Earnings Call Transcript - INTR Q3 2023

Operator, Operator

Good afternoon, and thank you for being here. Welcome to Inter & Co's Third Quarter Earnings Conference Call. Our speakers today are Joao Vitor Menin, Inter's CEO; Alexandre Riccio, Senior Vice President of Retail Banking; and Santiago Stel, Senior Vice President of Finance and Risks. Please note that this conference is being recorded, and a replay will be accessible on the company's investor relations website. Throughout this call, we will share non-IFRS financial information which, while significant for the company, does not conform to IFRS definitions. Reconciliations of our non-IFRS financial data to IFRS are included in our earnings release and presentation appendix. Today's discussion may involve forward-looking statements that do not guarantee future results. Please review the forward-looking statements disclaimer in our earnings release and presentation. Now, I will turn it over to Mr. Joao Vitor Menin. The floor is yours, sir.

João Vitor Nazareth Teixeira de Souza, CEO

Thank you, operator. Good afternoon, everyone. I'm pleased to announce another record-breaking quarter in our history. We believe that we have successfully entered a virtuous cycle that leads us into a sustainable, growing, and profitable business model. Once again, we can affirm that our results are no longer a glimpse as we said a few quarters ago, but a clear testament of our long-term profitability potential. When I reflect on the phases in our history, I see three clear phases. The first, which was until 2021, focused on growth, creating the full ecosystem of products and gaining market share while creating deep primary relationships with our customers. The second, which took place during 2022, when we had our platform in place and started to prioritize monetization, building the foundations for a business model that was built to last. Now in the third phase, with the foundations in place, we started 2023 with strong momentum. We continued improving our profitability while reaccelerating our growth profile. As I mentioned before, we have entered a virtuous cycle, as we can see on this slide, driven by our innovative DNA in the center. We built a best-in-class financial Super App, delivering the broadest digital offering with a top-notch UX that continuously attracts new clients. As these clients engage more deeply with us, we are generating higher revenues that yield growing profits, making it a sustainable business model. This dynamic then restarts to the beginning by reinforcing our innovative DNA, and the cycle keeps moving on and on. To conclude, I believe that the importance of this quarter goes beyond the amazing numbers we are reporting. It represents something far more relevant. We are on the right direction to meet our 5-year North Star, which we named the 60-30-30 plan. The commitment to the 60-30-30 is already generating significant value to our stakeholders, which we believe is the only way to build a company that lasts. Let me elaborate a little more on that. First, to our clients, by disrupting the industry by offering the best value in banking services. Second, to our employees, creating a great place that fosters creativity and growth. Third, to regulators, developing technology and bringing efficiency into the financial system. Fourth, to our community, with an eco-efficient business model. And last but not least, we're generating value to our shareholders by delivering sustainable long-term profitability. Before passing the word to Alexandre and Santi, I will highlight some of our record-breaking numbers of the quarter. We delivered an impressive combination of record figures, which we believe proves we are on the path to sustained profitability. From a financial perspective, our gross revenue had another record quarter, surpassing BRL 2.1 billion, 39% higher than last year. The combination of top-line growth and cost control enabled us to achieve another record efficiency ratio of 52.4%. On the bottom line, we had our highest-ever profitability level with a pretax income of BRL 145 million and post-tax income of BRL 104 million. We also achieved a record-breaking ROE of 5.7%. When we look at the operational side, we also see a series of milestones. For the third quarter in a row, we attracted 1 million new active clients. We also continued increasing our activation ratio, reaching 52.7%, the highest level since Q4 '21. Our monthly ARPAC increased once again, reaching the record level of BRL 48. And finally, we had a great quarter in terms of transacted volumes, expanding our TPV to BRL 219 billion. Now I'll pass it to Alexandre and Santiago, who will deep dive on both fronts. Thank you.

