Earnings Call Transcript - INTR Q2 2023

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to the Inter & Co Second Quarter Earnings Conference Call. Today's speakers are João Vitor Menin, CEO; Alexandre Riccio, Senior Vice President of Retail Banking; and Santiago Stel, Senior Vice President of Finance and Risks. 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'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 let me introduce the agenda for today. Mr. João Vitor Menin will start the presentation sharing with you an overview of the vision and the main achievements of the quarter. Then Mr. Alexandre Riccio will cover the banking and transactional platform sections. Mr. Santiago Stel will present the financial performance section. Then Mr. João Vitor Menin will make some closing remarks, and we will proceed to the Q&A session. Now I would like to lead the floor to Mr. João Vitor Menin. Sir, the floor is yours.

João Vitor Menin, CEO

Thank you, operator. Good afternoon, everyone, and thank you for joining our earnings call. This quarter is particularly special for a number of reasons. Firstly, it marks the one-year anniversary of our U.S. listing, which is why we are broadcasting from NASDAQ in New York. More importantly, this is a record-setting quarter that signifies a turning point in our history. In our last earnings call, I mentioned that our results were just a glimpse of our strong potential, and now that glimpse has become a reality, as demonstrated by the multiple records achieved in this single quarter. We saw both top and bottom line record performances. We delivered our best operational results, with the highest number of new active clients and activations. We also launched our seventh vertical in loyalty, enhancing our value proposition for clients through a new rewards program called Inter Loop. Additionally, we introduced our global app, a first in the banking industry. I couldn't be more thrilled, as this clearly illustrates our vast potential to provide the best platform for our stakeholders. On Page 6, we presented an interactive combination of impressive figures. Financially, our gross revenue reached BRL 1.9 billion, a 33% increase from last year, with a strong balance between fees and net interest income. The top line growth was achieved alongside disciplined cost control, resulting in our record efficiency of 53%. Our ROE-driven underwriting allowed us to achieve significant net interest margin expansion. In terms of profitability, we reached our highest levels ever, both before and after tax. This wasn't just a slight increase from the previous period but was significantly higher, especially on a pretax basis, reaching BRL 80 million. Looking at our operations and innovations, I'm pleased to highlight a number of significant milestones. We gained another million active clients, bringing our total to 28 million. Our activation ratio improved impressively by 6 to 8 basis points, surpassing 52%, our highest level since 2021. We continued our innovation with the launch of Inter Loop, which we anticipate will encourage strong user engagement and activation. The global app is now operational, and we have our Super App functioning smoothly across different regions, much like Uber or Netflix. On Page 7, as someone who enjoys building, I'm excited about our new loyalty product, Inter Loop. I felt the same enthusiasm when we introduced our digital account in 2015 and again when we launched Inter Shop in 2019. I am confident that we have all the essential components for success in this new venture: 28 million clients, BRL 200 billion in transactions per quarter, a cutting-edge technology platform, and a complete banking infrastructure. I believe we will disrupt this market in the same way we did with digital banking a few years back. In summary, this is a record-breaking quarter, the best one yet. It is a true turning point in our history, revealing what we can achieve even though we are still at the beginning and have much to deliver in the coming years. I am pleased to report genuine operational excellence and profitability. Our innovative and profitable business model is gaining traction as we continue to grow, capturing market share, innovating, enhancing our super app for clients, and boosting profitability for shareholders. We are entering the second half of this year with strong momentum, allowing us to keep delivering results based on what we have built so far. Thank you for listening. Xande, please proceed.

