Earnings Call Transcript - INTR Q1 2024

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to Inter & Co's first quarter earnings conference call. Today's speakers are Joao Vitor Menin, Inter's CEO; Alexandre Riccio, Senior Vice President of Retail Banking; and Santiago Stel, Senior Vice President of Finance and Risk. Please be advised that today's conference is being recorded, and a replay will be available at the company's investor relations website. Throughout this conference call, we will be presenting non-IFRS financial information. These are important financial measures for the company, but are not financial measures as defined by IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information are available in Inter & Co's earnings release and earnings presentation appendix. Today's discussion might include forward-looking statements, which are not guarantees of future performance. Please refer to the forward-looking statements disclosure in the company's earnings release and earnings presentation. Now I would like to yield the floor to Mr. Joao Vitor Menin. The floor is yours, Sir.

João Vitor Nazareth Teixeira de Souza, CEO

Thank you, operator. Hello, everyone. Thanks for joining us for our first quarter earnings release. As we generally do, I will start with a quick overview of our strategy to then pass it to Alexandre and Santiago, who will cover the rest of the presentation. I will then close with a final remark and open it for Q&A session. Jumping to Page 5, I will start with a quick update on this quarter's performance and how this connects to our North Star, which is the 60/30/30 plan. I'm glad to say that we reached almost 32 million clients this quarter. This increase in the number of clients came together with an increase in our activation rate. We reached 55%, an improvement of 86 basis points just this quarter. On the efficiency ratio, we continue making great progress quarter-by-quarter. It stands today at 47.7%, which implies a strong improvement of 3.6 percentage points, again, just this quarter. And last but not least, our ROE is approaching the double digits mark, closing the first quarter at 9.7%. We think this number is even more remarkable considering the high level of excess capital we hold. As I mentioned in the last earnings call, we are proud to be ahead of our North Star plan. It is strategically important for us to continue to be ahead of the plan, while continuing to grow and innovate. Now moving to Page 6. Here, we see Inter from a growth perspective and how we are disrupting the Brazilian banking market. We can see this disruption from three angles. First, on clients. We have experienced a strong expansion in our client base with a steady increase in the number of customers choosing to transact on our platform. Second, on loans. Our portfolio has been growing steadily as more individuals and businesses finance their needs through our lending options. Third, on revenues. We have achieved robust growth driven by increased client monetization across fees, savings, and credit products. These results show how Inter is delivering alpha by consistently over delivering growth across client, balance sheet, and income statement metrics. Moving to Page 7. Here, I will cover our main business achievements this quarter. There are three particular things I would like to highlight. First, Loop. We are disrupting an outdated industry by integrating our existing verticals into a comprehensive rewards program. This initiative aims to drive client engagement and expansion of our entire ecosystem. Second, we are scaling up our new credit lines. These are mainly fixed financing and Buy Now Pay Later in our Intershop. Lastly, we are strategically building our global accounts. We're doing this by leveraging the robust app infrastructure we have established in Brazil and replicating it in the U.S. These three groups of business opportunities are strategically important to continue reinforcing the power of our financial Super App. And to conclude on my side before handing over to Santi, I'd like to point out the three priorities that we have for the remaining of 2024. First, on the growth side, we expect to continue growing clients, loans, deposits, and top-line revenue. We will do that by continuing to innovate and delight our clients. Second, on the business side, we remain focused on increasing client engagement and principalities. We are doing this by offering the broadest digital solutions on the market. Lastly, on the financial side, our priority is to continue to improve operational leverage and expand our NIM, streamlining our operations, optimizing the efficiency and improving the portfolio mix. We aim to enhance profitability and financial growth. We believe that these factors will allow us to continue operating on a positive trajectory that balances growth with profitability. Now Santi will walk you through our business updates. Thank you very much.

