continue to be modestly optimistic about the future growth of Peru. We expect private investments and consumption to maintain its positive trend. However, we're cautious, given that 2025 is a pre-electoral year, and changes in the external environment could create certain volatility. The 2024 results for IFS confirm that we are emerging from the most challenging phase of the credit cycle. During the first half of 2024, we still faced challenges from the deterioration of the consumer portfolio from the previous year, but as expected in the second half, particularly in this last quarter, we saw an important recovery boosted by liquidity events that helped Peruvian consumers, including the fourth release of pension funds and the availability of severance indemnity deposits. The de-risking strategy we implemented in the banking segment has definitely paid off, as the cost of risk has returned to low levels. Additionally, the market performance has had a positive impact on our investment portfolio, both in the Insurance and the Wealth Management segments. As a result, the recovery of our business is evident. We achieved an ROE of over 18% in the fourth quarter, a fast recovery that demonstrates the resilience and value of our operations. We believe that these trends should continue. At Interbank, we had a positive year as we have been able to increase our market shares in loans and deposits, consolidating our position as the third-largest bank in both categories. Our growth in loans has been driven by commercial banking, where we have gained over 80 basis points in market share. We believe we have begun our recovery path in our consumer portfolio. We have deployed enhanced internal risk models, thus further improving our underwriting standards, although we are still being cautious. Izipay and Interbank continue to seize business opportunities together, while PLEAM keeps increasing user engagement, fostering more primary banking relationships and supporting growth. On a separate note in the Banking segment, it is worth mentioning that by year-end, we executed a successful issuance of subordinated bonds at the lowest ever spread for Interbank, which reaffirms the market's confidence in our franchise. At Interseguro, we have seen significant growth in our core business, mainly in individual life and annuities, where we continue to be the market leader. Our Wealth Management segment, Inteligo, had a positive year in its core operations as assets under management reached an all-time high, growing by 17% over the year. The investment portfolio's performance also improved. Our key strategic priority at IFS continues to be achieving digital excellence for our customers to generate primary relationships. Our ambition is to be a leading digital platform focused on key businesses and profitable growth, providing a comprehensive offering with the best digital experience and deep analytical capabilities as our competitive advantage. Going forward, we continue to be optimistic about IFS's franchise and outlook on the back of the continued recovery of Peru's fundamentals, while we continue to execute our long-term strategy. Now let me pass it on to Michela Casassa for further explanation of this quarter and full year results. Thank you.