Alexandre De Oliveira, Senior Vice President of Retail Banking

Thank you, Joao, and good afternoon, everyone. I'll start by talking about credit and our funding capabilities. Jumping to Page 10. I'll pass through some important highlights regarding credit. This quarter, we were able to accelerate the growth in our loan portfolio, growing by 7% and remaining focused on high ROE products, such as our FGTS loans, which once again grew more than 20%, and home equity, which grew nearly 10% and reached a market share in originations of also 10%. The most interesting factor of this quarter was on credit cards, which reached a growth of 13%. This is the result of continuous improvement in the credit underwriting processes, active portfolio management, and the success of Loop, among other factors. When we look at pricing on the top part of the page, the all-in yield, excluding real estate loans, which is the dotted line, continued its quarter-over-quarter improvement. Now moving to Page 11, we will talk about improvements in our asset quality metrics. What we see in this slide is the result of our ongoing efforts to enhance our credit underwriting processes and collection strategies, reaching a more precise data-driven model. As a result, we're delivering flat NPLs, both on a 15 to 90 days and above 90 days basis. When we look at the cohorts of NPLs of credit cards, we continue to see a sequential improvement, forecasting a positive trend for the upcoming quarters. Finally, the NPL and Stage 3 formation also have shown stability. On Page 12, we can see a very positive improvement on the cost of risk metric, which decreased by 30 bps. This improvement was driven by our active risk management mentioned in the previous slide. Despite the decrease in the cost of risk, our coverage ratio increased 200 bps to 132%. Always worth mentioning that around 70% of our portfolio is collateralized, thus presenting a lower-than-average risk profile. Overall, these results give us confidence for the quarters to come. On Page 13, we can see once again that we have one of the best-in-class funding franchises in the industry. Our deposit growth accelerated to 11% this quarter, almost twice the growth level of last quarter. In total, we reached a funding base of around BRL 40 billion. In Page 14, we see that we continue delivering an impressive cost of funding, which is now 61.4% of CDI, including all interest-bearing liabilities. We're confident in the sustainability of this cost of funding profile for the quarters to come. Our deposit base is diversified among more than 14 million retail customers that trust us with their savings and transactional balances. Our average deposit per client grew by 4% to BRL 2,600 despite the accelerated growth in our activation rates. Now let's move forward and talk about our transactional platform session. As mentioned in the beginning, we're reporting our third consecutive quarter bringing 1 million new active customers, achieving 15.5 million. Our activation rate showed another quarter of strong progress, increasing by 49 bps. This milestone, combined with the lowest CAC since the third quarter of 2020, is a direct outcome of our commitment to leveraging better client profile targeting, new customer journeys, and communication strategies. We're constantly deepening our understanding of customer profiles and feeding this new knowledge into our algorithms to optimize the new cohorts. In terms of volumes, you can see that our TPV reached an impressive BRL 219 billion, mostly driven by credit and PIX. This is the highest credit TPV growth in a quarter since the second quarter of 2022, combined with a more balanced mix between credit and debit transactions. This contributed to greater interchange revenue growth this quarter. On a cohort basis, as presented in the right chart, we can see that the newer cohorts are starting at higher levels and growing at a faster pace than other ones. We're proud of this performance, which is strong evidence of better quality in client ads and activation. Moving forward to our other verticals, we can see the power of our financial Super App ecosystem. On e-commerce, we reached 2.9 million clients who conducted over 10 million transactions in the quarter, another record. We also have BRL 870 million in GMV, leveraged by our interday on July 7. Our net take rate in the quarter was 8.7%. Combining this, we reached a record-breaking gross revenue in this vertical of BRL 124 million. On insurance, we had a great quarter, reaching more than 322,000 sales and 1.6 million active clients. And finally, on investments, our simpler and accessible product offering resulted in an impressive 74% year-over-year client growth, reaching 4.2 million, along with a strong AuC that increased to BRL 83 billion. Talking about our global solutions, we experienced another quarter of strong success. We achieved over USD 270 million in deposits and AuC. We continue replicating our Brazilian offering in the U.S. by taking advantage of our scalable technology to create a best-in-class global app. The strong adoption of these products is a result of the continuous UX improvement and our focus on Brazilians who travel, invest, and/or are immigrants in the U.S. The client base grew nearly 4x year-over-year, reaching almost 2 million. Before passing to Santi, I would like to comment that in the U.S., we're replicating our #1 competitive advantage that we have in Brazil, which is our unique cost of funding. Now Santi, please go ahead. Thanks, everyone.