Santiago Stel, SVP of Finance and Risk

Thank you, Joao. Good afternoon, everyone, and thanks for joining us today. As Joao mentioned previously, from day one, we have been disruptors in the banking industry, allowing us to gain market share in one of the largest banking markets in the world. Our focus on innovation has been instrumental to our success. The first quarter of this year was no different. We once again welcomed one million new active clients, bringing our total increment to 3.9 million in the last 12 months. This growth is on par with the previous 12-month period, however, with 340 basis points higher activation rates. All of this while maintaining an extremely comfortable level of customer acquisition costs. This consistency in growth has put us in a very good position to compete in our industry. And each day, we see market share gains across the markets we participate in. Moving to Page 11, we can see that the day-to-day banking remains the backbone of our financial Super App. Total TPV increased 42% on a year-over-year basis. This reflects the strong growth and adoption of our platform. This quarter, volumes from credit cards surpassed debit for the very first time. This shift contributed to stable interchange revenue even when compared to the seasonally strong fourth quarter. When looking on a cohort basis, we observed an encouraging trend. Newer cohorts show a steady increase in spending, reflecting their growing engagement with our offerings. Simultaneously, older cohorts continue to demonstrate robust growth as they mature. Moving to Page 12, I'll talk about Intershop, insurance, and investments, all of which had great performance this quarter. Starting with Intershop, we were able to resume GMV growth while increasing net take rate. We delivered BRL 1 billion GMV in a quarter typically marked by seasonal contraction. On insurance, we also had another great quarter, reaching more than 404,000 sales and 1.9 million active clients. These operating numbers supported a record-breaking BRL 52 million in net revenue for insurance. On investments, our cutting-edge product offering resulted in an impressive 61% year-over-year growth and you see reaching BRL 95 billion. On the global front, we're successfully replicating one of our most important competitive advantages, our strong deposit franchise. Our assets under custody and deposits in U.S. dollars have reached the impressive milestone of $460 million, reflecting a remarkable 223% year-over-year growth. We achieved almost 3 million clients in a vertical that is strategically important, given its typical customer profile. I would also like to emphasize that this quarter we introduced a new investment option for our clients, time deposits. Despite being a recent addition to our lineup, we're thrilled to see the rapid adoption and growing interest in the product. Jumping into our seventh vertical, loyalty. We achieved 6.6 million active clients bringing a net increase of BRL 1.2 million. Loop, as we call it, is an evolution of our cashback program and had one more quarter of success. A few highlights are: we have rolled out more than 40 missions to enhance client spending, engagement, and activation. These missions influenced the behavior of nearly 1 million clients. Second, we have observed that Loop clients have a spending lift of 66% as compared to non-loop clients. Third, we are consolidating all sources of cashback into points and customer feedback has been extremely positive. And last, from a financial perspective, we are observing a variety of benefits that range from profits made when selling points to interest earned on float, to making spreads when points are redeemed. We're excited about all possibilities Loop will keep bringing us, especially after the launch of our new experience one week ago. Finally, before giving the floor to Santi, I want to talk about the expansion of our new credit lines. First, we're observing consistent growth in PIX Financing. Second, our Buy Now Pay Later offering is fine-tuned and gaining traction, supporting GMV expansion in Intershop. These two products, along with Bill Pay Financing, cash financing, and overdraft are growing and showing great potential. Delinquency readings are within our expectations. We're continuously fine-tuning user experience and flexibly adjusting credit policies to broaden the offering. There is a lot of room to grow within our base. The portfolio reached BRL 170 million this quarter and is evolving at an encouraging pace. Now I'll pass the word to Santi to present our financial performance. Thank you, and hello, everyone. Thank you for attending our call. Starting on Page 17, we can see a strong performance in our credit book. After increasing our loans over several quarters at 5%, we have now adjusted to 4%, which aligns with first-quarter seasonal trends and reflects slightly lower demand due to holidays and carnival. Year-over-year, our portfolio grew by 28%, exceeding BRL 32 billion. It's important to highlight that we continue to grow our loans at a much faster pace than the market, which allows us to gain significant market share across products and reduce our cost base. Regarding interest rates, we observed a 1.0% increase in the overall loans rate during this quarter. This