Earnings Call Transcript - INTR Q4 2023

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to Inter & Co’s Fourth Quarter Earnings Conference Call. Today's speakers are João Vitor Menin, Inter’s CEO; Alexandre Riccio, Senior Vice President of Retail Banking; and Santiago Stel, Senior Vice President of Finance and Risks. Please be advised that today's conference is being recorded and a replay will be available at the company's IR website. At this time, all participants are in listen-only mode. After the prepared remarks, there will be a question-and-answer session. 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 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. João Vitor Menin. Sir, the floor is yours.

João Vitor Menin, CEO

Thank you, operator. Good morning, everyone. I will start with a quick overview of our strategy and then pass this to Santiago to cover the operating and financial performance of Inter. As in prior calls, I will close with some final remarks and then open it for the Q&A section. At our Investor Day held in Belo a year ago, we introduced our five-year business plan known as the 60-30-30. This North Star means that Inter’s goal for 2027 is to achieve 60 million clients, a 30% efficient ratio, and a 10% ROE. When we announced it, it was received as a highly ambitious plan, and I have to say that the first year of our plan was a resounding success, much better than many anticipated. Aside from being an important direction for the market, the point of the plan was to engage and drive our organization to our goals. We're both humbled and proud of our progress. This is the first step toward profitability. But more importantly, it validates how sustainable our business model is. To illustrate our progress in year one, as you can see, we achieved 30 million clients right on track, an efficient ratio of 51%, significantly ahead of schedule, and an ROE of 9%, also ahead of the plan. Our metrics are stronger than expected, demonstrating our strong execution towards the plan. We have been able to combine growth, operational leverage, and profitability, while staying true to our core principle of always putting the clients first by innovating and bringing new solutions as our financial superpower. This is only possible, thanks to our unmatched set of products that are organized across seven verticals. These are: banking, credit, insurance, investments, shopping, global, and loyalty. This powerful engine that is our financial Super App is continuously evolving and improving day by day. Our wide set of products and services complement each other, creating a flywheel that brings together a complete ecosystem of financial solutions. When I say clients connect to our solutions, I really mean it. For instance, we see strong acceleration in the adoption of new products. Today, we have more than 12 products with more than one million active clients. I want to highlight that by the end of this year, we will have a new product that we didn't even launch yet, but with more than one million active clients by year-end. This is what happened this year, for example, with Inter Loop and our new booking. This is the consequence of having what we believe is the best Super App in the Americas. With over 30 million clients, more than 4 million individual daily logins per day, and a run rate TPV of over 1 trillion cards. With that said, I have no reason to doubt that the only possible direction for our profitability and growth trend is upward. We have reached and surpassed the inflection point, and in 2023, we presented four consecutive quarters of consistent growth in net income, EBT, ROE, and many other metrics. We are on the right track towards our long-term plans and we are thrilled to announce that we are on track to deliver an even better year two of our 60-30-30 plan. Now, Santiago will walk you through our business updates. Thank you very much.