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, Alexandre. Good afternoon, everyone. Now I'll walk you through the financial section. Jumping into Page 21. Here, we can see revenues, which had another great quarter, reaching also record numbers. As mentioned at the beginning of the presentation, we achieved BRL 2.1 billion of gross and BRL 1.3 billion of net revenues this quarter. The growth was mainly driven by fee expansion, which resulted from the strong performance of interchange, e-commerce, insurance, and banking revenues. In terms of net interest income, the lower inflation in the quarter impacted NII, resulting in a growth of 2%, though we're seeing acceleration in the fourth quarter as inflation returns to normalized levels. Now moving to Page 22. Here, we can see the unit economic metrics. Our monthly ARPAC reached BRL 48, an all-time record. This is impressive in our opinion, as we continue adding a strong number of new clients every quarter. The strong ARPAC, combined with a stable cost to serve, has led us to improve our gross margin per active client for the fourth consecutive quarter, reaching another record of BRL 35. We expect that this trend will continue improving as the new approach of client acquisition, activation, and the app personalization continue to move forward. Jumping to the NIMs on Page 23. Here we can see that our NIM 1.0, which considers the full portfolio, including cash receivables that do not accrue interest, known in Portuguese as 'avista', reached 7.8%, our second highest level ever. Regarding NIM 2.0, which considers only the interest-earning portfolio, it reached 9.2% this quarter. As mentioned before, we observed lower inflation levels in the third quarter, which are now normalizing to the current one. Additionally, we had more renegotiations triggered by the 'Decentrola' program, which, despite impacting NII, had a positive effect on the cost of risk. Finally, our repricing strategy continues ongoing. And in addition to a shift in underwriting mix, we expect to continue improving the implied rates of our portfolios. Moving to the expense side on Page 24. Here we can see better trends in the last three quarters as a result of our cost control initiatives. As our profitability increased, our personnel expense line reflected an increase in compensation associated with accrued bonuses and profit share agreements. The other expense lines remain roughly in line with the prior period as a consequence of multiple initiatives to optimize our cost structure. With this disciplined focus on expense management, we still see a strong opportunity to continue delivering economies of scale. Moving to Page 25. To summarize the work that we are doing on the operational leverage front, these two charts provide good insights. On the left-hand side, we can easily see the remarkable increased gap between the growth levels in net revenues and expenses. And on the right-hand side, I would like to highlight another great quarter of improvement in our efficiency ratio, which once again is a record low of 52.4%, meaning 100 bps better than the prior quarter. Unlike in the prior two quarters, in this third quarter, the improvement in efficiency was led entirely by revenue growth. On Page 26, we are actively monitoring at Inter what the percentages of the SG&A base related to the net fees. As you can see in the chart, the ratio has been nicely evolving during the past few quarters and now stands at 73%, our all-time high. The continuous improvement in this ratio is a key component to meet our ROE goals. In terms of profitability on Page 27, we couldn't be more proud of what we achieved. We're able to deliver a record-breaking ROE of 5.7% by printing our best-ever net income of BRL 104 million. On a pretax basis, we reached BRL 145 million, which is more than 80% higher than in the prior quarter. Concluding our financial section on Page 28, we recorded a 23.7% CET1 ratio this quarter, our first-ever organic capital creation. As mentioned in prior calls, our capital is fully comprised of top-quality core equity with no hybrid instruments. Now I'll pass the mic back to Joao for his final remarks.

João Vitor Nazareth Teixeira de Souza, CEO

Thank you, Alexandre and Santi for highlighting all the important topics of our another record-breaking quarter. Before moving to Q&A, I would like to summarize this impressive quarter in one phrase. We are building a business model to last by adding value to our stakeholders. Our core competitive advantages, which are cost of funding, cost to serve, and strong fee income, remain as strong as ever. We are delivering solid growth, leading to strong market share gains and disrupting the status quo. Our state-of-the-art technology is like no other and sets us apart from our competitors, offering the best UX and integrated banking experience in the market. I would like to close by thanking everyone for the amazing work done this past quarter. We will now start the Q&A. Thank you very much.

Operator, Operator

Our first question comes from Flavio Yoshida from Bank of America.

Flavio Yoshida, Analyst

I actually have two questions on my side. The first one is on the net interest margin. So you guys already mentioned the impact of lower inflation that ended up impacting the NII. But I was wondering what happened here. I mean, you guys were doing a great job on the repricing process and announcing the shift in the loan portfolio mix towards a higher ROA product. So we're not expecting a NIM reduction in this quarter. So what really happened here? And what should we expect going forward? And then my second question is on expenses, specifically on personnel expenses, right? So there was a strong increase compared to the previous quarter, even considering the headcount reduction, right? So according to our calculations, the cost per employee increased more than 40% year-on-year. So I would appreciate if you guys could share some color here.

Santiago Stel, Senior Vice President of Finance and Risks

Santiago here. I'll address your question. Thank you for asking. Regarding the first point about NIM, I want to clarify that our net interest income grew this quarter from BRL 802 million to BRL 818 million, following very strong growth last quarter. We are starting from a high base and have grown on top of that. The BRL 818 million we reported this quarter is 50% higher than a year ago. Now, specifically about NIM, several factors are at play. On the negative side, we experienced lower inflation, which affected our real estate loans with revenues linked to the inflation index, resulting in about BRL 20 million of negative impact this quarter. Additionally, we had a higher volume of loan renegotiations this quarter due to the Decentrola program, which contributed around BRL 30 million negatively. These two factors reduced NII compared to what we had in the prior quarter and what we anticipate for the next one. On the positive side, we maintained continuous optimization of the reserve requirement throughout the three months due to the Conta Compontos or Loop program we announced last quarter. We also saw an improvement in our loan mix as higher ROE products grew faster than lower ones and gained share in our loan mix. Overall, in terms of NII, the numerator grew less than average earning assets, the denominator. The fundamentals supporting our trend to expand net income margin remain strong, relying on our funding franchise and the improving portfolio driven by ROE. We don’t see any deviation from our repricing strategy; we are continuing to pursue it actively and taking advantage of opportunities like the Conta Compontos program and the renegotiations while staying committed to delivering double-digit NIMs. Now, regarding your second question about personal loans. Given our strong bottom line result this quarter, we accrued profit bonuses and profit-sharing for employees and executives. Excluding these factors, personnel expenses grew by 5% this quarter, despite a reduction in our employee count which now stands at around 3,300. The average salary is increasing as we enhance performance and talent levels across the organization. We believe that going forward, personnel expenses will closely relate to the bottom line. It's also important to note that we do not adjust net income for salary expenses or personnel share base; they are fully included. Thus, the bottom line reflects all these expenses in its calculation. Thank you, Flavio.