Michela Casassa, CFO

Thank you, everyone, for joining us for Intercorp Financial Services' fourth quarter and full year earnings call. To start, I want to discuss the macroeconomic outlook for Peru. Throughout the year, macroeconomic indicators have shown steady improvement. In the fourth quarter, Peru's economic recovery has solidified, largely due to investment, with GDP growth around 3.7%, marking three consecutive quarters above 3%. November recorded a growth of 3.9%, totaling 3.1% for the year. Growth has been driven by primary sectors, which increased by 3.5%, thanks to a robust fishing season and a rebound in agriculture, while non-primary sectors grew by 3%. The Central Bank has successfully managed to keep inflation controlled and within its target range, anticipating a 2% inflation rate for 2025. Peru was the first in the region to lower reference rates, cutting them by 300 basis points from a peak of 7.75% to 4.75% currently. While we are nearing a neutral interest rate, there remains potential for further rate reductions if the Federal Reserve maintains its current stance. Additionally, the currency has remained stable throughout the year, with expectations for inflation and exchange rates to stabilize in 2025. Looking ahead, Peru's economy is projected to grow by approximately 2.8%, with a more dynamic first half due to the pre-electoral environment affecting the latter half. Sectors like trade, services, construction, agriculture, mining, and tourism are anticipated to drive significant growth this year, supported by increased private spending and higher copper and gold prices. However, the fiscal deficit is expected to be 3.6% of GDP in 2024, which is still a better position than the regional average. Monitoring the evolution of U.S. economic policy will be crucial as it could impact the business environment negatively. Our indicators show optimism in the labor market and private investment, with private consumption being a key factor in improving domestic demand. Consumer confidence has been gradually increasing each quarter, aligning with economic optimism and a market recovery. In November, formal employment and real wages have shown year-over-year growth, positively influencing private consumption. This rebound in consumption has been aided by pension fund withdrawals and severance payments, boosting purchasing power. Business confidence has remained stable and positive all year. The Central Bank's latest report projects private investment growth of 4.1% in 2025, indicating a positive outlook for the economy. According to the Ministry of Foreign Affairs, there are several infrastructure projects planned for 2025 and 2026, amounting to an estimated investment of $16 billion, with $7.6 billion expected to start in 2025. Key projects include the new Carretera Central and Linea Dos of the Metro. The mining sector is also expected to see significant investment, exceeding $50 billion by 2028, with projects like Tia Maria and Yanacocha. In this context, we continue to focus on our three key strategic priorities. First, we aim for profitable growth to establish ourselves as a leading digital platform. IFS has demonstrated a solid recovery, with net income increasing by 70% year-over-year and achieving over 18% ROE in the fourth quarter. We continue to grow our customer base at double-digit rates across all segments. Second, we strive to create the best digital experience and develop primary banking relationships. Over 80% of our retail banking customers and more than 70% of our commercial customers are now digital. Our net promoter score for retail banking was 55 points in December, with a positive trend heading into January. Third, we maintain our focus on core businesses, holding a significant market share in consumer banking loans, retail deposits, and annuities. In Wealth Management, we saw assets under management grow at a double-digit rate, surpassing previous records. In terms of quarterly performance, we witnessed a strong recovery in earnings and profitability, with a net income of S/ 496 million. This resulted in an ROE exceeding 18%, reflecting consistent improvement. Our cost of risk continues to decrease, and our cost of funds has improved significantly, with a year-over-year decrease of 100 basis points. We have strengthened our commercial and payments ecosystem, allowing us to grow our market share in commercial banking. Additionally, we've experienced double-digit growth in individual life and annuities, continuing our leadership in the sector. In Wealth Management, we had a record year with significant growth in assets under management and corresponding fee income. Now, let's review sustainable growth, key businesses, digital uptake, and our guidance and key takeaways. In the last quarter, net income of S/ 490 million was 71% higher than the same quarter last year and 26% higher than the previous quarter. This improvement reflects an ROE of 18.2%, indicating we are on track with our mid-term targets. Our Banking segment saw net income nearly triple year-over-year, primarily because of lower costs and improved margins. Finally, we remain committed to efficiency, with total expenses rising only 5% year-over-year, keeping our cost-income ratios within expected levels. Thank you for your attention.

Carlos Tori, CEO, Interbank

Thank you, Felipe. I agree with your point. While I won’t go into detail about each competitor, we expect the market to grow around 5% to 7%, which is twice the rate of our anticipated GDP growth. We've managed to grow at a higher rate than that for the past several years. As Felipe pointed out, we aim to recover some of the consumer finance segment and perhaps achieve additional growth there. In 2024, we experienced greater growth in commercial banking even when the system itself did not grow. We plan to continue growing somewhat faster than the market. Therefore, we will grow and gain market share; that is our objective. It won't be excessively high, but we expect to be slightly above the market, especially in consumer segments.

Ernesto Gabilondo, Analyst

Thank you. Hi, good morning, Mr. Felipe, Michela, Carlos and good morning to all your team. Congrats on your fourth quarter results and 2025 guidance. My first question will be in fee income growth. Considering you're expecting higher loan growth in 2025, how should we think about fee income growth? It will also be supported by Izipay, Interfondos, cash management? How much of your fees or total revenues are coming from digital channels? And I don't know if you have like a long-term target or how much digital revenues will represent of total revenues. So that's for my first one. My second one will be on the Wealth Management business. As you pointed out, we continue to see a recovery in this business. So just wondering, what will be the variables that we should monitor to see this further recovery during 2025? I don't know inflation rate, anything that you can provide us some color will be very helpful. And the last question is on your effective tax rate. We saw it was kind of low in '24 when compared to historical levels. So, what should be the level we should expect in 2025 and the next years? Thank you.

Luis Felipe Castellanos, CEO

Thank you, Ernesto, for your kind words. We are also very pleased with the recovery and performance in the fourth quarter. We anticipate maintaining this positive trend in the coming year. I will now turn it over to Michela to discuss the Wealth Management business, and she can address both the first and third points.