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, João. Good afternoon, everyone, and thank you for joining us today. I would like to discuss four topics as we go along the presentation: first, clients and engagement; second, the performance of the different business verticals; third, our innovation capabilities; and fourth, our potential for further growth. Before going through the numbers, I'd like to quickly reflect on what we said a little over a year ago at our 60-30-30 Investor Day. At the event, we stated that our mission to deliver the 60-30-30 was relatively simple but not easy, and that the most uncertain part of building Inter was already delivered from 2018 through 2022. A lot of focus and discipline are key, and the results we’re about to share demonstrate our team's commitment to getting there. Moving to the results, when we look at clients, besides surpassing the impressive mark of 30 million, we're happy to announce a 135 basis points improvement in our activation rates, which now stands at 54%, the highest level in eight quarters. Our efforts to boost activation include improving onboarding, personalizing the Super App, streamlining our customer lifecycle strategy, and offering highly engaging new products, such as Loop, alongside overall UX fine-tuning. This combined with the lowest cost per acquisition since 2020 brings us confidence in the future, adding our ability to keep the flywheel moving with low acquisition costs and engagement, building stronger relationships for a seamless and complete experience. In day-to-day banking, it makes us proud to see the robustness of our transactional business; despite the materiality achieved, we see accelerated growth. The fourth quarter showed strong acceleration in our TPV, surpassing BRL250 billion. There was consistent growth in peaks, which grew by 45% in 2023, alongside a significant 36% growth in credit card volume, continuing our focus on gaining credit share against debit in cards. For the full year, we achieved an impressive BRL851 billion in TPV, with over 1 trillion TPV in the fourth-quarter run rate. On a cohort basis, as presented in the right charts, we see another quarter of improvements both in new and old cohorts. The new cohort's performance shows the consistency of our client growth strategy, starting with higher levels of engagement and growth. The new cohort performance, complemented by the existing cohorts that keep accelerating engagement, puts us in a confident position for future revenue growth and margin expansion. The current clients alone can sustain our growth for many years. Regarding three verticals representing the powerful numbers the financial Super App ecosystem can generate, in e-commerce, we reached 3 million clients and surpassed 10 million transactions in the quarter, another record. We also surpassed BRL1 million in GMV, leveraged by our Orange Friday and the holidays. We are scaling our Buy Now Pay Later partnerships in our app, now having nearly 150 merchants with whom we offer these new payment methods. This is set to be the engine that will fuel the beginning of personal loans at Inter. In insurance, we also had a great quarter reaching over 388,000 sales and 1.7 million active clients, achieving a record-breaking net revenue in this vertical of BRL47 million. A successful product to highlight is consortium, which grew by 21% on a yearly basis, surpassing 38,000 sales. Lastly, in investments, our cutting-edge product offering resulted in an impressive 66% year-over-year client growth, the highest adoption amongst our verticals beyond day-to-day banking. Our AuC reached BRL92 billion, with BRL9 billion being third-party fixed income products distributed within our Super App. We also innovated by launching Meu Porquinho, or Piggy bank, surpassing BRL1 billion in AuC and 1 million clients in just one quarter. On a global scale, we see strong success in our global vertical as a significant driver of value creation. We achieved over 2 million clients and more than $360 million in AuC and deposits, a 4x growth compared to 2022. Clients active in our global products exhibit better profiles, are more engaged, and adopt three times more products than the average client. To continue this success, our branding strategy included investments in the U.S. We became, in 2023, the official financial institution of Orlando City and Orlando Pride, U.S. soccer teams, and now have the naming rights of their stadium. We believe being in Orlando and connecting through soccer will not only bring awareness but also create an emotional connection between Inter and the Brazilian and Latin communities living and traveling to Orlando. It is worth mentioning that over 900,000 Brazilians visit Florida each year, with more than 400,000 Brazilians being U.S. residents in the state. Now, on loyalty, we achieved 5.4 million active clients in the fourth quarter, adding 1.5 million in these last three months. As we observe with our global clients, Loop clients also create better profiles, spending, on average, 60% more on cards. Positive engagement trends have also been observed in our gamification initiatives. We are adding other ways to earn and redeem points, including allowing clients to convert their points into U.S. dollars in their global accounts. We made an option available this week to allow payment with points for products in our marketplace. Our Loop enables us to unlock value from all other verticals in our financial Super App. We are excited to see these results. Moreover, 2023 demonstrated our unique capability to combine innovation with a focus on efficiency. We launched many products, such as PIX Credit, Buy Now Pay Later, Overdraft, and Loop. We also created a new version of our financial Super App to deliver enhanced user experience with personalized home screens to optimize our clients' lives. As we're showing in the financial performance section, we didn’t stop innovating while delivering operational leverage. We're confident that our vendor proposition is best-in-class, and our next moves will keep us on the frontier needed to continue delivering. Lastly, we're still in the early stages in every market we operate. We have achieved significant market share in multiple segments, and