Operator, Operator

The next question comes from Rafael Frade from Citi.

Rafael Berger Frade, Analyst

Two questions here. One is a follow-up on some comments about renegotiations. Just to be clear, how does this BRL 30 million impact the NII, if it's related to discounts? I understand that other banks maybe classify this as cost of risk. So just to understand a little bit this dynamic of renegotiations on the NII in the quarter. And second, if you could comment on fees. So you have a very strong performance quarter-over-quarter. So try to understand here is there some one-off here or if it's a base that we can use as a reference going forward.

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, Frade, for your questions. So starting with the one related to renegotiations. So renegotiations were done over interest income, so accrued interest income. So it does impact that line. This has been done this way for a long manner because the discounts are done on accrued interest. So that impacts interest income. We do think we will continue having a bit of that in the fourth quarter. We are looking at the integral or the full economic impact in the P&L of this. So when we look at it together with the impact on asset quality, it's clearly a net positive. And to give a bit of broader context on this, Frade, as our written-off portfolio has grown significantly, we started to debate whether to continue with our written-off portfolio sales, the HA portfolios that we have historically been doing. We typically give discounts on those that were plus 90%, but these ones that we're doing in the context of the program are close to 40%. So this has much better performance on the P&L, and we see great results from the clients anticipating payments as soon as the agreements are done. And then going on to fees, the increase in fees was BRL 100 million this quarter. The main driver of that was growth of interchange of credit cards. This is driven as a consequence of the increase in the loan portfolio of cards in particular, which had 13% growth, the second highest in our portfolio, followed by insurance revenues, close to BRL 10 million additional. On MasterCard, we had extra performance of close to BRL 20 million as a consequence of beating the performance metrics that we have with them. Inter Shop performed very well and delivered growing GMV for the first time in several quarters, and that generated an additional BRL 10 million of revenue. So it's a combination of factors. We do see fees as a key component of our strategy. We always say that it's one of the three competitive advantages that we have, which are cost of funding, cost to serve, and a high percentage of fee income that continues to be around one-third of the total net fees. And this is the way it’s explained, and we are happy with the performance and expect to continue delivering that way.

João Vitor Nazareth Teixeira de Souza, CEO

Frade, here Joao Vitor, just to complement Santiago's answer. I have been telling other shareholders and everybody for a while that the fee income is very important for our business. By delivering growth on fee income and sustainable fee income, our fee income is here and will be for a while. We're not charging BRL 10 on the peaks in those types of things. We will always have a big percentage of our fees on top of total revenues. And with that trend, we will always be able to improve our ROE going forward. So I myself, I'm very, very dedicated to improving our types of fees on Inter Shop, on insurance, and on the expansion to the U.S. through FX. So this is a very important revenue generation for Inter. So I do believe that it will keep being important, and also I see room to keep improving on a percentage basis going forward.

Operator, Operator

The next question comes from Neha Agarwala from HSBC.

Neha Agarwala, Analyst

Can I just have a clarification on the NIM discussion that we had earlier in the call? There was a negative impact on the real estate portfolio of about BRL 20 million, you mentioned, from lower inflation. Is this something that we should see in the coming quarters as well? Or do you think the adjustment is largely done by now? And my second question is on asset quality. Asset quality so far is stable, but we noticed that you reaccelerated the growth in the credit card portfolio. So how do you think about the asset quality in the credit card portfolio now? Do you see improvements enough for you to be encouraged to expand your loan portfolio there? And how confident are you with the improvement in your origination that you made in the past quarters.

João Vitor Nazareth Teixeira de Souza, CEO

Neha, Joao Vitor here. I'm going to talk about the growth on the credit card. Alexandre is going to cover later the links. So first of all, we have always been very cautious on credit card underwriting. Everybody knows that at Inter we like to have a very well-collateralized credit portfolio. But I would say that for the past 12 months or so, we have been improving our underwriting process and also our collection process as well. We have, in spite of the market, been more excited about this product. You see that our TPV is growing, as Santiago also mentioned, we improved the credit limit from BRL 20 billion to BRL 25 billion. So it's a big incremental in a quarter or so. And so we are more excited with the credit card business going forward. And not only that, we believe that we have a lot of change on the regulatory framework ahead. And combining what we learned and what we're improving and what we're doing on the credit card together with Inter Shop, we do believe that we're going to have the best consumer finance product available in the market to run this business here at Inter. So I'm very excited with the improvements on the credit card and combining this with Inter Shop initiatives, and therefore having this state-of-the-art consumer finance portfolio. Regarding the NPLs, we have a gap between what we have underwritten before now. And Alexandre will cover that. Okay. Thank you, Neha.