Michela Casassa, CFO

Yes. Okay. Good morning, Ernesto. First of all, talking about fees. We are expecting fees to grow at, I mean, between high single-digits and maybe low double-digits, and this is mainly due to the composition of our fees. As you have seen, when you see IFS as a whole, fees have been growing nicely in some of the business segments like for example Inteligo and they have also been growing nicely in commercial bank. The portion of fees that was impacted during 2024 was the one related to the consumer loan book, so to credit and debit cards. Now given that now we are expecting a recovery of that business, we are expecting that personal fees to be the one that impacts positively and makes us grow faster than what you have seen during 2024. You talked about digital fees. I guess, for us, it is difficult to split it because most of the fees that we have today are coming from digital, because of the higher incidence of the digital players as you have seen, with the 80% retail clients and 70% commercial clients. And as for the tax rate is concerned, I mean, the tax rate actually varies a little bit depending on the weight of two things, not the weight of bank versus insurance, versus wealth management, that is one of the factors that impacts the tax rate of IFS. But the second one that has impacted specifically the tax rate of the Bank is the mix between, let's say, the portion of the earnings or the income of the bank that comes from tax-exempted instruments. Okay? Basically, especially at the beginning of the year the tax rate for Interbank was particularly low because of the mix and that has been going up to more normalized level as of the fourth quarter. So, I guess when you look at the tax rate as a whole, during 2025, you should see a slightly higher tax rate, when you put everything together, Ernesto, for IFS as a whole. So, with the hiring of the Bank as a whole and of the core business parents.

Bruno Ferreccio, CEO, Inteligo

Good morning, Ernesto. With regards to Wealth Management, we've already seen good growth in fees all 2024. We expect that to continue to be the case during 2025. The first half was a little slower in terms of portfolio returns with a good performance in the second half. So, we would expect a normalization on that end. I'm sure you know, but the last probably 18 months were very volatile and in a couple of quarters were affecting results. But again, the fourth quarter was very solid and we expect that to normalize during the year. Perhaps the one thing that wasn't that great during '24 was NIM. We were expecting rates to fall or Fed rates to come down a little bit faster than we saw last year. But as those rates continue to go down a little bit, we expect NIM to recuperate and do better this year as opposed to last. So, I would say, continued growth in these, better NIM and more stable results in the portfolio should be the explanation for this year's results.

Nicolas Riva, Analyst

Thanks, Michele and Felipe for taking those questions. I have only one question about the Tier 2 bonds of Interbank. So last week you raised the $325 million, $350 million with a new 2035 bonds. I wanted to ask about the plan for the regarding the call option on the 2030 Tier 2s in July. I would assume given the new issue last week that you're going to be calling the 2030s in July. But if you can discuss your thoughts on that, that would be helpful. Thanks.

Luis Felipe Castellanos, CEO

Yes. Let's take a look at it. It's very simple. Yes, we're planning to execute that call. That's the reason for the proceeds of the issues we raised. So, you're right.

Yuri Fernandes, Analyst

Hi, guys. Thank you. Good morning and congrats also for the 18% ROE. I have a question actually on this, on your guidance for ROEs on the 16%. I understand the cost of risk was very low this quarter and you also have Inteligo help, on high ROE. But 16% for next year, it’s not embedding a lot of recovery. I know versus the full year, yes, it's a recovery, but versus the pace we are seeing on the 4Q. So, trying to understand if we're being a little bit more conservative, if it is the tax rate going up a little bit, it's just the cost of risk in the 4Q that is not a good sample and should converge the 3% of your guidance. Just trying to understand because not saying 16% is not bad, but I know your goal at some point was to return to 18%. I don't know, I just would like to understand a little bit more depth towards like a higher teens ROE. Thank you.

