Earnings Call Transcript - IFS Q1 2023

Operator, Operator

Good morning, and welcome to Intercorp Financial Services First Quarter 2023 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’ll open the floor for questions. At this time, instructions will be given as to the procedure to follow if you would like to ask a question. Also, you can submit online questions at any time today using the window on the webcast, and they will be answered after the presentation during the Q&A session. Simply type your question in the box and click submit 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 Representative

Thank you, and good morning, everyone. On today’s call Intercorp Financial Services will discuss its first quarter 2023 earnings. We’re very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; Mr. JuanPablo Segura, Chief Financial Officer of Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo; and Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They will be discussing the results that were distributed by the company yesterday. There is also a webcast video presentations to accompany discussion during this call. If you didn’t receive a copy of the presentation or the earnings report, they are now available on the company’s website, ifs.com.pe, to download a copy. Otherwise for any reason if you need any assistance today, please call InspIR Group in New York at 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. This 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 first quarter 2023 earnings call. Thank you all for joining us today. Let me start by giving you a brief overview of the macro situation in our country. As you may be aware, we continue to operate in a challenging environment with GDP growth expectations for the year at 2.5% according to the Ministry of Finance. Economic activity was affected during December 2022 and January this year by certain episodes of social unrest and most recently by heavy rainfalls and flooding impacting Peru’s coast. The possibility of an El Niño phenomenon later this year has not been ruled out. On the other hand, the 12-month inflation rate is slowing down below the 8% mark. Yet, sustained high inflation is still negatively impacting Peruvian businesses and consumers with pressure on margins and families' purchasing power. Inflation expectations for 2023 remain above the Central Bank’s target range. Internationally, market conditions continue to be volatile and inflation continues to be a source of concern for global central banks. Moving to our business. We continue to experience higher interest rates in both soles and dollars contributing to higher margins this year as we were expecting. However, the cost of deposits have also increased sharply, slowing margin expansion. We have seen an increase in the cost of risks mainly in the retail portfolio. We had anticipated costs of risk to increase. However, sustaining inflation and the aforementioned factors are putting additional pressure on our portfolio. The banking superintendency announced a new loan rescheduling program to provide relief for debt holders. We have been very proactive in using this facility to help our customers. We’re closely monitoring payment behavior and being cautious with our operations given the scenario that we’re facing and we have taken a conservative approach to loan loss provisions this quarter. We remain committed to helping Peruvians overcome these challenging times. On a different note, we have started to report our insurance business under IFRS 17 accounting this quarter. The first-time adoption impacts equity by over S/640 million and it will normalize in time. Our Wealth Management segment is slowly recovering its investment performance with a second consecutive positive quarter after a challenging 2022 due to market conditions. Finally, our payments ecosystem continues to show solid growth and is well-positioned to take advantage of opportunities presented by interoperability as we pursue additional growth. Overall, we are pleased to continue to see double-digit growth in IFS’ recurrent revenues and world-class efficiency levels. We remain optimistic about IFS’ outlook going forward. Even though we’re facing challenging conditions, we believe that once the silos break, we will return to our path of sustainable profitability and growth. We continue to execute our strategy across our four business segments. We’re confident that our Peruvian people, our efficient operations, our digital capabilities, and our ability to adapt to changes are our core pillars to achieve our objectives. On a final note, as you are aware, in our last shareholders meeting, a shares repurchase program was approved. We are in the process of finalizing details on the institution that will help us in this effort. Now, let me pass it on to Michela to update you on the results of this quarter and to give you a detailed review of our operations. Thank you very much.