rise resulted from the continued growth in high-margin portfolios, the repricing of legacy payroll and real estate portfolios, and higher-than-average inflation for the quarter. We will discuss the full impact of rates on the NIM page later. Delving into growth by loan type, we remain dedicated to deploying capital as profitably as possible, thereby enhancing yields and ROEs on our loan portfolio. Our top credit products, FGTS and Home Equity, demonstrated the highest scales of growth within our loan mix. In FGTS, we achieved the highest underwriting volume on record this quarter, totaling approximately BRL 500 million in new loans at an average monthly rate of 1.8%. In the credit card sector, we continue to prioritize credit limits for existing and strong-performing clients, resulting in a nearly 40% increase in this portfolio while also enhancing asset quality. Lastly, for real estate and payroll loans, we have balanced growth with repricing to ensure continued profitability in these portfolios. Moving to Page 19 concerning asset quality, NPLs grew by 20 basis points, which is typical in the first quarter due to reduced liquidity among consumers compared to previous quarters. However, we observed ongoing improvement in credit card NPLs by cohort, as well as in Stage 3 formation. This improvement is attributed to constant enhancements in underwriting models, better risk management, and collection strategies. On Page 20, we see stability in the cost of risk metric, remaining flat at 5.2%. Our coverage ratio also remained stable at 131%, indicating that we continue provisioning in line with NPL formation trends. Regarding loan mix, there are balancing forces. While we are growing FGTS and home equity loans, which could lower the ratios, we are also accelerating credit card and fixed financing, keeping the overall numbers stable. We are focusing on enhancing our underwriting models alongside collection practices, which are crucial for our asset quality trends. Now on Page 21, our strong funding franchise reached BRL 43.8 billion, supported by the trust of 15.7 million clients with their deposits. Our attractive funding mix, with transactional deposits making up 32% of our total funding, is one of the best in Brazilian banking. This quarter, our funding base grew by 1%, demonstrating solid performance for the first quarter. For comparison, in the first quarter of 2023, we saw a 1% decline. Moving to Page 22, our cost of funding remains a key competitive advantage, consistently shown over time and through rate cycles of increasing, stabilizing, and then declining. This quarter our cost of funding was 61.9% of CDI, remaining around 60% of our target market. As rates decrease further, we expect to benefit from this dynamic due to our balance sheet structure that makes Inter liability-sensitive. Turning to Page 23, we experienced excellent revenue this quarter, achieving record numbers of BRL 2.3 billion in gross revenue and BRL 1.4 billion in net revenue. This represents a 37% growth year-over-year and 7% quarter-over-quarter. The primary driver of this growth was net interest income, which performed well due to improved asset allocation into profitable loan segments. Fees decreased slightly this quarter due to strong performances at the end of the previous year, but net fee growth year-on-year was robust at 38%. On Page 24, our ARPAC remains stable as we continue to add one million active clients each quarter, maintaining an ARPAC of approximately BRL 30 per month. On the cost side, we significantly improved our cost-to-serve metric, achieving a record low of BRL 11.8. Additionally, our margin per active client reached a record of BRL 18.5, which is 23% higher than last year. Moving to Page 25, we show the evolution of our net interest margins. Even in a quarter when the percentage of demand deposits typically declines, all our NIMs performed strongly. Both our NIM 1.0 and 2.0 increased by 20 basis points this quarter. The risk-adjusted NIM, which accounts for the cost of risk, performed even better, reaching records in both the 1.0 and 2.0 metrics. This strong performance is attributed to several factors: improved repricing of legacy real estate and payroll loans, a shift in the loan mix towards more profitable products, and lower funding costs. Now on Page 26, we illustrate improvements in our operational leverage trends. The growth of net revenue exceeded expenses, which remained flat while net revenues grew by 7% this quarter. This has allowed us to continue expanding the gap between the two curves, achieving our operational leverage goals. Consequently, our efficiency ratio improved by 370 basis points to 47.7%. We celebrate this achievement of penetrating the 50% mark and note that it is one of the key ratios we aim for in our 60/30/30 North Star target, where we are well ahead of our goal at this moment. To conclude, we delivered a record return on equity of 9.7%, reporting our best-ever net income of BRL 195 million, with pre-tax income at BRL 274 million. This ongoing quarter-by-quarter growth in profitability reinforces our confidence in our ability to achieve a balanced combination of growth and profitability while establishing a long-term franchise. Now I'll pass it to Joao for his closing remarks.