Alexandre De Oliveira, Senior Vice President of Retail Banking

Thank you, Neha. Regarding nonperforming loans and delinquency, our asset quality metrics performed well this quarter as we anticipated. The cost of risk closed at 5.9%, which is 30 basis points better than last quarter. The figures for nonperforming loans from 15 to 90 days and 90 days plus remained unchanged, which is positive news. Additionally, NPL formation was stable at 1.6%. The primary driver of delinquency continues to be credit cards, accounting for about 90%. A deeper analysis of credit cards shows improving delinquency across all cohorts. This information is detailed on Page 11 of our presentation, where we observe consistent improvement among all cohorts. The 30 basis points improvement in cost of risk is largely due to our underwriting models and collection initiatives. We have implemented maintenance strategies in our card portfolio, which include increasing limits for high-performing customers and reducing limits for those with declining credit profiles. This approach tends to be beneficial for lowering costs of risk both in the short and long term. As for the overall portfolio mix, we are actively adding FGTS and Home Equity Loans, which have better average delinquency rates. These segments comprised 8% of the portfolio a year ago, and they now account for 13%. Importantly, our coverage ratio increased by 2 percentage points to 132%, even though a significant portion of the portfolio is well-collateralized. We feel very confident in our underwriting processes and the speed at which we are advancing. Thank you, Neha.

Neha Agarwala, Analyst

Could I follow-up on one of the topics? You mentioned about integrating the credit cards with the Inter Shop. Is this something that you already started to pilot or test? Or is it something in the works, and maybe something we see in 2024?

João Vitor Nazareth Teixeira de Souza, CEO

Okay, Neha, Joao Vitor speaking here. As I mentioned, we do believe that the future of consumer finance is the integration of the payments, the installments together with e-commerce. And yes, we started that already. I would say that we started our pilot two months ago or so. We don't have yet the right trends, the right number for the delinquents on that product. But one of the good news are we get a very reduced take rate on that product, and we do get a down payment for the products. So when you combine down payment plus a good take rate, the cushion that you have for delinquency is huge. So we're very confident that this product is going to be profitable going forward. We expect to share more on that NPL ratios maybe by end of the year or Q4 maybe. But again, I'm myself very excited with the way we are combining these two things, the commerce and the banking side. Thank you, Neha.

Santiago Stel, Senior Vice President of Finance and Risks

So on inflation, Neha, we're seeing now for the fourth quarter similar levels that we saw in the first half. So the impact on the third quarter, which actually has one month of lag, was from the last month of the second quarter. June, July, and August had lower inflation levels. Now we're seeing normalized levels into the following three months.

Operator, Operator

The next question comes from Yuri Fernandes from JPMorgan.

Yuri Fernandes, Analyst

I have a follow-up on the fees, on Frade's question on fees. We know the interchange, growing a lot, like 50%, 60% quarter-over-quarter. But your credit card's TPV, excluding peaks, was growing like 8%. So what drove this different behavior? Usually, TPV and interchange, they tend to follow each other; why is interchange growing faster? Is this because of, I don't know, higher-income clients, higher-income cards? I just would like to have more details on the interchange versus TPV behavior. And I have a second question regarding other revenues. Other revenues was also part of the good quarter, right? Like it's growing 60% quarter-over-quarter. And when we look to your financial statement, we see capital gains, other revenues, and performance fees. Performance fees you already mentioned, I think, was MasterCard here. But what drove the capital gains and the other revenues? My point about this line is how recurring these other revenues should be for the coming quarters.

Alexandre De Oliveira, Senior Vice President of Retail Banking

Yuri, this is Alex. Thank you for your question. I'll take the first part and defer the second one for Santi. So in terms of the interchange revenues, what we had was a change in mix. So we started growing credit cards again and had a mix flip with credit becoming more relevant than debit. That was the key change, so relatively simple, and drives a lot more interchange fees, which is a good move for us. We are preparing, as Joao Vitor mentioned earlier, to keep on growing on that front with several initiatives, including Loop. So our loyalty program is starting to kick in in terms of bringing more recurring spenders to Inter. So I'll pass the word to Santi. Thank you.

Santiago Stel, Senior Vice President of Finance and Risks

Yuri, so on the other fee revenue question, 100% of these other fee revenues are correlated to business volumes where we excel in cards, insurance, and investments, diving on each of these points on PPV of cards, building up on what Alexandre just mentioned, it grew 12% this quarter, exclusively of credit cards to BRL 10.3 billion in a quarter with no particular positive seasonality, just driven by our acceleration in the credit card business, while the loan portfolio grew 13%. Another relevant number to mention, which I think Joao anticipated a bit, it's the increase in our credit card limits from BRL 20 billion to BRL 25 billion. This is a 25% increase in our limits in just a quarter, focusing on clients with a higher propensity to spend, therefore driving higher TPV. The second point is insurance. This has two parts. The first part is related to performance, where we've been over-delivering the business goals with our bancassurance partners, both Liberty and Sompo. For that, we accrued recurring revenue. The second part is related to our stake in Interseguro, where we have a profit-sharing agreement. The more performance the company has, the more we benefit from it. Third and last is investments, where we have a volume-based agreement with B3 that we've been beating quarter after quarter and for which we also receive a performance fee. To put numbers into these three components, we have on credit cards close to BRL 20 million, on insurance close to BRL 20 million, and the remaining is mainly investments with a bit of Inter Shop as well. So that explains the BRL 50 million delta in other revenues. It's 100% again related to business. And we think this is recurrent. Though some of them are recurrent in every single quarter, and some are recurrent in every single year, but not necessarily in every single quarter, which I understand that makes it a little bit more complex, but they have occurred in each of the prior years, and they will continue occurring in the future.