Alexandre Riccio, Senior Vice President of Retail Banking

Thank you, João, and good afternoon, everyone. I'll start talking about our credit and funding capabilities. Jumping into our loans on Page 10, I'll pass through some important highlights. Our portfolio grew by 5% this quarter, focused on high ROE products such as FGTS loans, which grew 26% and home equity, which grew nearly 10% in a quarter-over-quarter basis. In credit cards, we grew 6%. In payroll and real estate, we continued improving our pricing and materially increased the average yields. The word that better describes this quarter in terms of credit underwriting is consistency. This discipline has enabled us to improve more and more the average yield of our portfolio, with 200 basis points increase in a single quarter. We have been doing a very diligent job related to our underwriting capabilities and are already seeing the strong results of it. Now on Page 11, we present our asset quality metrics. Starting with the 15 to 90-days NPL, we saw an impressive decrease of 30 bps in a year-over-year comparison. On the 90-days metric, which has an impact of changes in growth rates, the ratio increased 30 bps on a quarterly basis, in line with the general market trend. We're happy to report that newer cohorts are consistently improving as a result of our more assertive and data-driven credit underwriting, as you can see in the bottom left chart. Finally, the NPL and Stage 3 formation reached 1.6%, in line with the market trends and our best performance. On Page 12, we see that our cost of risk reached 6.5% in the quarter. The increase, as mentioned in the prior page, is mainly associated with older cohorts of credit cards. Aside from cards, our cost of risk is demonstrating a solid and stable trend of around 1% since the fourth quarter of 2022. Our coverage ratio remained constant at 130% by provisioning in line with the NPL trend. Overall, we see that our asset quality metrics are following the macro trend with similar behavior when compared to peers. On Page 13, we can see the evolution of our funding base, one of the key competitive advantages of our platform. Our deposits grew 29% year-over-year reaching BRL 33.5 billion in a highly fragmented base, with more than 13 million clients trusting us with their deposits. We continue delivering best-in-class cost of funding, reaching 63% of CDI in the quarter. Now let's move forward to the transactional platform session. We're glad to report our second consecutive quarter, adding 1 million new active clients, combined with the lower CAC in over 2 years. Our activation rate showed strong progress, increasing 68 basis points, surpassing the trend that started last quarter. We achieved these results with big data and AI, which allowed us to advance towards much stronger understanding of our customer profiles, behaviors, and product preferences. In addition, we have advanced significantly in the app personalization, which we presented early this year in our Investor Day. As an example, we have more than doubled the number of app home screens when comparing to the end of the first quarter. In terms of volumes on Page 16, you can see that debit and credit cards as well as PIX reached BRL 197 billion in TPV, which demonstrates our strong position in banking and in the daily lives of our customers. Interesting to note that credit cards continue to outpace debit transactions, providing us with a much higher interchange and profitability profile. In a cohort basis, as presented in the right chart, we can see the positive evolution in: One, increasing TPV across cohorts; and two, higher starting points, which is a strong evidence of better quality clients. With our clients transacting almost BRL 200 billion per quarter in their daily banking activities, the cross-selling opportunities are notably higher. As we keep enhancing communication channels and create new engagement solutions such as Inter Loop, this opportunity can scale even more in the future. On e-commerce, we reached 2.7 million clients transacting during the quarter. Our momentum allowed us to continue growing our net take rate, which now stands at 9%, our highest level ever. On insurance, we saw a 46% increase in active clients as we evolve with our upselling and cross-selling initiatives. And finally, on investments, which reached 3.6 million clients, we saw an impressive 66% year-over-year growth along with a strong AUC that increased 41% to BRL 77 billion. These products boost ROE and consume no capital. As João mentioned in the beginning of the presentation, we are super excited with all the possibilities that Inter Loop is bringing as our seventh business vertical. We're using our robust banking structure as the backbone of this program. The breadth of our platform dramatically facilitates the earn and burn opportunities with the marketplace being the most obvious synergy. The solutions are already built. We just need to connect them.