João Vitor Nazareth Teixeira de Souza, CEO

Thank you, and Santi. As highlighted in this presentation, we are transforming the market by adhering to our principles as builders and innovators. We genuinely believe we are developing a distinctive, exceptional, and durable financial platform. In the first three months of this year, our strong financial and operational performance demonstrated that the model is evolving and revealing the true advantages of its design. These accomplishments also underscore the resilience and effectiveness of our business as we successfully combine profitability with disruptive growth. The first quarter's performance, particularly two of the goals from the 60/30/30 plan, has provided us with a solid foundation. Thus, we are moving forward with great momentum for the upcoming quarters and years. I want to thank our incredible team for their dedication and our shareholders for their ongoing support since our inception. Before we move to the Q&A segment, I invite all of you to join our Tech Day on May 13 at 3:00 p.m. Eastern Time. This event will be held live at the Nasdaq New York office, with virtual access available for remote attendees. During this event, we will explore Inter's key competitive advantage: our technology platform. All the details for the event can be found on our Investor Relations website. Thank you for your attention and for participating in this earnings presentation. Operator, we can now open it for questions. Thank you.

Operator, Operator

Our first question comes from Mr. Tito Labarta from Goldman Sachs.

Tito Labarta, Analyst

I have two questions, if I can. One, just good loan growth, asset quality held up despite some seasonality. Just thinking from here, how much of the pickup in NPLs do you think was related to seasonality and in terms of continuing to grow the loan book close to this 30% level? how comfortable are you in being able to continue to do that? And then my second question, really just to clarify a little bit the decline in the capital ratio in the quarter. I see here that you paid a dividend, I guess, from the bank to the holding, but it looks like the reference equity fell even more than what the dividend was, mostly a dividend of $125 million, if I have it correctly. But just if you can clarify a little bit the decline in the reference equity in the quarter and how much of it was related just to the dividend payment?

Santiago Stel, SVP of Finance and Risk

Thank you for your questions. This is Santiago. Regarding asset quality, we believe the situation is primarily due to seasonality. We are currently experiencing delinquency levels related to non-performing loans and cost of risk that we expect to maintain throughout the year. There is potential for us to operate below these levels, but it will be around the SIP code. Please note that we are increasing underwriting on specific unsecured lines, which may put some pressure on these ratios. Conversely, we are seeing growth in FGTS and home equity, which tends to balance this out. We are focused on achieving a risk-adjusted net interest margin, which we have mentioned in previous calls, as this is a key area of concern, particularly regarding our ability to manage interest expenses and cost of risk effectively. In terms of capital, several factors contributed to our current position. We experienced changes in the accumulated other comprehensive income, or AOCI, related to the mark-to-market value of our securities portfolio, which fluctuates between positive and negative across quarters. In this quarter, it was a negative impact of BRL 50 million, directly affecting our equity and regulatory capital. We also distributed dividends from the bank to the holding company amounting to around BRL 160 million, along with a capital contribution of BRL 140 million to our broker dealer in Brazil. This contribution will be reversed once the Central Bank acknowledges the consolidated capital. Therefore, this BRL 140 million is temporary. We anticipate the OCI fluctuations will also be temporary due to their inherent variability. These three areas help explain the change in reference capital. However, I want to emphasize that we are focused on improving financial performance. To this end, we've established a new corporate structure, including an interim core holding entity following our earlier capital raise. Alongside the increasing profits we are generating, we expect a larger portion of our excess capital to reside at the holding level, which is more efficient for our company's performance. We will maintain a comfortable CET1 level at the Brazilian bank level but will gradually shift more excess capital to the holding company.

Tito Labarta, Analyst

Okay. No, that's pretty clear. Just a follow-up on the first question. So the 30-ish percent loan growth, you feel pretty comfortable that you'll continue to be able to grow at that pace?

Santiago Stel, SVP of Finance and Risk

Yes. We think it's going to be in the 30s. Obviously, the second half of the year is the most active one, so that we will determine the final outcome. We saw that in the last year when we had acceleration towards the end. The first quarter wasn't bad, 4%. It was higher than prior first quarters, but we will see as the year goes by.

Operator, Operator

The next question comes from Mr. Thiago Batista from UBS.

Thiago Bovolenta Batista, Analyst

First of all, congrats Joao, Alexandre, Santiago for the results, very strong numbers. I have two questions also. The first one about the PIX financing. How transformational can the PIX Financing be for Inter? Do you believe that this can really change the profitability or change the business of the bank? Or how big can this be? The second question about the interest hedge strategy. So we are seeing interest rates increasing a lot in the last couple of months in Brazil. So how is Inter doing its hedge strategy?