Michela Casassa, CFO

Thanks, Luis Felipe. Good morning, and welcome, everyone to IFS first quarter 2023 earnings call. Today, we will review our financial highlights and key messages. Despite certain volatility in our financial results, our operational trends are aligned with the strategy we’re deploying as Luis Felipe has just mentioned with a clear priority on digital growth with a focus on profitability. Today’s information includes new accounting standards IFRS 17 for the insurance business figures. In 2022, figures have been restated for comparison purposes at Interseguro and IFS level. The first adoption impact is around S/600 million at Interseguro and IFS equity. I will start with a summary of financial highlights on Slides 3 to 9. On Slides 3 and 4, IFS first quarter recurring earnings are S/308 million with an ROE of 13.3% when normalizing an impairment effect from new reschedulings at Interbank. The quarterly and yearly decreases in earnings are mainly due to a higher cost of risk in the consumer portfolio, but also to a lower than expected result from investments in insurance and wealth management. Payments have performed nicely and continue with double-digit growth in most KPIs. On banking, we have seen some signs of moderation in growth due to the macro scenario as we have continued our focus on low-risk clients within the consumer portfolio. NIM was up this quarter by 10 basis points reaching 5.5% despite the further increase in the cost of funds as yields on loans improved by 40% in the quarter. As discussed in our previous conference calls and in line with the change in portfolio mix and sustained inflation, cost of risk has increased reaching 3.2% this quarter impacted by two additional and unexpected events: the social protest and unusually heavy rains in some specific regions of Peru. Due to these events, we have helped our clients with loan rescheduling, mainly on credit cards, in line with the superintendency guidelines, which will start maturing in the coming months. On insurance, the first figures reported under IFRS 17 showed earnings below our expectations, mainly due to soft results from the investment portfolio. On wealth management, results continue on a recovery path; however, they are still below sustainable profitability. Finally, on our payments business, Izipay continues to show solid growth in business, strong growth in the number of merchants and transactional volumes, and gaining market share within our volumes in e-commerce in the year. Additionally, Plin and Tunki continue with strong growth in users and transactions, as we will see more detail further on in the presentation, which should help us to benefit from the interoperability that has just started and to advance with our payment ecosystem. Among the key performance indicators for the quarter in the year on Slide number 5, I would like to highlight the very good quarterly efficiency ratio, which stood at 33% at IFS, going back and even better than pre-pandemic efficiency levels. On Slide 6 and 7, good news in top line as total recurring revenues for IFS grew 21% year-over-year, thanks to the growth registered in banking of 21%, wealth management of 10%, insurance of 8%, and payments of 7%. On a quarterly basis, growth of 2% is impacted by seasonality, mainly coming from a strong fourth quarter. On Slide 7, another positive is our fee income, which constitutes a source of incremental and diversified revenues, growing 11% year-over-year with important contributions from banking, which represents 63% of IFS fees, payments at 26%, and wealth management at 12%. Moreover, banking fees continue to grow double digits on a yearly basis, thanks to double-digit growth of credit card fees and a negligible impact from lower account fees as we have not been charging Interbank fees to our retail clients for many years now in line with our digital growth strategy. On Slide 8, the efficiency ratio of IFS was 33% in the quarter and was 37% for banking. Both ratios are very good, mainly thanks to the operating leverage of the bank, which was very strong in the quarter with revenues growing 21% year-over-year and costs growing only 7%. This has helped the efficiency ratio of the bank to improve almost 500 basis points in the year. On Slide 9, we have a solid capital position, as evidenced by the ratios of Interbank, but also Interseguro and Inteligo. First quarter capital ratios at Interbank are now Basel III compliant following the latest superintendency implementation, which ceases a gradual implementation in the minimum required limits for both total capital ratio and Core Equity Tier 1. Core Equity Tier 1 ratio at Interbank is at 11.1% as of March, and total capital ratio stands at 15.2%, both including already the effect of dividend distribution. There have also been some changes in wealth management capital requirements established by the Central Bank of Bahamas, which raised the minimum limit to 12%, and there have also been some additional deductions to capital that have resulted in the decrease of the capital ratio on a quarterly basis. Now, I will focus on six key messages we would like you to take home from this call on Slide number 11. First, the macro outlook continues to be challenging impacting banking profitability. Second, we have implemented IFRS 17 with impacts in the insurance business disclosures and at IFS level. Third, wealth management results are still impacted by investments but register their second consecutive positive quarter in terms of earnings. Fourth, we continue to work on our two-tier digital strategy, showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fifth, we