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, Xande. Good afternoon, everyone. Now let me walk you through the financial performance section. In the context of the quarter records, revenue is certainly one of them. We reached BRL 1.9 billion of gross and BRL 1.2 billion of net revenue this quarter. In terms of growth, it's interesting to notice the acceleration of 12% in net revenues in a single quarter marking the strong momentum of our franchise. Another important highlight is how balanced NII and net fees grew side by side, both at double-digit rates. On Page 22, we can see ARPAC evolution across cohorts. As we already highlighted in prior quarters, newer cohorts continue outperforming the older ones. In addition, when clients get to know our platform by using it, we see even higher ARPAC levels. We believe that this trend will remain increasing as a new approach of client activation and the app personalization continues moving forward. On the right-hand side, we can see a stable ARPAC trend from a financial statements perspective in the strong growth in new active clients. Now let's discuss our strong NIM evolution on Page 23, starting with the NIM 1.0, which considers the full portfolio, including core receivables that do not accrue interest, known as Avista in Portuguese. We reached an impressive 8.1%, which is 70 bps higher than the first quarter of this year. Regarding NIM 2.0, which considers only the interest earning portfolio, the increase was even higher at 80 basis points, by far our best performance in several years. When we look at the evolution of NIM since 2022, we can see 4 different stages. First, we converted our rates to market levels as we shifted from growth to growth with profitability. Second, we actually repriced the legacy portfolio of mortgages and payrolls. Third, we're changing the portfolio mix as we originate more of the high ROE products. And finally, going forward, we expect to benefit from the recent launch of Conta com Pontos, the scale-up of new products, and the increase of Selic rates. Moving to the expense side on Page 24, we can see the effectiveness of our cost control initiatives. Our expenses decreased for the second consecutive quarter, even on a nominal basis. When we look across lines, you can see a very stable trend in all of them. With this disciplined focus on expense management, we still see a strong opportunity to continue strong operational leverage. Moving to Page 25, we can see that these results are also visible in the ratio of active clients per employee, which is a good proxy of our workforce productivity. It now stands at 4,200 with the most notable evolution in a single quarter. The cost to serve also had a strong performance, decreasing 20% on a year-over-year basis standing today at BRL 12.5. I would like to highlight the importance of operating at such low cost to serve, as it gives us a unique competitive advantage vis-à-vis incumbent banks. Moving to Page 26, what is probably my preferred slide, the left chart shows the impressive work that we are doing at Inter on the operating side. We're able to increase revenue and expenses at an accelerated pace while delivering best-in-class products to our customers. On the right-hand side, I would like to highlight a remarkable improvement in our efficiency ratio, which is also one of the most important records for our quarter of records. We reached 53% in the second consecutive quarter with nearly 900 bps improvement. As you can see, we had a great performance in personal and administrative expenses with an increasing trend in both lines. Recording our Investor Day target of 30% efficiency, we're considerably ahead of schedule towards this metric. These results reinforce our strong commitment and disciplined focus towards our 5-year business plan. Moving to capital on Page 27, we recorded a CET1 of 22.8% in the quarter, which is the lowest capital consumption of a quarter since our IPO. As mentioned in prior calls, our capital is fully comprised of top-quality core equity without any high rate capital instruments. When we compare CET1 level, it remains nearly twice that of the median of the 5 largest income banks of Brazil. And last, but definitely not least, another record for the quarter of records is profitability on Page 28. We accelerated our back to profitability, delivering BRL 64 million of net income at a 14x increase in a pretax basis to reach an EBITDA of BRL 80 million. This is our highest profitability since our IPO back in 2018, and we couldn't be more excited about what's coming next. Now João will share with you his closing remarks. João, please go ahead.

João Vitor Menin, CEO

Thank you, Xande. Thank you, Santi for highlighting all the important topics of our quarter of records. Before moving to Q&A, I would like to say that these results were possible because first, we have a very disciplined focus on increasing our revenue, scaling up the products in our platform. Second, we optimized our cost structure. And third, we maintained our strong innovative DNA approach. As you can see, Inter is at its inflection point, delivering strong results still with the best yet to come. Thank you, clients and investors for your valuable trust. Thank you to our employees to make this incredible quarter of records possible. Like I already said, we're starting the second half of this year on a very strong note. We will now start the Q&A section. Thank you very much.

Operator, Operator

Our first question comes from Mr. Thiago Batista from UBS.

Thiago Batista, Analyst

Very good earnings, congratulations. I have two questions. The first is about Conta com Pontos. It's fair to say that the majority of the conversion from demand deposits to low-cost deposits has already been completed. However, we have not yet seen the full impact of this change on the profit and loss statement. Will we see the improvement in our profitability from this change in the future? Secondly, when I look at your ARPAC and consider the net ARPAC, I noticed some expansion this quarter to around BRL 30 per month. However, this is still about 10% to 12% below the peak from about a year ago. Looking at the chart you provided regarding net ARPAC by cohorts, it appears that the new vintages are performing slightly worse than average. So my question is, are the new clients of Inter performing worse than previous clients, or is the bank's more conservative credit approach the reason for this slightly lower net ARPAC among new clients?