João Vitor Nazareth Teixeira de Souza, CEO

Joao Vitor speaking. I'm going to cover the PIX Financing part of the question, then Santi will cover the hedge. So we are very excited about the PIX Financing product. We have been saying for a while that we see the 2.0 consumer finance in Brazil starting to play out. And what do you mean by that? We see with the PIX Finance different from what we think in using credit cards as a more active product, more interesting product for us to deploy our capital. We can manage better the interest. We can manage better the moment where we do the underwriting. We have fewer intermediaries in the process, such as the card companies, the acquired companies, and so on. We started about a year ago or even less with PIX Financing. So far, the delinquency is better than that of credit cards and the economics are better than credit cards. We're still improving and rolling out that offering for our clients as we always say at Inter when it comes to credit underwriting. We like to move forward with caution, but we see it as a big addressable market for PIX Finance. So very excited with what we have seen so far. And again, just to remind the market, we have 80% penetration on PIX. So we will be able to play a very good role in that product going forward.

Santiago Stel, SVP of Finance and Risk

Santiago here. On the hedging side, what we started to do at the beginning of last year was to hedge the originations, not the stock, the originations of the loans that have more than a year of operations. This was payroll, FGTS, home equity, and traditional mortgages, and we have been doing that since. Now that the interest rates have gone up a lot, we paused. We will resume once we see rates going down. So we are smoothly increasing the ratio of the hedge in the long-duration portfolio. We expect to do this, and we seek to have less volatility in the results. We think this is a strategy we're doing, but we don't want to rush into over-hedging too fast, and we still see some potential for rates to decrease. But overall, that's the strategy so far.

Operator, Operator

The next question comes from Mr. Pedro Leduc from Itau BBA.

Pedro Leduc, Analyst

Congrats on the quarter. I'd like to pick your brain a little bit on the loan book. It's growing very well, and we know that credit current and special. So first on that, what led you to have more comfort on this? What are you doing differently? What kind of clients are you going after or user profile on these cards? And then on the overall loan book pace, 30% yearly growth, if that's the level we should see also for the remaining of the year?

Alexandre De Oliveira, SVP of Retail Banking

This is Alexandre speaking. Thank you for the question. So as you know, credit card is an important product for the transactional banking vertical and the key driver of principalities. So growth there is aligned with our short and long-term objectives. With that, when we think about specifically in the first quarter, we had a few factors contributing to growth. First was Loop. So our loyalty program is gaining a lot of traction. We've deployed several missions, and these have been drivers of a lot more usage on our cards with a good contribution from higher income clients who also use the upper scale products. This has been beneficial. A second part is an early contribution in the total portfolio coming from PIX Financing and also bill pay and cash financing. It's growing. So it starts to contribute to the growth of the portfolio. Last but not least, the continuity of our usual growth, and that includes new clients from onboarding that we continue underwriting credit limits, and we're having good engagement. New clients for the credit card products are coming from the behavior models. We're also very active on underwriting those limits with a big focus on gaining share of wallet on existing customers. So clients that are already using credit cards, we've been doing all the typical increases of limits, and again, with Loop, it's easier to enhance this engagement. We'll keep working in this direction throughout the year. And that's good for the business. When moving forward, the growth is expected to be in the ballpark that Santiago just mentioned. So we're going to be in the 30s. And with the credit profile evolving in parallel with good growth on FGTS, so products with low delinquency, balancing with products that might have a little bit more delinquency. So we see growth in NPLs at good levels as we saw in the first quarter.

Operator, Operator

Our next question comes from Ms. Neha Agarwala from HSBC.

Neha Agarwala, Analyst

Just a quick follow-up on the previous question regarding the unsecured credit lines that you're now expanding into. We have seen a lot of players offering PIX Financing now. Even the incumbent banks are increasingly improving their offering in PIX Financing. How do you think Inter can differentiate? Or you don't require differentiation given that you have 8% market share of PIX transactions, you could continue to grow aggressively on PIX Financing? And this BRL 170 million number that you've shown this quarter, where could this be by the end of this year roughly? Where do you see these new lines growing into at least by the end of this year? That would be very helpful for us to kind of anticipate what kind of growth we should imagine.