there is still plenty of room for growth in every one of these marketplaces. We remain confident that we're well-positioned to reach our long-term North Star and continue driving growth and profitability in the years to come as we deepen our relationships with our clients. Our team is ready, and our financial Super App is adaptable and scalable to navigate these challenges. Now, I'll pass the word to Santi to present our financial performance. Thank you. Hello, everyone. Now I will walk you through our financial performance section. Jumping into Page 20, we can see strong acceleration on the credit side, growing our portfolio for two consecutive quarters at 5%, with growth of 7% to 10% in the third and fourth quarters respectively. Therefore, we are entering 2024 with strong momentum. The credit portfolio reached an impressive BRL31 billion mark, growing 4x more than the Brazilian market average, gaining significant market share across products as mentioned earlier. Moving to interest rates shown at the top of the page, we can see personal FGTS and real estate rates growing sequentially, while SMB rates remain stable. As we delve deeper into the full impact of rates on the mid pages, going to Page 21, we look at growth by loan product. As illustrated, we remain disciplined in growing the most profitable lines, with best credit products, MCTS, and home equity presenting the highest growth levels within our loan portfolio. In credit cards, successful prioritization of credit limits for existing and strong portfolio clients resulted in an increase of nearly 40% in the portfolio, while improving asset quality trends. For real estate and payroll, we ensured that profitability continues to improve with balanced growth and repricing. Jumping onto Page 22, we have had a great quarter for asset quality with all metrics improving. We started with a 15 to 90-day MPL ratio, seeing an improvement of 30 basis points quarter-over-quarter. We also improved the 90-day MPL metric as well as the MPL stage three formation metrics, each by 10 basis points. Finally, the delinquency of credit cards by cohorts continues to show strong performance in recent cohorts. On Page 23, we see a significant decrease in the cost of risk, about 70 basis points. This dynamic was driven by underwriting and protection processes, producing stronger performance in our cohorts. Coverage ratio remains stable at 132%. Of note, 70% of our portfolio is collateralized, presenting lower average risk products. Overall, we see that the strong work in data and risk management is paying off, enabling us to start 2024 with positive trends. On Page 24, we once again showcase our leading franchise, which has almost 15 million clients trusting us with their deposits. Moreover, our transactional deposits represent only 3% of our total funding, which is one of the best funding mixes in the industry. Funding accelerated 10% this quarter reaching almost BRL44 billion. At the product level, it is worth noting a 17% growth in transactional deposits which reached BRL14.4 billion. Lastly, we saw growth in the average deposit balance per active client, which is BRL2,000 with a 6% growth compared to the prior quarter. On Page 25, we can see how our cost of funding continues to be one of our key competitive advantages. This quarter, we reported a 59.2% CDI cost. Once again, we lowered it by 60% margin than we had anticipated. In terms of our all-in cost, the improvement was a hundred basis points, decreasing from 8.2% to 7.2%. As costs decrease further, we should continue benefiting from this dynamic in our balance sheet structure. In terms of revenues, we achieved record-breaking numbers this quarter. We reached BRL2.2 billion in revenue for the fourth quarter and BRL8.1 billion for the year. Net revenues grew by NII, which increased by 31% over the year. In terms of income, we maintained levels similar to the prior quarter, with healthy growth in the main income banks from interchange banking and investments. Moving to unit economics, on Page 27, gross monthly ARPAC reached BRL46 as we continue adding a strong number of market players every quarter. This, combined with stable costs, led us to enhance our gross margin per active client, reaching BRL17.7 on a net basis, which is our second-best quarter ever. Finally, on Page 28, we represent our NIM evaluating net cost of risk, providing us a full picture of our pricing and risk management practices. In the fourth quarter, risk-adjusted NIM reached the highest level of the year, the second highest since 2020. This strong expansion results from four key factors: one, improvement on the repricing of legacy real estate and payroll loans; two, adjustments in the loans towards the most profitable; three, reduction in the cost of funding; and four, efficiency in reserve requirements due to our new royalty program. For 2024, we see this dynamic continuing, plus scaling up new product launches such as fixed credit and Buy Now Pay Later. On Page 29, we observe significant expense improvements. Most major items remained roughly in line with prior periods, achieving a 1% reduction in revenue compared to the previous year, a reflection of our focus on expense management. We still see strong opportunities to continue delivering operational leverage. Moving on to Page 30, we can see our operational efforts in more detail. In the fourth quarter of 2023, we further increased the gap between the growth of net revenues and the growth of expenses. We had another impressive quarter of improvement in our efficiency ratio, closing 2023 with a record low of 51.4%. The efficiency ratio net of cost of risk shows similar positive trends. As previously mentioned, we had another five percentage points improvement this quarter. On Page 31, our net fees continue to cover a good percentage of our SG&A base, which is currently at 70%. Lastly, we couldn't be prouder of our achievement in profitability, delivering a record ROE of 8.5%, along with our best-ever net income of BRL160 million, translating to an annualized BRL640 million combined EBITDA. On a pre-tax basis, we reached BRL208 million, reflecting a remarkable 50% increase over the third quarter. These results underscore our dedication and operational efficiency.