continue to see a positive evolution in our payment business. Finally, we continue making progress in our sustainability efforts. On Slide 12, we show the evolution of some of the key macro indicators. GDP growth continues to be low with a revised estimate of 2.5%. Interest rates have been stable in soles at 7.75% and the dollar rate has continued its upward trend up to 5.25%. The exchange rate is now down to 3.76 soles per dollar at the end of March and has continued to go down during the next month. Inflation continues high at 8% as of April but shows a downward trend from the peak of 8.8% of June last year. Moving on to banking on Slide 13. We have strengthened the focus on low-risk clients in consumer finance and SMEs, as shown in the quarterly decrease of new loan disbursements in personal loans and SME loans. Credit and debit card purchases are flat on a quarterly basis but continue to grow 25% year-over-year. In the same way, balances have increased 6% in the quarter and 27% year-over-year. We continue to see important growth in turnover as both credit and debit cards increase their penetration in the country, which is still low. This growth has allowed us to increase market share by around 50 basis points in the past 12 months for the combined turnover, thanks mainly to our Interbank Benefit loyalty program, our increased focus on e-commerce, high growth product categories, and finally, our upselling strategy. The good news is that we continue to see double-digit growth in banking revenues on Slide 14, thanks to double-digit growth in all revenue lines. Net interest income grew 24% with a strong contribution from credit card and personal loans, but also from the repricing of commercial banking loans. Fee income grew 13%, mainly due to the growth of credit card fee income but also to the sustained growth in fee income coming from cash management services in commercial banking. Other income at the bank grew 15% year-over-year, mainly due to FX trading income. All in all, total core revenues grew 21% on a yearly basis. Continuous repricing efforts push yield on loans upwards by 40 basis points in the quarter and 260 basis points in the year, reaching 10.9% and NIM 10 basis points in the quarter and 100 basis points in the year reaching 5.5%. Risk-adjusted NIM has decreased 50 basis points in the quarter, mainly due to the increasing cost of risk of consumer loans. We have continued to see rising cost of funds, reaching 3.6% in the quarter, up 40 basis points on a quarterly basis and 180 basis points on a yearly basis. We continue to have the best loan-to-deposit ratio among peers at 99% as of March 2023, versus a system average of 104%. On Slide 17, we have seen a pickup in the cost of risk as previously mentioned by Luis Felipe, up to 3.2%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 5.4% during the first quarter. We have granted some credit card customers rescheduling programs in line with SBS guidelines for social disruption El Niño phenomenon. The monthly volume of rescheduling increased from an average of S/60 million in 2022 to S/130 million to S/160 million in the first three months of the year, representing around 6% of the credit card portfolio as of the end of March. As of the end of April, only a small portion of these loans have matured, for which it is still early to understand consumer payment behavior, which we will closely monitor and manage during the next four to six months when most of these facilities mature. The NPL coverage ratio continues to be very high at bank level at 178% and even more in retail banking at 252%, much higher than the 179% pre-COVID. Now, let’s move to the second key message of this presentation related to the insurance business and the newly adopted IFRS 17. On Slide 19, the first quarter earnings of S/31.3 million with a 40% ROE are the first results under IFRS 17. This quarter, we have registered some negative impacts in our investment portfolio from the impairment of a fixed income investment, plus the negative impacts on real estate valuation from the depreciation of the dollar. Moreover, we have registered a positive translation result from the devaluation of the dollar, as with the liabilities, under IFRS, we have a higher position in liabilities in dollars. On Slide 20, there has been a decrease in annuities due to a contraction of the market and increased competition, but our market share remains strong for annuities at 25%. Both individual life and retail insurance businesses continue to grow double digits year-over-year, at 28% and 17% respectively. On Slide 21, the quarterly return over the investment portfolio came at 6.6%, below the extraordinary heights of the fourth quarter 2022, but above the previous year. On wealth management, the performance is still impacted by market conditions on the other income profit line. Good news is the asset under management evolution is positive this quarter, with contributions from both our offshore wealth management platform as well as the local mutual fund business. On Slide 26 to 28, positive news is that our digital indicators continued to show nice trends when compared to the previous year. Still, we believe there is a way to go in moving these indicators further. As of March 2023, digital customers reached 71% of customers who interact with the bank during the last 30 days, up 6 points in the past year. Digital sales reached 60%, up 1% from last year. We continue to see a significant number of new digital accounts being opened for both individuals and businesses. For example, as of the end of March, 96% of new