Alexandre Riccio, Senior Vice President of Retail Banking

Thiago, this is Alexandre. Thank you for your question. I'll begin with the Conta com Pontos, and Santi will address the second part. Conta com Pontos is part of a broader initiative called Inter Loop, which we launched about two months ago as our loyalty program. We see this as a chance to develop it into our seventh business vertical. It's a comprehensive rewards program that enhances our ecosystem and provides more options for our clients. Instead of just getting cash back from e-commerce purchases and credit cards, clients can now earn points and choose how to use them. They can redeem points for cash back, discounts at Inter Shop, airline miles, investments, or donations to various charities, which is a great feature. There’s more to come as well. Our key strategy with Inter Loop is to retain, engage, and further monetize our existing customers in the short term, while also attracting new clients with a more adaptable offering that suits a broader range of preferences. In the long run, we believe this could develop into a standalone business. João mentioned it in his comments that with our 28 million clients, a full banking platform, and advanced technology, this is a clear opportunity that our customers have requested. We are excited to take on this challenge. Looking closely at Conta com Pontos, it's one way for our clients to earn points within Inter Loop, based on specific rules tied to their transactional account balance. Essentially, clients earn points as their overnight deposits are invested in a CD, with the CD's returns being converted into points. There are no changes to the clients' experience apart from earning points, and the returns on a transactional account are optimized from either perspective. Regarding project implementation, we converted about 75% of the demand deposit balance, mostly in June, allowing for roughly a third of the month to benefit from revenue optimization for the reserve balance. We expect to see much more progress in the third and fourth quarters.

Santiago Stel, Senior Vice President of Finance and Risks

Thiago, Santiago here. So we're very happy with the performance of the ARPAC this quarter. Still more to go, but at the end of the day it's a race between the numerator and the denominator now with revenues, which has been growing very well, particularly this quarter and new active clients with 1 million new per quarter, which also has been performing well. So when we look at the underlying dynamics for this ratio, we see new active clients at close to record coming into Inter, which was super important. It means that they like the platform and they continue selecting it. The new cohorts are starting at slightly higher points which is a reflection of the profile of the clients. On average, the clients we're bringing now are around 30 years old with slightly higher income than in prior quarters, like the ones we had in 2020 and 2021. And then we have dynamics on new products that have been recently launched, which are still to be penetrated in the existing clients, and that will also drive our ARPAC higher. So overall, we look at it on a cohort basis and with these underlying trends, which we think are flowing well, and eventually, it will adjust because revenue will end up growing more than new ARPAC client growth going forward.

Yuri Fernandes, Analyst

Congrats for the strong quarter, João, Alexandre, Santiago. I have a first one regarding payroll. When we try to see the implied yield, we see a big increase on personal loans, right? That's mostly, I guess, payroll. The gross financial income for this line is up maybe 40% quarter-over-quarter. So just checking the box here, what drove this increase on payroll? Is it basically the repricing? Is this FGTS mix? How sustainable is this and if you see room for higher mix on payroll? And I can ask my second question later.

Santiago Stel, Senior Vice President of Finance and Risks

Thank you, Yuri. I can take that one. So it's a mix of two factors. One, the loan mix more towards FGTS. And we added this quarter, the breakdown of FGTS together with the breakdown of home equity in the loan breakdown to be able to see this more clearly. So the growth has been clearly skewed towards these 2 ROE products, higher ROE products. And then on rates and payroll loans, we are originating very decently above 1.7%. The curve has been going down. So the spread has been increasing. We're evaluating the new levers to originate in the second half as Selic moves. But so far, what's reflected in the second quarter is an origination rate that has stood around 1.7% on payroll. And in FGTS, we increased from 2 to around 2.1%, 2.15% the monthly rate and that is driving the overall personal loans rate up. And you have a follow up?