João Vitor Menin, CEO

Thank you, Santi. Since we launched our digital bank back in 2016, we have been focused on creating a unique platform that attracted tens of millions of clients who engage with us every day and transacted over BRL1 trillion last year. For the past two years, we entered what we call the compounding phase. This means continuing to innovate and deliver the best for our clients while beginning to see the benefits of our digital banking model. These benefits include scalability, strong rates on fee income, strong NIM risk-adjusted margins, a best-in-class funding mix, and a highly diversified revenue base. This year, these competitive advantages became clearly visible and enabled us to deliver even more than what we expected for year one of the 60-30-30 plan. We are highly proud of our achievements this year, both from a business and financial performance standpoint, and could not be more excited for what lies ahead in 2024 and beyond. Thank you for joining our call today. Now, we will start the Q&A session.

Thiago Batista, Analyst

I have one question about PIX Finance. I know that this product is still in a kind of early stage on Inter, but can you comment on your initial impression and how relevant this product could become?

João Vitor Menin, CEO

Actually, we are very excited about its credit. To put things in context, we have 8% of the market share in PIX in Brazil. Everyone knows that. But most importantly, the UX/UI for PIX credit is amazing. Therefore, we believe we can outpace this market share for this product in Brazil going forward. 100% of our clients use our app to transact, providing us a strong advantage. Lastly, the economics for PIX Credits are impressive, better than the current credit card schemes in Brazil. We don’t incur interchange fees or MDR for the merchant. So it is a win-win situation. I genuinely believe it will be a very profitable product for us moving forward. We are very excited; initial readings on delinquency are good, and the rates are better. It’s a far more efficient product. I really think it will be a game-changer for the payment industry in Brazil, especially for digital banks.

Tito Labarta, Analyst

Good morning. Thank you for the call and for taking my question. My question is regarding the margin pressures in the quarter; I believe it related to renegotiations and discounts that you implemented, which also helped reduce the cost of risk. Should we expect more of this going forward? How should we think about both the margin and the cost of risk in the near future?

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, Tito. Santiago here, taking the question. What we continued doing in the fourth quarter was similar to our approach in the third quarter, being proactive toward renegotiating delinquent loans. We realized an additional BRL30 million impact on our NII due to this approach, bringing our total to BRL60 million when comparing the fourth quarter to the second quarter. This impact reduced our cost of risk, which also affected NIM. This new method, which we call risk-adjusted NIM, captures both variables together. We recorded a 5.0% risk-adjusted NIM, the highest in the year and the second highest in the last four years. Going forward, we expect to maintain the level we've reached now without any major incremental changes.

Tito Labarta, Analyst

Great, thanks, Santiago. Just a follow-up: we saw some improvements in funding costs during the quarter. Is there room for further improvement?

Santiago Stel, Senior Vice President of Finance and Risks

In the fourth quarter, we experienced seasonality; we pushed the level down to below 60%. Generally, we aim for around that level. As mentioned, the structure of our funding base is a key competitive advantage, and we'll do our best to maintain it. Thankfully, the worst moment of stress, where we saw nearly 14%, without a shift towards higher yielding deposits, did not materialize. We maintain a strong funding mix with a 60% cost of funding and expect to benefit from a downtrend in cost moving forward.

Mario Pierry, Analyst

Quick question on efficiency. As shown, you made significant improvements to your efficiency ratio, largely because you kept costs flat, especially personnel expenses. How do you foresee this improvement continuing? Will it come more from revenue generation or from further cost reductions?

João Vitor Menin, CEO

To address that, in 2023, we had certain low-hanging fruits that we aggressively capitalized on. If we look at the index of expenses and revenues in the second half, both grew, but revenue growth surpassed expense growth. We expect this trend to continue into 2024. We will invest more but at a much lower growth rate, and the improvement in efficiency will largely be driven by revenue growth exceeding expense growth.

Mario Pierry, Analyst

Regarding your efficiency target, you showed that slide indicating you're nearly halfway to the target set for a five-year period. Would you say you're ahead of schedule or is this trajectory what you expected?

Santiago Stel, Senior Vice President of Finance and Risks

We are definitely ahead. The improvements we made in expenses were more aggressive than we initially planned. We launched a project at the end of April to enhance efficiency. Our focus remains strong as we aim to continue exceeding our targets. While we may not achieve another 20 percentage points improvement like this year, we believe our digital bank model offers significant cost advantages that we will continue to utilize.

Yuri Fernandes, Analyst

I have a question regarding loan loss recoveries. It was a good quarter, tracking at BRL80 million, which used to be around BRL40 million. Can you explain what happened here? Is this level sustainable, or was there a one-time recovery?