businesses accounts were opened digitally. NPS for digital retail customers continues its path to become a top-end NPS in the next few years, reaching 47 points this quarter, improving 2 points versus the previous year. On Slide 27, insurance digital indicators show positive developments as well, with Vida cash life premiums and digital products reaching 35% of total life premiums. Wealth management's digital journey is also underway, with 41% of digital transactions within the local business conducted on our digital platform. On Slide 28, in line with our digital strategy, we continue to see important growth in our customer base of the bank, with a 17% increase year-over-year in retail, 29% in digital retail customers, and 23% in commercial banking customers, reaching S/5.5 million as of the end of March. Now, let’s move to payments. On Slide 30, we are showing solid yearly growth in key business drivers. Merchants increased 67% year-over-year, reaching S/1.2 million. Transactional volumes grew 24% year-over-year. Moreover, e-commerce transactions are gaining share within our transactional volumes, reaching 16% as of the end of March. Revenues continue to grow nicely, 7% on a yearly basis supported by increasing transactional volumes and merchants. EBITDA shows a slight contraction year-over-year, mainly due to an unusually high first quarter 2022 caused by specific seasonal impacts and a slight decrease in margins. We have been working to accelerate the growth of our payment ecosystem by having all our assets work towards a common strategy. We are focusing on increasing transactional volumes, offering merchants additional services, continuing to pilot low-risk loans to merchants, and using Izipay as a distribution network for Interbank products, as well as a source to increase float. On Slide 31 and 32, Plin and Tunki continue with their accelerated growth. Plin reached 11 million customers as of the end of April with Interbank participation still above 40%, and Tunki users reached S/2.6 million. The number of merchants continues to increase as well, at 59% year-over-year for Plin and 56% for Tunki. The number of transactions has continued its strong growth, at 7% in the month of April for Plin and 6% for Tunki. Plin and Yape interoperability has just started. This is an important development for financial inclusion in the country, which the central bank has encouraged and which should help to bring more people into the financial system, reducing cash usage, which continues to be high in the country. We expect to benefit from more digital transactions, less cash, more data, and increased float. On Slide 34, moving to our ESG update, we have continued to enhance our sustainability strategy upon our focus areas. On our environmental front, Interbank has received minimum recognition for its carbon footprint measurement and along with Interseguro and Inteligo awarded a certification on behalf of the Greenhouse Gas Protocol for the measurement of their GHG emissions. Our latest developments on the social front include all four subsidiaries being in the top 10 positions of the Great Place to Work Peru 2023, as well as the development of further content and learnings through our financial services education platform Aprendemas. Finally, on our governance front, we have been included for the second year in the S&P ESG sustainability index, along with other 13 companies that carry out the best sustainable practices. Moreover, our recently published Interbank sustainability report for the year 2022 summarizes our performance on the environmental, social, and governance fronts under the Global Reporting Initiative framework. To strengthen our sustainability culture, we have co-designed with Dalberg our first IFS sustainability forum that involves the participation of our four subsidiaries to reinforce our sustainability commitment. Now, let me give you an update on our operating results for the first quarter 2023. The total capital ratio is 15.2% and the Core Equity Tier 1 ratio is 11.1% with new Basel III implementation and after dividend distribution, both above our guidance. ROE of 13.3% in the quarter has been impacted by cost of risk and investment results. Year-End ROE recovery will depend mostly on the recovery of those two factors. Loan growth of 15% is above our guidance, though we expect some moderation in the coming months. NIM for Interbank was 5.5% when excluding the impairment effect, in line with guidance. The cost of risk for banking was 3.2% in the quarter, slightly above the higher end of the guidance. Following quarters might continue to be challenging depending on the behavior of repayment of the reschedulings done this quarter and the overall behavior of the consumer portfolio. New guidance for the efficiency ratio at IFS level is to be below 36%. This first quarter efficiency ratio at IFS was 33.3%, and the efficiency ratio for Interbank was 37% this quarter better than guidance. Now, let me recap the six key messages of this presentation. First, the macro outlook continues to be challenging impacting banking profitability. Second, we have implemented IFRS 17 with impacts in the insurance business disclosures as well as at IFS. Third, wealth management results are still impacted by investments. Fourth, we continue to work on our two-tier digital strategy showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fifth, we continue to see a very positive evolution in our payment business and ecosystem. Finally, we continue to make progress in our sustainability efforts. Thank you very much. Now we welcome any questions you might have.