Yuri Fernandes, Analyst

That's very clear, Santi, which one is reflecting capital gains, of those?

Santiago Stel, Senior Vice President of Finance and Risks

The insurance part, Yuri, reflects capital gains.

Yuri Fernandes, Analyst

Perfect. If I may, guys, a third one on capital, it was pretty good. Your capital this quarter, your Tier 1 ratio was up almost 100 bps, right, like 90 bps. What drove this? It's basically the new Central Bank credit risk regulation? Or are you optimizing capital somehow? Because in the past, you discussed doing some things to improve your capital. So just checking if this is more regulation or if this is also Inter doing something on the capital side?

João Vitor Nazareth Teixeira de Souza, CEO

Yuri, Joao Vitor speaking. We always like to get all the benefits from the context of the market, which are exactly what you mentioned, some changes in the regulation, but we are also working at Inter to improve everything from operations and the way we use our capital. And I would say that one of the most recurrent words for the past, I'd say, 12 months or so here at Inter was ROE. So every underwriting, credit underwriting, is it delivering a good ROE for us? Yes or no? And let's not underwrite if not. So we really changed our mindset on that. You need to remember that before we had, I don't know, 50% CET1 after following on offers we did. And we were not so concerned about the right use of our equity. I would say that, again, for the past 12 months, it's a whole different scenario. So we have been way more diligent on underwriting and getting the best use of our equity. That's why I also mentioned in one of the previous questions, we want to see these fee revenues that you also asked, growing consistently quarter-over-quarter and year-over-year because this is going to help also our CET1. So using the equity in the right way for credit portfolio expansion and bringing more revenue in fees, we will always have, I would say, the best CET1 in the retail banking industry in Brazil. So that's what we're working hard to achieve.

Yuri Fernandes, Analyst

Congrats on the ROE improvement in the past quarters.

Operator, Operator

The next question comes from Eduardo Rosman from BTG.

Eduardo Rosman, Analyst

I have one question here. In the CEO letter, at the press release, you mentioned that interest is currently ahead of schedule with respect to the 60-30-30 goals for 2027, right? So do you believe it's just a matter of time of doing more of the same to get there? Or do you still need to come up with new products such as overdraft or expand in other geographies such as the U.S.? So it would be great if you could share with us where you think you are ahead of schedule and what needs to be done for you to get there?

João Vitor Nazareth Teixeira de Souza, CEO

Rosman, Joao Vitor speaking. Thank you for the question. Yes, we are, I would say, ahead of the budget. But we are still trying to work harder, even harder to try to anticipate as much as we can and to keep being ahead of it. So I believe that on client engagement and client adoption, we're doing great. So adding 1.5 million, 1.6 million new clients every single quarter with a very good CAC. So they are doing a really, really good job. Also on efficiency, we're able to improve a lot. But also, we've gone after the biggest vendors to renegotiate most of our contracts. So anyway, we're working hard to also improve our efficiency ratio. We still have room to improve that. We're close to 50, but we see this also ahead of the budget. And lastly, on ROE, which is the last three of the 60-30-30 projects, we know that we are still far from the 30% mark. But again, we need to consider we have a big buffer of CET1. So we will keep growing our credit portfolio. We can grow our credit portfolio, Rosman. We do have only 1.5% of the credit portfolio in Brazil, but we do have 8% of the PIX transactions. We do have a very good cost of funding, actually the best cost of funding on the street. We do have seven different credit portfolios for us to grow, and we're adding more credit portfolios, such as FGTS, PIX cred. So we're very comfortable that we will average more our balance sheet. And then combined with the fee revenue, which are very good, we'll be able to achieve maybe, who knows, also ahead of the budget of our 60-30-30. So I'm very convinced that it's achievable more than when we launched it, when we unveiled it by the beginning of the year. But again, still a lot of work to be done, but I'm happy that we are improving on the two fronts of the plan. So that's how I see Inter performing on that North Star project called the 60-30-30.

Eduardo Rosman, Analyst

Great, Joao. If I may, just another topic here, another question because we've been receiving a lot of questions on the payroll lending market. There's another digital bank that has set very aggressive goals for growing in that market. And indeed, they are coming with very low interest rates, right? So we know that you were one of the first ones to offer the product 100% digitally. So what steps can you take to further accelerate your market share gains? What are the challenges and opportunities that you see in the segment going forward?