João Vitor Nazareth Teixeira de Souza, CEO

Joao Vitor speaking here. Thank you for the question. As I told you before, it's a mantra at Inter that we like to move forward with caution, mostly on unsecured credit portfolio. But the good news is we're putting these new products up and running, and the clients are adopting very fast. And lastly, the way that people buy this product with us is 100% digital through our app in a very seamless way. This helps us to grow fast. Also, to mention, by having the best cost of funding in the market, we can offer a very good profitability on that. We have been tracking delinquency of the PIX Financing product, Buy Now Pay Later for our Intershop, the Boleto payment option, and the withdrawal option with BITs. So far, as I mentioned before in the previous question, the numbers are better than the credit card, and therefore, the economics are much better without the intermediaries that I also mentioned in the previous question. So our appetite for this consumer finance 2.0 is big. I believe that, as you said, having a big market share in the market, a good cost of funding, and a very seamless way to hire the products, we believe that we'll gather, again with caution, a significant market share going forward.

Neha Agarwala, Analyst

I would like to follow up on the cost aspect. We are seeing strong cost control, which has certainly contributed to improving the return on equity. What are your projections for cost control this year? Can we expect continued strong cost performance, or should we anticipate significant changes? The most substantial changes occurred last year, but what are the expectations for cost growth and control measures this year? Congratulations once again.

Alexandre De Oliveira, SVP of Retail Banking

Thanks, Neha. This is Alexandre speaking. So on cost control, one reality is we keep surprising ourselves. We expected it to grow marginally. It's not that we expect it to grow aligned with revenues. We want to gain efficiency, right? So we need operating leverage, and we need this to happen. But with technology, with gains from the implementation of new technologies, and all the projects that we've been doing to keep costs under control, we've been surprising ourselves quarter after quarter. As we look forward, we still see a little bit of what we said in the last quarter call, which was having the costs growing at about half the pace that we see revenue growth. So that's kind of how we are aiming and how we are running the company.

João Vitor Nazareth Teixeira de Souza, CEO

And Neha, here Joao speaking. Just to complement Alexandre, it's important to mention that it's not by accident that our expenses are growing way less than the revenues. We need to think that by design, Inter was structured without the big IT legacy systems, without the brands, 100% cloud-based, with a very developed database. So we are working with that now with the technology that we have under the hood to improve the number of clients that we can serve, proactive employees, and the number of products that we can offer in our Super App. All of these combined have been helping us to achieve this operational leverage, and we believe that we're just scratching the surface. So we see how we have been able to reduce from almost 90% cost-to-income to 47% cost-to-income in just maybe 3 or 4 quarters. It's really a very good achievement, and I believe that this metric is going to be maybe the one that we're going to get first in our 60/30/30 plan. I'm very excited with the cost control and the operational leverage that we are putting on the balance sheet.

Operator, Operator

The next question comes from Mr. Flavio Yoshida from Bank of America.

Flavio Yoshida, Analyst

Congratulations on the strong results. I have a question regarding engagement and client loyalty. We've noticed many banks discussing the importance of client loyalty, and I would like to know your thoughts on what is essential for achieving this. Do you believe that credit limits play a significant role in this aspect? I would appreciate it if you could elaborate on how to enhance engagement levels. My second question pertains to the coverage ratio. I understand that you are pursuing growth in unsecured credit lines, including credit cards, while maintaining a stable coverage ratio of around 130%. In contrast, other publicly listed banks have a historical average of about 200%. How comfortable are you with your current level, and do you think it will be necessary to increase this coverage ratio given that the loan mix is becoming riskier?

Alexandre De Oliveira, SVP of Retail Banking

This is Alexandre. So I'll start with the engagement and principality part, and then Santi will talk about the portfolio and risk part. What we see is, first, strategically, how do we position ourselves to gain principality and high engagement. It's about several things. So not only credit cards, but a lot about the product. We started differentiating ourselves since the early days back in 2018, and invested a lot in bringing many different products to our Super App. We have today the best PIX in the market based on the Central Bank rating system, and that's an important one. But then we have a lot of different verticals, including insurance, a very complete investment platform, all Intershop, adding a lot of value to customers. More recently, our global account offering that drives tremendous engagement from many upper-scale clients. So having the Super App offering with all the products within the same app at a seamless user experience is, for us, the biggest driver of principality. People don't need to leave Inter to take care of their entire financial lives. We'll keep moving there to get more principality. And when we get more to the tactics, to the tactical action items, then we do a lot of things to make sure we bring everything that I talked about before as soon as possible to Inter. For example, when we think PIX, an important part of the process is to get one of the clients' main PIX keys, as they are called in Brazil. We've been doing a lot of that to get clients to engage with credit card limits. You need to have a loyalty program that has to be complete. We're doing a lot of missions to make sure we bring those clients. And as we go, we're being able to engage clients with more value-added products such as PIX Financing. I'll pass over to Joao, who is going to fill in a little bit.