Operator, Operator

Thank you. We will now start the question-and-answer session. We will first take questions from the conference call and then proceed to those from the webcast. Our first question is from Ernesto Gabilondo with Bank of America. You may go ahead.

Ernesto Gabilondo, Analyst

Thank you. Hi. Good morning, Luis Felipe, and good morning everybody. Thanks for the opportunity to ask questions. My first one will be on your NIM expectations. I remember your NIM has not benefited during this high interest rate environment. As you have mentioned in the past, IFS sensitivity to rates is neutral. So considering this, how should we think about IFS NIM’s evolution under an easing cycle? Then my second question is on asset quality. As you pointed out, there was a higher cost of risk in the quarter. So should we speak now the high end of the cost risk guidance? And then on my last question, you mentioned in the last slide that you are keeping an ROE guidance at around 18% for the year and this is by the earnings contraction of this first quarter. So can you elaborate on what would be the key drivers to support higher earnings growth and improved ROE over the next quarters? Thank you.

Luis Felipe Castellanos, CEO

Okay. Ernesto, thanks very much for your questions. Okay, let me go in order here. Michela’s going to help me, but our – I think with the evidence shows that our NIM has expanded marginally during the increase of rates. We do expect during an easing cycle that we will be able to expand NIM and that will be very dependent on pricing discipline. But I’m going to, after answering the other two earlier questions, I’m going to pass it on to Michela, so she can give you a little bit more detail. In terms of risk, yeah, it’s – I think it’s safe to assume the higher end of the range given where we’re seeing basically as you’re aware. We had expected an increase in cost of risk for the year given the normalization of the economic activity, the post-pandemic effect of less liquidity in the system, and we had also expected inflation and a slow growth. However, I think that what we are witnessing is more sticky inflation that probably will last more than we had anticipated during the year, similar to what’s happening in parts of the world. Although, we do expect that by the end of the year inflation will start going down more importantly. And second, the impact of the protests especially in the south of Peru was significant. We had not a significant amount, but our portfolio around between 10% and 12% of our portfolios in the south. So it was impacted because of that, and then we had all the rains. And we’re very careful, because it looks like a linear phenomenon could happen this year. No, so all that has taken us to be very conservative on the provision front and that’s what you’ve seen this quarter. Again, the risk models and the expected losses are still being calibrated, because similar to what happened throughout the region, the big liquidity injected into the system really made the risk models not have great predictability. So we’re being very careful there and as the situation normalizes and we have – are able to digest these impacts, we’d rather go on the conservative front, both on the provisions we have booked for this quarter, probably this will continue in the next quarter, and also thinking that the range probably will be more towards the upper part as you mentioned. Okay. And then in terms of the ROE guideline, obviously it is a challenge. No, we felt it was too early in the year to really elaborate on changes on the ROE. We will work strongly in achieving the target. That’s what we think is the sustainable ROE for IFS. What would need to happen? Obviously, we need to see – if you look at what's going on, like the operations are growing nicely, okay, and our efficiency levels are working very well. Okay. So we’ve had this provisions impact and then market conditions affecting our investments, okay? We do expect investments to recover, especially, hopefully, in the second part of the year. We’ll probably see some more lagging resource from investments next quarter. But I think the worst might be over, hopefully, and that will be a significant driver of our potential recovery, but we’ve had very good results in the same type of portfolio during previous years. So structurally nothing has changed other than hopefully the volatility will go away. So that happens, we can’t build from there. And then risk will be the other factor. We do expect growth to moderate. The efficiency, obviously, we’re laser-focused on being very efficient. We’re still continued to invest in the important things for us, but we’re very disciplined in terms of the way we are approaching expenses. So if that materializes, even though it’s a challenge, the target ROE that we have anticipated will be there if those couple of factors turn positive as we hope. Now, on the first question, again, if maybe Michela you can give us a little bit more detail on the NIM question.

Michela Casassa, CFO

Sure. Good morning, Ernesto. I mean, you are correct. When you asked us in the past, the sensitivity now of increases in rates, we always said that was going to be neutral. But if you see what has happened with the NIM both at Interbank and at IFS level in the past year, it has actually improved by 100 basis points in both numbers. So the NIM has moved from 4.5% in the first quarter of 2022 to 5.5% in this quarter, okay? So what has been different, if you want, from the sensitivity – the theoretical sensitivity that we made? Well, first of all, we’ve had many increasing rates together. No, so basically, we’ve had more than 500 basis points of increasing rates in soles and more than 400 basis points of increasing rates in dollar rates. So basically, we’ve been very disciplined in trying to transfer these increasing rates to the yields. As you can see from the evolution of the yield on loans, that has moved from 8.3% in the first quarter last year to 10.9%. So here we’re talking about 260 basis points. Of course, also the portfolio mix has helped, not so much retail, more consumer, and also the decrease of the Reactiva loan book. So, NIM, when you look at the final results of what has really happened during the last year, has improved by 100 basis points. Now, what we will expect for? What you have seen this quarter, not on a quarterly basis, the improvement has moderated, that is just 10 basis points. And it is becoming a little bit harder not to continue to increase NIM for two factors: the increasing cost of funds, especially in soles, and the second one is that a big portion of the transfer to clients has already taken place. So I believe we will maybe still see some improvements in NIM, but much more moderate. And just to give an additional comment about profitability, I mean, the drivers are – as you see, the drivers of the subsidiaries now. So basically, what has happened this quarter is that still wealth management ROE is low and the banking ROE is low because of cost of risk. So if those two ROEs normalize for the factors that Luis Felipe has mentioned, also with some additional investment results from Interseguro, that is what should drive ROE to the sustainable levels.

Ernesto Gabilondo, Analyst

Perfect. Now, thank you very much Luis Felipe and Michela. Just to follow-up on the NIM’s expectations. So considering that you have been increasing into retail and consumer and the loan mix has changed. So considering a lower interest rate environment – so all of the variable funding costs will come down and that could give you like another element for NIM expansion, not this year, but maybe next year. Do you think that could be feasible?

Luis Felipe Castellanos, CEO

Yes. That will be the case, especially in the retail book. In the commercial book, it’s more spread-based, so probably that will not be the case. No, but we do expect that we will be able to hold our current yields or existing yields at the moment in the retail book. Maybe mortgages will be more challenging, but definitely in consumer, we have a – we have a chance to keep that at the levels where we have them.

Ernesto Gabilondo, Analyst

Perfect. Thank you very much.

Luis Felipe Castellanos, CEO

Thank you.

Operator, Operator

Our next question will come from Juan Recalde with Scotiabank. You may now go ahead.