Luis Felipe Castellanos, CEO

Thanks very much. That's a very good question. Actually, we're very happy with the result of this quarter obviously. As you know, there's some seasonality in the results of IFS, especially at the bank, at Interbank. It usually wraps up. The last quarter, especially December, are normally the highest points of the year in terms of returns. And as you mentioned, Inteligo had very strong investment results, so I think they looked like a 28% ROE. We're targeting more like 20% is how we’re sustainable in terms of what we are looking at. So, if you go do those types of adjustments, you get to lower numbers than the 18% that we specifically booked on the specific quarter. However, we need to understand we are rebuilding, the consumer boom. If that happens faster in a more efficient way in terms of cost of risk, depending on the performance of the Peruvian economy, probably we have some upside risk potential in terms of the numbers that we have guided. It's not that we are being extremely conservative. I think we are being cautious, because there are some unknowns around next year. But, obviously, we'll be trying to get on to each opportunity that comes up. So, the combination of the seasonality, the way that we’re going to ramp up the recovery and the strong results from investments are the ones that explain a little bit why we are still, probably the last part of the year, we will be at those 18% levels. However, the question mark will be how we build into the first half of next year.

Yuri Fernandes, Analyst

Got it. 18% to the target maybe for the first half of next year. Is that correct understanding?

Luis Felipe Castellanos, CEO

Yes. So, it's going to be lower in the first half and then we'll be building up in the second half.

Andres Soto, Analyst

Good morning to all and thank you for the opportunity to ask questions. My question is a follow-up. I want to make clear, if the numbers that you suggested in terms of the ROE for the business units, is that what you expect in 2025 or is it the medium-term number? And specifically, for 2025, what will be target mostly for Interbank?

Luis Felipe Castellanos, CEO

Yes. What I referred to was the medium-term targets, Andres. That's the way we build the vision of our sustainable 18% ROE for IFS. That's our medium-term. I think we're not going specifically subsidiary-by-subsidiary. Maybe we can follow-up on that. I think we don't have that info right now. I don't know if you have any problem with that.

Michela Casassa, CFO

I mean, just to say, we have always started at the 18% ROE medium-term, which was a combination of 20% Interseguro, 20% Inteligo, and around 18% Interbank. If you see what's happened in the fourth quarter of this year, the numbers that we have on the slides there, the 18.5% of IFS is a combination of a higher ROE of Interseguro, a high ROE of Inteligo but Interbank still at 16% ROE, and despite the seasonality that we have discussed. Basically, due to the mix of the portfolio and the fact that we are still in the recovery phase of that business, that is the ROE that is still not on the mid-term range. If you look at the numbers, now that we have already provided to you, and when we target the 16% ROE of next year, I mean, what I can say is that it's mainly because the Bank is not yet in our mid-term ROE. That's the way how it works and that should get to the 18% full year, most likely the year next to that because of the full recovery of the bank. I guess maybe that can help the explanation.

Andres Soto, Analyst

That's clear. Thank you, both. When I look at your NIM guidance for next year, it looks a bit conservative, considering the improvement in the funding cost and you expect already a recovery in consumer lending. So the mix should at least remain the same. What are your thoughts about the NIM? Is there any structural change in the system, in the Bank that prevents you to have higher NIM than the one that you currently have, or is this the driver that is going to take the ROE to the 18% over the medium-term?

Luis Felipe Castellanos, CEO

Yes. I think it's related to the pace of recovery of the consumer group. Again, we're happy, the economy is improving, Andres. We're seeing, no doubt that the salaries of Peruvians improving, but this is a process. It's not going to be automatic. It's not that the first quarter of next year, we're going to see super growth in our consumer group. We've been through cycles. We know that we're seeing some indicators of recovery. However, we're still being very cautious in our approach to going back with more strength into the market. We need to see more indicators of this consolidating and then our book will start to grow. In the second half, we have to be cautious because of the potential volatility coming up from the pre-electoral year. So that is still early to tell, but usually, we know how this moves in terms of investments being delayed until they're more clarity in the picture. Again, we're cautiously optimistic, but we're being cautious even in the way we think we're going to rebuild the book. If things turn out like this year that we get processes to prices, obviously we'll be ready to deploy more resources into growing our group faster. However, we’re coming from the part of the rate cycle that we've gone through, we'd rather be careful rather than aggressive at this point.

Michela Casassa, CFO

Okay. Thank you. And thank you everybody for being with us today. We will see everybody again during our first quarter 2025 results. Bye.

Operator, Operator

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.