João Vitor Nazareth Teixeira de Souza, CEO

No, Yoshida, just to add on top of Alexandre's comments, I would say that two things are very, very important to have the best product on the street. By having the best product, you have client principality. I would say it's the combination of innovation and technology. As we told before, our technology is the best-in-class, and we have this culture trait. We are a very innovative home. When you combine these two things, we are always the first mover on the new trends that we see in the digital banking environment and digital banking market. With that in place, clients are embracing Inter more and more as their first option in the digital banking industry. And now Santi will cover the coverage ratio for our portfolio.

Santiago Stel, SVP of Finance and Risk

So on the coverage ratio, we have two different realities. On the one hand, we have the unsecured part, which is around 30%. That has tariff ratios which are higher than 130. And then the secured part, which has a lower. The blended is what the market sees, which is the 130. But within that, there are different realities. What we have is a big level also of fragmentation or diversification of individual clients within the portfolio. So what we will see is how the portfolio mix evolves through time. So far, the changes have not been too significant, that 30% now stands at 32%, the unsecured part. It wasn't something that made a substantial change in the coverage ratio. If we do happen to have a bigger growth or bigger share in the unsecured part, we would assess that accordingly. But we do not see our portfolio in the future having a mix significantly skewed towards unsecured. We do imagine unsecured growing beyond the 30%, but nothing substantially higher than that.

Operator, Operator

The next question comes from Mr. Yuri Fernandes from JP Morgan.

Yuri Fernandes, Analyst

Congrats on the quarter. I have a question about payroll loans. You provided the breakdown of personnel, excluding FGTS, so I see that the ex FGTS is essentially payroll. It hasn't been growing, so I want to understand your perspective on the product. Are there any challenges in originating this more digitally? What are your expectations for this more traditional payroll? Additionally, could you comment on any potential changes to the product? Currently, we observe lower rates, such as rate caps from the government, and the government is also pursuing some marketplaces for payroll, which might make it easier for companies like yours to offer these products. Any insights you have on these initiatives, their likelihood of happening, or timing would be helpful. Essentially, why aren't we seeing growth, and can you accelerate growth if changes occur for this product?

Alexandre De Oliveira, SVP of Retail Banking

This is Alexandre speaking. Thank you for your question. Starting with the traditional payroll loans. I'll cover a few different topics that we're seeing and how we're approaching the product. First is portfolio management. Our focus is on having a healthy and profitable portfolio. Having said that, we're happy or even with a stable portfolio in size, so we remained in the BRL 5 billion ballpark. We grew our implied rates by 80 basis points in one quarter. This was very positive, and there continues to be a lot of room to keep this trend, given our discipline in pricing and the rates of the overall portfolio that are considerably lower than the current levels. Second, in terms of origination channels, as we have communicated before, we've been evolving from an origination that used to be mostly omni-channel, which is digital with human support, to a hybrid of omni-channel, so the same one as before and a digital-only origination. We see early results already happening with the digital-only origination with a lot of INSS through WhatsApp going on already, and we're confident that we should resume portfolio growth throughout 2024. These, I believe, are the main points as we think about traditional payroll. We'll keep the discipline to grow on this portfolio. When we think about everything that we've heard in the market, we heard noise on the FGTS product. We believe this product is here to stay. It's the lowest cost loan a normal worker can get in Brazil. This is a product that we do 100% digitally. We're confident it's here to stay. And on the other issues that we've heard through the last few months, private payroll can be a gigantic opportunity, although it might take longer to see it implemented. We've heard a lot about digital INSS, and that one is probably going to be in the short term. This is going to be like a portal from Dataprev, who manages the INSS payroll loans. We'll be able to put our offering there along with other competitors. Given our differentiated cost of funding, we should be able to use that as a great opportunity to grow and attract clients as we can comfortably underwrite at the lower end of the market prices with very good ROEs.