Juan Recalde, Analyst

Hi, good morning. Thank you for taking my question. I have a question related to the impact of equity of the implementation of IFRS 17. So the first one is, can you confirm that the impact was around S/644 million? And the second question related to this is if we can – if we will see a reversion of this impact. And if yes, if you can give us some color of how can we see its reversion in the future? Thank you.

Luis Felipe Castellanos, CEO

Okay. Thank you. Yes, it was S/644 million impact on equity that goes to Interseguro on obviously IFS, and the reversion will take time. But maybe I can pass it on to Gonzalo or JuanPablo so they can elaborate a little bit more on the dynamics of how will that work. Hey, Gonzalo, you’re on mute. You’re muted.

Juan Pablo Segura, CFO of Interseguro

Maybe I can take the question if you want, Luis Felipe. So yes, the S/640-ish million liability will be released based on the duration of our contracts with the customers, right? So there are products that have durations of eight years, or they have 12 years operations. So we will see them released as the maturities of the contracts with the customers expire, right? So I would say overall Interseguro that duration mix of products will be around 10 years.

Juan Recalde, Analyst

That’s helpful. Thank you for the color.

Operator, Operator

Our next question will come from Yuri Fernandes with JPMorgan. You may now go ahead.

Yuri Fernandes, Analyst

Hello everyone. Hi everyone, good morning. I have a first question regarding your reschedule launch this quarter. Looking at the presentation, there is an appendix, and it seems this is mostly related to your credit card loans. So my question is, what is the size of like your – I guess S/70 million was the financial – the gross financial income tax rate of this? So my question is what is the balance and how should we see this balance of rescheduled loans evolving over time? And I have a second question regarding deposits. You have a good deposit behavior gaining market share. I guess the industry is not growing a lot deposit basically later, right? But you are growing loans a little bit faster, tenure deposit rates, and we are seeing a mix shift on your deposits, right? So my question is how to keep growing fast. Not fast, but like we’re covering a little bit of growth on the loan side with this more challenging environment for banking deposits. Thank you very much.

Luis Felipe Castellanos, CEO

Okay. Thank you, Yuri. On your first question, I’m going to pass it on to Michela for the detail, like I think the numbers you mentioned, right, that she has a little bit more color. On the second one, obviously one of our challenges is to continue growing deposits, especially efficient deposits. So we have obviously our like core strategy is to grow deposits with one additional challenge, especially and particularly for us, which is as you know, we have reduced our branch footprint, so we’re very pleased that despite that reduction of more than 100 financial stores in the last couple of years, we keep our market share in retail deposits. So that’s a testament to the power of our detail solutions to gain deposits, okay? And then obviously we have a complete ecosystem strategy for our commercial clients. And we’re deploying that and it’s also working nicely. We do expect loan growth to moderate, so that should ease a bit. And obviously, we have other alternative sources of funding that will allow us to continue growing. Like we – I don’t think we will need to decelerate growth – if growth – no healthy growth is there because we cannot grow deposits because we have other sources of funding there. But medium and long-term, our strategy is to continue deploying digital solutions both for our retail and commercial customers that should allow us to continue gaining market share. Now, let me get back to Michela so she can work on the first part of your question.

Michela Casassa, CFO

Okay. Good morning, Yuri. Yes, you are right. Most of the reschedulings that we have made have been in the credit card portfolio. And as of the end of March, that balance is around 6% of the credit card portfolio or less than 2% of the retail portfolio. So, meaning less than 1% of the total bank book. So these reschedulings have just started to mature. So we have seen a very small number of rescheduled loans maturing in April. We will see some more in May and June, and then a big portion of them will come in up until August. So basically this is what we have done so far. There – I mean the level of April in terms of the new reschedulings have normalized, and of course, this evolution in the coming month will depend a little bit on what we can see after the management we’re doing and the monitoring of the maturities that will come in the coming – in the following months.

Yuri Fernandes, Analyst

No, that’s clear, Michela. I have just a follow-up on rescheduling—your cost of risk was higher, right? And I think you are postponing helping like clients should be able to pay the loans. And I think it makes sense, but shouldn’t this be helping the cost of risk or no or when you have to reschedule and need to migrate to Stage 2 or Stage 3, and you need to build more provision? So my question is, shouldn’t this process of rescheduling some loans not be helping your cost of risk? It was not the case this quarter, so that’s why I was a little bit confused, right? Because higher reschedules shouldn’t be helping maybe your cost of risk.

Michela Casassa, CFO

No, you are right in the local gap, Yuri, but as in IFRS not the loans move to Stage 2 when you see a substantial increase in risk, these clients that have been rescheduled are already considered not in the substantial increase of risk. So basically this is why a big portion of this is already included in the cost of risk of this quarter, because of the forward-looking vision of IFRS 9 for provisions.