João Vitor Menin, CEO

João Vitor here. Yes, we have a loss on the income from Granito, which is a one-off, yes. Though we are very excited with the Granito business, we just changed the management to have a new COO, Enrique, that came from Pfizer. The Granito business is very important for us to have a full service platform for our business account, which is performing really, really well. So I believe that it is going to be a great moment ahead for our business account and also for the acquiring business going forward. Thank you very much.

Eduardo Rosman, Analyst

I have two questions here. First one is on asset quality. When do you think we can expect to see a real improvement in NPLs and the cost of risk, right? I think if we look to your results, all the lines are moving in the right direction. So we're just missing this one. If we see cost of risk moving down, I think the ROE jump will become more clear and loud to everyone. And the second question has some sort of a relationship as well, has to do with principality. We saw most banks and retailers facing challenges with NPLs within the riskier individual lending sectors, right? You have a peer, which is a new bank that clearly stood out. And one of the reasons is the strong principality with clients. You also have you have been showing there are a lot of clients of Inter that use Inter as their primary choice. So what have you learned? And what can you, let's say, use to be better prepared in the future once you have to resume growth on these riskier lines again?

Santiago Stel, Senior Vice President of Finance and Risks

Rosman, I'll address the first part and João Vitor will handle the second. Regarding asset quality, we are becoming more optimistic as we have diligently worked on this for several quarters. I will differentiate between noncard and card segments. For noncards, as noted in the disclosure, the cost of risk has remained stable at about 1%, affecting approximately 70% of the loan portfolio. There have been no issues with noncards, which aligns with our expectations, so that's positive news. For cards, we analyze performance cohort by cohort, having added this disclosure last quarter, which we have now updated to track the performance and improvement of these cohorts. Additionally, we have implemented maintenance strategies for the card portfolio, including raising limits for high-performing clients and reducing limits for clients with deteriorating credit profiles. Overall, we believe that with an improved mix in origination and the effective efforts of our risk management and collection team, we anticipate an improvement in the second half of the year compared to the first half. Even the June numbers show positive dynamics compared to the beginning of the second quarter, indicating this improving trend.

João Vitor Menin, CEO

This is João Vitor, I'm going to take the second one regarding principality. This is, by the way, is a metric that we have been improving so far. So we've reached almost 70% principality amongst our clients. So we're improving quite fast, to be honest. Regarding the connection between principal and NPLs, we don't see that as the main thing for us to underwrite well, to collect well and, therefore, have good NPLs. We do think that as Santi mentioned, the right credit model with a very good collection process, is the one that is going to drive the right NPLs down the road. And by having the clients using us, which is the principality that you mentioned, we can also help to gather some information. But again, it's not a silver bullet. It's more important to bring more revenue streams, using other verticals than to reduce the NPLs. That's how we see principality versus NPL's trend.

Rafael Frade, Analyst

Congrats on the strong results. I have two questions. One is about your positioning regarding a potential easing cycle in interest rates. I noticed an increase of about BRL 3 billion related to hedging for interest rates, so I would like to understand how this reflects your positioning. The second question concerns expenses. You've had a significant decline in headcount since the end of last year, yet personnel expenses seem to be rising. I'm curious if we haven't yet seen the impact of the lower headcount, or if there were some severance costs involved. I would like to understand how this will develop moving forward.

Santiago Stel, Senior Vice President of Finance and Risks

I'll take that one, both of them. So starting with the rates front, so just to revise the structure of our balance sheet, first, we're highly unlevered with a CET1 of 22.8%. And additionally, we have a much higher funding base than where we have loans. So in summary, we're liability sensitive and we expect to benefit from a Selic reduction. The impact is more or less depending on the way that plays out. But the impact for us is positive, and we see that as one of the factors driving NIM expansion towards the second half. In terms of personal loans, we have a few dynamics playing out. First, we had severance costs. So around half of the reduction that we have in personnel, it was voluntary. The other half was involuntary or company induced. And in addition to that, as we recorded positive profitability, we started provisioning according to accounting rules, the long-term incentive plans and compensation for the team. So both things together made the number on personnel expenses go up by around 9%.