João Vitor Nazareth Teixeira de Souza, CEO

Sorry, I just wanted to add to Alexandre's comment. It’s important to note that with the cap at 1.68%, the market average for portfolios is around 1.75%. As Santi mentioned earlier, our portfolio is at 1.25% because it was underwritten about two years ago. This gives us significant potential to enhance the monetization of our current portfolio and capture market share. I want to emphasize our competitive funding costs and the new product that Alexandre discussed. It reminds me of when PIX launched in Brazil, which initially put pressure on our margins with costs from study fees and Interbank fees. However, as PIX gained traction, it benefited us greatly. Now, think about how employees in Brazil could utilize payroll loans through a portal, as Santi mentioned, going through our API in our Super App. This would be remarkable. We've seen seamless growth in FGTS processing through our app, and our underwriting has consistently increased each quarter. We are very optimistic that if this new type of payroll loan materializes, it will significantly benefit our balance sheet.

Operator, Operator

The next question comes from Mr. Andrew Garrity from Morgan Stanley.

Unknown Analyst, Analyst

I just wanted to briefly ask about how we should think about the income from derivatives portion of your securities income, which ultimately gets included in the NII. There was a pretty significant swing in this line quarter-over-quarter. Can you just kind of provide some more details as to what happened? And do you expect this to continue to be a tailwind for NII for the rest of the year?

Santiago Stel, SVP of Finance and Risk

Santiago taking this one. What we do is we break down the result of those derivatives, which are interest rates of the longer duration portfolios that I mentioned earlier in a question. We break that down by product, and we disclose that to calculate the implied rates at the portfolio level. We disclosed that in the release. We also disclose that in the excel file of the IR website called Historical Series. With that, you can see how the interest rates of real estate loans, personal loans, etc., performed through time. The way that we think about it is how the interest rates, considering the hedges, will evolve through time. As Alexandre said, the payroll, which is the main part of personal loans, there we are still with a portfolio that is running at around 1.25% per month, and we originated about 1.6%. Those rates will continue to go up. The same thing on real estate, which is a bit more complicated because we have inflation-adjusted loans there, but they're also increasing in performance quarter-by-quarter. To answer the question, we do break this down at the product level. That is part of the hedge that touches directly the interest income as well and part that goes to the derivative line. But to see all that together, we do the work, and now we show it in the breakdown to calculate the all-in rates of the portfolio.

Operator, Operator

The next question comes from Mr. Ricardo Buchpiguel from BTG.

Ricardo Buchpiguel, Analyst

I have two here on my side. First, can you please share some light on when do you expect to have the NPL formation declining? If you could provide an update for this metric so far in Q2 as we have April and a little bit of May numbers? I want to basically get an idea on when we could see the cost of risk declining more as a reduction in this indicator is very important for that? For my second question, we saw that personnel expenses decreased by around 14% quarter-over-quarter due to, if I'm not mistaken, lower bonus provisioning. I want to understand what was the rationale for that? Does it make sense to consider this level as a recurring base going forward?

Santiago Stel, SVP of Finance and Risk

Santiago here. On NPL formation, we did have two consecutive quarters of NPL formation decreasing. This one was marginal at 4 basis points, but it is a lower number than the fourth quarter despite the pressure we have typically in the first quarter. We don't see this number changing too much. As I mentioned before in another question, we think that the asset quality metrics will stay at around these levels, potentially a bit better, but not meaningfully different from what we have now. The cost of risk was 5.2%. We see it operating also at around that level, maybe even closer to 5.5% throughout the year. Ultimately, the second half drives more of the final outcome as there is more growth there. We also have to see the level of penetration and success that we will have on the unsecured lines like PIX Credit and Buy Now Pay Later, which are ramping up. In terms of personnel expenses, we did have the same situation at the beginning of last year. We have higher expenses of bonuses, of which a few are provisioned throughout the year, and we decided to pay voluntarily in the fourth quarter. Last year was a very good year. We wanted to recognize the personnel and the talent again for the huge effort that the team throughout Inter put in a year that was very strong in terms of effort to get the results done. This year, we start at this level. That number will go up throughout the quarters. But we tend to provision as the net income grows quarter-by-quarter.

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.