Yuri Fernandes, Analyst

Well, that’s good to know. That was what I thought. Thank you, Michela.

JuanPablo Segura, CFO of Interseguro

Luis Felipe, we couldn’t hear you. You were on mute.

Luis Felipe Castellanos, CEO

I'm not on mute. What I was telling Yuri is that it captures a big portion, but not all of it, we will have to continue monitoring. But the forward-looking, as Michela mentioned, does capture a portion of the increase in risk of these types of customers as opposed to, as she mentioned, also local gap.

Operator, Operator

Our next question will come from Carlos Gomez with HSBC. You may now go ahead.

Carlos Gomez, Analyst

Hello, and good morning. So maybe you have already answered this. You have this extraordinary touch of S/70 million. And perhaps if you could give us a bit more explanation as to why you take it now. And I think it’s somewhat differentiated approach to the way other competitors are recording, the impact of the disturbances at the beginning of the year. What makes you take it, what – and do you expect this to be a complete one off, or might you have to revisit this in the future? And the second, if you could tell us what your payout ratio should be in the long-term? Thank you.

Luis Felipe Castellanos, CEO

Hey, could you repeat the second part? Is your payout ratio?

Carlos Gomez, Analyst

Yes, the payout, dividend payout ratio in your long-term plan 35 years, where would you expect your payout today? Thank you.

Luis Felipe Castellanos, CEO

Okay. Great. The first part of the question let me pass it on to Michela. She probably can help you more than I. The second part of the question, our payout ratio continues to be the addition of the dividends of our subsidiaries. And to just to remind you, local gap, okay? So what we’re doing in the bank, like at Interbank it’s 45% to 50% payout ratio, in Interseguro around 50% and Inteligo around 50% plus as well. All those funds go up. We just keep a bid for our holding operation, which includes financial expenses and minor operating expenses, and everything else goes up for dividends. No. So that’s the way you should think about it and the way you should model it. And then for the first part of your question, let me pass it on to Michela.

Michela Casassa, CFO

Hi Carlos, good morning. So let me give you an explanation of the impact that we have. This is something similar to the impairment that we had during the second quarter of 2020. Now, we did the reschedulings on COVID? Of course, the magnitude of what we have done this time is much smaller, okay? But the impairment is high because what has changed is that as you need to do the difference between the NPV cash flows of the old loans versus the NPVs of the cash flows of the new loans. What has changed this time is that we are taking loans that were consumer loans with very high rates because of the high-rate environment that we are today. So the conditions of these new loans have lower rates, so the differential in rates of these flows is much higher than it was from COVID. So this is why not even if the volumes are very small. Now, when you do this exercise of NPVs, you find this big impact this quarter. So basically what happens is you have this negative this quarter, but as long as those loans mature and some of them are repaid, you will see some small positive impacts in the coming quarters. What we should expect going forward? If we do not do additional reschedulings, not in the magnitude, not volumes, but on the differential in rates that we did in the first quarter, we shouldn’t have such a big impact going forward in the year. And I’m not sure whether this was clear.

Carlos Gomez, Analyst

No, it is clear. And it is because as you said, the rates are higher now. But again, you do not recover anything. Even if rates go down, there should not be – we should not expect a recovery on this...

Michela Casassa, CFO

No, no. The recovery will happen, will take place, no, when clients, I mean the – for the personal clients that pay their debts.

Luis Felipe Castellanos, CEO

Okay. Felipe, and again, this was mostly because of the disturbances earlier in the year. We follow the news, we understand that everything is relatively normal right now. But is it – I mean, are things operationally normal in the entire country today, or do you still find difficulties in parts?

Michela Casassa, CFO

No, not. Today, we are fully operational. I mean, the disruption was for the protests more than January, beginning of February for the rains was a portion of March. But now everything is restored back to normal.

Carlos Gomez, Analyst

Very clear. Thank you so much.

Luis Felipe Castellanos, CEO

Thank you.

Operator, Operator

At this time, we’ll take the webcast questions. I’d now turn the call over to Rafael with InspIR Group.

Rafael Borja, InspIR Group Representative

Thank you, operator. We have a question from an unidentified participant. Can you provide more details on the main changes that positively impacted the results in the insurance sector due to IFRS 17?

Luis Felipe Castellanos, CEO

Okay. Maybe Gonzalo or JuanPablo can help me with that part of the positive impacts of IFRS 17 for positive question. JP?