Pedro Leduc, Analyst

First, great job again on efficiency. If you could talk a little bit more on the cost savings fronts that you felt, if growth projects more costs, or if there are core aspects that you've come to optimize? Maybe some learnings, so we can start to draw some dynamics here for the next few quarters. In other words, if maybe you pushed something forward to 2024 or most of it is really here to stay. That would be great. Thank you.

Santiago Stel, Senior Vice President of Finance and Risks

Thanks, Leduc. So on expenses, we were quite aggressive both on personal and non-personal. So we closed the year in 4,100 employees last year. We reduced 300 headcount and another 400 in the second quarter. Now we expect to stay roughly at this level for some time. We want to see the platform responding with this level of employees. We have some impressions that potentially we can improve in the future. But for now, we want to cruise at this level for some time. But this has already been an interesting effort that the organization has adjusted pretty well. On non-personnel expenses, there is a mix of variable expenses, many of which are vendors or providers like Mastercard, Salesforce, in the U.S., etc. Those are contracts that are not fast to renegotiate or take some time to deliver operational level, but we're working on them as well. And then there's a large collection of expenses that are being monitored by our expense committee, that meets every Friday morning and is led by João Vitor personally. And that has many improvements to happen still in the second half. Overall, if you remember, we wanted to have at least 10 percentage points of operational leverage in the year, which was going from 70 to 60. We're at 53. What we see in terms of this ratio for the second half is to stay as close to 50% as we can. So the majority of the improvement was done with a few more percentage points to come, but not in the 900 basis points magnitude that we had in the first and the second quarter.

Neha Agarwala, Analyst

Congratulations on the great quarter. Just quickly following up on the cost side. Regarding the CAC which went down on a positive note. And we saw a big reduction in the marketing expenses. Could you please elaborate on what area specifically have you captured regarding the marketing? And how sustainable do you see that in the coming quarters?

João Vitor Menin, CEO

João Vitor speaking. Thank you for the comments. We do see an opportunity to keep improving our marketing costs for acquisition. Not only that, we believe that the competition is slowing down, has slowed down a lot. And also not only regarding competition, but we have been improving our platform since then. So new products, new features and therefore, we are gaining new clients with more engagement and new clients cheaper than we used to do before. So the trend for CAC is very good. We believe that, again, we don't think it will have tens of platforms being a winner of this digital banking business, and we believe that we are ahead and capturing all the benefits of this position that I just mentioned to you. Again, the best app and the right pricing, the right products, and this is what is really driving our low CAC and high engagement since the mid last year, and this trend should continue going forward.

Tito Labarta, Analyst

Congrats on the strong results. Question on loan growth rate, good growth this quarter, but just think about the outlook going forward. With rates coming down, you mentioned asset quality, perhaps maybe some positive signs there. Is there room to accelerate loan growth from here? Which segments would you feel most comfortable growing in? And then just kind of related to that, a good improvement on the margin, but as you continue to grow the loan portfolio and if there's any more repricing, how high or how much more can the margin improve from here?

Santiago Stel, Senior Vice President of Finance and Risks

Tito, thanks for the question. So on loan growth, we reported 5.4% this quarter, which is an annualized of about 20%. We think at the very least, we would like to have this level of growth, if not more. We would actually like to have a second half closer to 30% annualized than to 20% annualized. But we want to do that very meaningfully in terms of use of our capital allocation. So we have been prioritizing higher ROE products which are mainly but not exclusively FGTS loans and home equity. We think that we are well positioned to accelerate traditional payroll loans and real estate loans as well as other products. The decrease in the rates will help on the demand side and the portability side, which is something that was a bit tougher with Selic at 13.75. And then we have the scaling up of new products. We have launched overdraft. We have launched buy now, pay later. And those are products that are doing the baby steps, but we have a great potential to penetrate our client base with them as well. And we think that overall, this, together with maintaining the higher ROE discipline, will be a driving force for the NIM to stay in the high single digit as we have reported this quarter.

Operator, Operator

The 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.