Santiago Stel, Senior Vice President of Finance and Risks

Hi, Yuri. Recoveries typically improve in the fourth quarter due to increased consumer spending post-holiday season. However, the dramatic growth in our recovery was also enhanced by the effectiveness of our underwriting team. Though the fourth quarter has seasonality, we believe there’s significant room for improvement in this metric moving forward.

Yuri Fernandes, Analyst

On a different note, regarding the marketplace on Inter Shop, we've noticed the net take rate was slightly down. Should we anticipate recovery, possibly due to promotions around events like Black Friday and Christmas?

João Vitor Menin, CEO

Yuri, João Vitor speaking here. Regarding the marketplace, we have always aimed to balance growth and profitability. The good news is our ability to quickly shift between these focuses. Each week, I meet with our Marketplace CEO to assess whether we should adjust our strategies based on upcoming seasons. I don’t foresee major changes in trends for 2024. However, if the retail sector in Brazil recovers, we could enhance both growth and the net take rate moving forward. Essentially, we maintain stability for 2024, with flexible adjustments as necessary.

Neha Agarwala, Analyst

On the revenue side, you mentioned that cost-to-income improvement will be mostly driven by revenue growth. What are the main levers for revenue growth in 2024? Additionally, what kind of loan growth should we anticipate this year, translating into stronger interest income?

Alexandre Riccio, Senior Vice President of Retail Banking

This is Alexandre speaking. Regarding BNPL, it is a new payment method we have incorporated into our marketplace. We see it as Consumer Finance 2.0, expanding our revenue potential. We are refining the model as we scale, and we're aiming for a contribution of around BRL250 million by the end of the year. The risk will be mitigated by our partnerships, which optimize our take rates, helping cover potential delinquencies. Notably, this BNPL will be available to a wider customer base, including many without credit cards, which we believe is super positive for revenue expansion and margin growth as we approach 2024.

Neha Agarwala, Analyst

That’s helpful. Regarding the BNPL product, it seems part will be on your balance sheet and part through partners. What's the anticipated ratio, and who are the partners involved?

Santiago Stel, Senior Vice President of Finance and Risks

In terms of balance sheet, all goes to our own. For instance, if a customer buys a phone for BRL1,000, rather than disbursing the full amount, we might only provide BRL750, with the remaining BRL250 coming from the partner. Thus, we won't face the same risks as we typically would. We'll keep expanding partnerships to facilitate further growth.

Alexandre Riccio, Senior Vice President of Retail Banking

In terms of growth, we expect to exceed 30% this year, as we experienced a strong 10% growth in the fourth quarter. Home equity financing is key, alongside other areas like FTPS and new products launched last year, such as overdraft and PIX credit, which are designed for margin expansion. We're positive about our growth trajectory.

Santiago Stel, Senior Vice President of Finance and Risks

While we cannot provide specific ROE guidance, we see the momentum we built up in both net income and ROE should continue into 2024 as year two of the 60-30-30 plan unfolds. We clearly anticipate continuation of the trend we saw this year.

Brian Flores, Analyst

I wanted to get a sense of how you're viewing the FGTS loans. They have steadily grown but currently contribute around 6% of your total portfolio. What dynamics do you foresee going forward?

Alexandre Riccio, Senior Vice President of Retail Banking

Starting with FGTS, it’s a product we value highly, with 100% digital underwriting, good margins, and high engagement. We expect its contribution to grow to around 10% of the portfolio by the end of 2024. In terms of defending deposits, it’s mainly about defending our transactional business. We've managed to maintain around 8% market share and will prioritize growth in this area as we go into 2024.

Operator, Operator

This concludes our question-and-answer session. The conference is now concluded. The Inter IR area is available to answer any additional questions. I'd like to yield the floor to Mr. João Vitor Menin for his closing remarks. Sir, the floor is yours.

João Vitor Menin, CEO

Thank you very much. I want to first thank our employees for the great year we had in 2023. We worked hard and with the right strategy and focus, achieving significant milestones outlined in our 60-30-30 plan. I see similar engagement as we move into 2024. Our priorities are to continue exceeding budgeted outcomes and ensure we maintain focus on these targets. We are a growth-oriented company and combining profitability with growth will be our key focus. I’m optimistic about continuing our success both in profitability and growth through 2024. Thank you to all employees and shareholders for your continued support. Have a great day.

Operator, Operator

The conference is now concluded. The Inter IR area is available to answer any additional questions. Thank you for attending today's presentation. Have a nice day.