JuanPablo Segura, CFO of Interseguro

Sure. I think Gonzalo is having big troubles, so there are different impacts with the IFRS 17 adoption. There are some favorable ones and some unfavorable ones. I wouldn’t say that all of them were favorable in Q1 or the performer that we show for 2022, right? So the main changes that I can highlight is one, you have a higher liability that we’re constituting because all the maintenance expenses of a contract from now on to the future until the contract expires with the customers are now brought to net present value in the liability, and that’s why the liabilities of the insurance balance sheet goes up. The other big impact is a concept called risk adjustment, which is around 4% to 5% of the total liabilities of an insurance company. So IFRS 17 calls for additional liabilities for risks that are not specific to the industry, but risks that can come up during the time of the contract that’s around 4% to 5% of our liabilities. The other one is all the gains that we get from the new business. So when we underwrite a new insurance policy, we were recognizing the profit of that policy right away. Now you capitalize it, we can call it capitalize it within liabilities, and then you accrue that profit for the duration of the contract, right? So that’s the other one. The other impact, big impact is the customer acquisition cost. With IFRS 4, we recognize – as we recognize revenue also, we recognize all the customer acquisition cost right away. Now we also capitalize it and we accrue it over the duration of the contract. And the last one will be something that is called the loss component. And this is for insurance contracts that when we underwrite them or any insurance company underwrites them, that benefit or the net present value of the benefit is negative. And that depends obviously on the work or the interest rate that we are using to calculate the net present value. When the policy underwriting is negative and it’s a loss, we have to recognize that immediately in the results of the quarter or of the month. So those are the big highlights of the new adoption of IFRS 17.

Luis Felipe Castellanos, CEO

Okay. Thank you, JuanPablo. Just for everyone on the call, there is information about the effects of IFRS 17 and even a reconciliation of the results of 2022 as if they had been under IFRS 17 in the appendix of our earnings presentation. So probably there you will have important insights in terms of the effect, not only what we should expect going forward, but you can reconcile it to what would have happened if that were in place during last year, no. So hopefully that’s helpful for everyone.

Rafael Borja, InspIR Group Representative

We have another question from ADP Ventures. You have shown impressive growth and penetration numbers for the digital and payments business. Can you please discuss other metrics you are tracking for the digital payment business that help you determine whether you are creating value, perhaps unit economics or revenue per user wages? Thank you.

Luis Felipe Castellanos, CEO

Okay. Well, hi Greg, thanks very much for your question. For this – to answer this question, let me pass it on to Carlos Tori. So I guess everybody knows Carlos, he’s been the VP of Retail Banking for many years and has played an important role in pushing forward our retail strategy. And since the beginning of the year, he’s been in charge of now responsible for our new payments pillar. So he will have good insights about the way we’re looking at this. So, Carlos, please.

Carlos Tori, VP of Retail Banking

Thank you, Luis Felipe, and thank you, Greg, for the question. First of all, the good thing or the great thing is there are still a lot of opportunities depending on which source you use, 60% or 80% of the payments in Peru are still made in cash. So there’s a lot of growth coming in the future that we're focusing on the whole funnel. No, we’re – we started trying to get as many users as possible, both on the user or payer side as well as the merchant side. So we start there and then we try to keep them active. And the more transactions each user has both on the paying side or the receiving side is better. So we have a lot of focus on each of those numbers or KPIs. Then we have to separate the payers, which are customers at the bank, who either use credit cards or debit cards, but mostly Plin. And then I’ll talk about the merchants later. The customers that use Plin, we have seen have a much lower cost to serve. They are digital clients. We have higher flow, higher engagement, and higher NPS. We have a higher gross and obviously, less use of ATMs. No, so that’s a definite positive. We have been – you’ve probably heard that we’ve been very focused on lowering the cost of acquisition as well. Not only cost to serve, but most of our clients come through digital already, so cost of acquisition is very low. So that’s one source of revenue or some source of value. And then when you look at the merchant side, we’re also focusing on cost of acquisition, more clients, more use. It’s easier to see the value there because you can see the positive EBITDA and net income on that business. All of the credit card and debit card payments have a fee and we have a very active department of pricing and analysis, and we continue to be very active on everything we do with pricing there. And so using the results on that company, obviously we continue to work on additional sources of income, either aggregated services. We’ve been working very closely to move the flows of the merchant companies to Interbank. So there are additional flows from that, and we’ve been highly successful in doing that. So we’re seeing some other synergies. So there are a lot of sources of value. We have, as you can imagine, many, many KPIs, but I would say the net income at Izipay and the EBITDA is probably the most specific one to follow very, very focused on activity ratios on our customers.

Luis Felipe Castellanos, CEO

Thank you, Carlos. More questions?

Operator, Operator

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

Michela Casassa, CFO

Okay. Thank you very much. Thanks again everybody for joining us in our call today. And we will see everyone back again during our second quarter earnings call. Thank you. Bye-Bye.

Operator, Operator

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