João Vitor Nazareth Teixeira de Souza, CEO

Rosman, thank you. Look, we have been underwriting payroll loans at Inter since 2001, okay? So this is not something new at Inter. And I know you covered the space for a while, and we know that the payroll loan is not a commodity. I also just mentioned a few questions ago that we're being very diligent at Inter to underwrite credit portfolios of the right ROE. And also I just mentioned, we have the best funding in the market. And also, you know that we are a very digital-oriented player. Having said that, in a diligent way, I consider Inter the most capable player in the industry to reduce costs for the payroll loan. Also, we don't do that with the banking correspondents, which take a big toll on the profitability of the business and also put a lot of pressure on the legal claims down the road. So I'm confident that we will be able to keep improving. Of course, we need to always improve the CRM initiative. So to get to the clients that are willing to change and to migrate to Inter, we know that when the interest rates are high, it's not easy to migrate from one bank to another, but we are very well positioned. We don't want to do a dumping as we did before already, if you remember. We were doing the lowest rate in Consignado in the past, and we don't think that is the right way to go. But we have the tools to be one of the cheapest on the market. And I would say that with time, we will conquer more and more and more clients. I would say a B2C strategy, okay? We own that client. They're going to use our other products and not a B2B approach. So I'm excited with that product as well.

Operator, Operator

The next question comes from Jorge Kuri from Morgan Stanley, and I will read it.

Jorge Kuri, Analyst

I actually have two questions, please. First, can you help us understand how your NIM will look like if rates get to 9% as the current consensus anticipates? What are the puts and takes here? The second question is, I also wanted to get some guidance on how your cost of risk should move going forward. Your provisions to loans are running at around 6% on a last 12-month basis. What do you think the level should be in 2024 and 2025?

Santiago Stel, Senior Vice President of Finance and Risks

Thank you for the question. I'll take the first one, and I'll let Alexandre take the second one. Regarding the decreased impact from the lowering of SELIC, we believe our balance sheet is quite unique because we have a distinctive funding structure with high free transaction deposits, making up about one-fourth of our funding. As a result, we are sensitive to liabilities and benefit from a decrease in SELIC, at least in the short term. To quantify this, for every 100 basis points reduction in SELIC, our net interest income grows by approximately BRL 20 million per quarter. The effects of the SELIC reduction will likely become noticeable in our net interest margin in the fourth quarter. The first reduction took place in an earlier period, and it generally takes about a month to see repricing on the liability side. Furthermore, we are observing a significant change in our credit mix as we continue to grow in higher yielding segments like FGTS, home equity, and credit cards, while we are reducing our lower-yielding mortgages. This combination will have a positive impact for us, but it will take a few quarters for this to be fully reflected, which is essential for our overall strategy.

Alexandre De Oliveira, Senior Vice President of Retail Banking

Thank you, Santi. Jorge, I appreciate your question. When we analyze the cost of risk, historically, we started from about 3% in 2020, increased to 4.6% in 2021, and last year we noticed a significant rise in delinquency rates from a macro perspective, reaching 5.4%. This year, we peaked at 6.2% in the second quarter, but we improved this quarter to 5.9%. We have implemented numerous actions to drive this down further. Factors such as advanced modeling for collections and the renegotiation discounts that Santiago previously mentioned are contributing to the improvements in the cost of risk. Our goal is to reduce it to around 5% in 2024 and 2025. Early indicators from our new cohorts suggest that this is certainly achievable. We will continue to work diligently on collections and execute all our strategies to reach this 5% target, which should align well with our 60-30-30 plan. Thank you.

Operator, Operator

The next question comes from Pedro Leduc from Itau BBA.

Pedro Leduc, Analyst

I feel that prepared ones have been answered already, but I would like to dig in a little bit into what you've mentioned in the prepared remarks, Santiago, on the renegotiated portfolio that is partially explaining the NIMs at least visually. Can you remind us how large it is, how much it grew this quarter? And which product line is the renegotiation concentrated in?

Santiago Stel, Senior Vice President of Finance and Risks

So thank you, Leduc. So the impact was mainly for renegotiation of delinquent credit card portfolios, and that impacted the NIM, I mentioned around BRL 25 million of difference versus what we had the prior quarter, taking the compression on the NII. That's the impact that we had. And then on the positive side, it impacted the asset quality metric, the cost of risk with a net positive impact on the bottom line.

Pedro Leduc, Analyst

Can you remind us, Santiago, how large it is nowadays within either your total portfolio or within credit cards, the renegotiated portion?

Santiago Stel, Senior Vice President of Finance and Risks

So we closed the renegotiation showing in the financial statements, and it went up from 1.6% to 1.9%, the amount renegotiated this quarter.

Pedro Leduc, Analyst

And the second question to…

Santiago Stel, Senior Vice President of Finance and Risks

Leduc, just correcting, I apologize. I missed the number. It went up from 0.6% to 0.9%, the renegotiated amount, and that's on the notes of the Basel financials.

Pedro Leduc, Analyst

That's very clear. It's a small number indeed. Second question, perhaps more for Joao Vitor on the U.S. expansion. There's a nice chart where you have the product rollout schedule, the 2 million global accounts, almost. Can you tell us if these are clients in Brazil that you're bringing to global accounts or we're already onboarding U.S. clients itself? I know you're also sponsoring a soccer team there. I imagine it's part of the marketing rollout as well.

João Vitor Nazareth Teixeira de Souza, CEO

Leduc, it's Joao Vitor here. As I mentioned earlier, when we launched in 2016, we had a strong product that gained us traction through word of mouth in the Brazilian market. Additionally, by securing this client, we were able to achieve favorable funding costs that enabled us to extend credit across various portfolios. We're observing a similar trend in our U.S. expansion. We have a solid product at this stage, but we are not completely there yet. We still need to refine the product to address certain verticals in Brazil that are currently absent. However, we anticipate that in the next one or two quarters, we will have the product nearly finalized. We are continuously enhancing our offering in Brazil, and I would describe next year as primarily a go-to-market phase in the U.S. with an improved product. This will hopefully lead to increased word of mouth and client adoption rather than just relying on customer acquisition costs. Our initial approach is to facilitate transactions for Brazilians in the U.S. using our debit card, our Inter Shop, and our Inter Seguros. We are optimistic that over time we can attract both American customers and Latin American individuals residing in the U.S. to utilize our products. Given our state-of-the-art IT framework, we are confident we can replicate our successful product for our global app, potentially offering one of the best financial products in the U.S. as we do in Brazil. We are very excited about the future ahead, especially with deposits exceeding $200 million. I truly believe we have a promising outlook for digital banking in the U.S.

Operator, Operator

The next question comes from Thiago Batista from UBS.

Thiago Bovolenta Batista, Analyst

I have two questions. The first one about the PIX finance. I understand that Inter includes the PIX finance inside of the credit card, but I want to double-check to confirm if this is the case. And more importantly, if you can comment on the asset quality trends or the asset quality profile that you believe this product will have, if this is better or worse than the average credit card loans. And also, if the behavior of the users of this is more to make money transfer or to buy things even in the shop. And the second question, you mentioned already a couple of times that the numbers are ahead of your budget or ahead of where you guys are expecting to achieve the 2027 growth. Is it possible to say already that the bank ROE should achieve double digits in the next year?

Alexandre De Oliveira, Senior Vice President of Retail Banking

Hi, Thiago. This is Alex. Thank you for your question. I'll start addressing the first part. So when we think about PIX credit, we launched this product about 40 days ago. Along with it, we also launched payment Boletos with the credit card. So the approach we're taking to the product is to start from the lowest risk clients and expand through the highest risk clients with different pricing according to the risk profile. See, we're in the early stages of the product, so we don't have yet the behavior of delinquency, but our expectation is to have something very similar to what we have in the regular credit cards.

João Vitor Nazareth Teixeira de Souza, CEO

Thiago, Joao Vitor here. I wanted to add to Alexandre's response regarding the PIX Credit and PIX Boletos. What's noteworthy about them is that we're maximizing the potential of Brazil's innovative PIX platform. Essentially, the risk profile of the client remains consistent. Whether Thiago is making a credit card purchase at a mall or using PIX, the credit profile is largely the same, but the economics are improved because we don't rely on the entire payment scheme for the transaction. That's the approach we're taking at Inter Shop. We maintain the same credit profile but with enhanced economics. Whenever we establish a consumer finance option like PIX Credit or Boletos credit within our ecosystem, we generally achieve better monetization and a higher return on equity. We're very optimistic about PIX Credit, PIX Boletos, and our developments at Inter Shop. However, as Alexandre mentioned, we are still in the early stages of this portfolio. As always, we are adopting a conservative strategy, but I’m confident we will excel in this area moving forward. Now Alexandre will address the question regarding the return on equity for 2024.

Santiago Stel, Senior Vice President of Finance and Risks

So on ROE, we gave two numbers in the Investor Day back in January. We mentioned that the North Star is 30% by 2027. We mentioned that in 2023, which is year one of that 5-year business plan, we expect it to have a mid-single-digit ROE. We are fully focused on closing this year. Until we close this year, we're not going to give any numbers or share any guidance at all in terms of what we expect in 2024. We do think that the fourth quarter will be meaningfully more profitable than the third quarter, which is basically the continuation of the trend that we're seeing from the first quarter, 1% ROE, 3.5% on the second one, almost 6 on this one. This is despite the high excess capital that pushes the metric down, and we see the continuation into the fourth quarter. We have time to talk about 2024 later once we close this year.

Operator, Operator

This conference call is now concluded. Inter's IR area is at your disposal to answer any additional questions. Thank you for attending today's presentation. Have a good day.