Inter & Co Inc

NASDAQ:INTR

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, and thank you for holding. Welcome to Banco Inter's results call for the first quarter of 2020. Today with us, we have João Vitor Menin, CEO; Alexandre Riccio De Oliveira, VP; and Helena Caldeira, IR Officer. We'd like to inform you that this event is being recorded. [Operator Instructions] We are also on a live webcast, which can be accessed through the company's Investor Relations website, ri.bancointer.com.br. This recording will be available right after the call is over. As a reminder, you may send questions via webcast and they will be answered after the conference is over through the -- by the IR department. We'd also like to inform you that this conference is being translated into English in order to help our foreign investors.

Before we continue, we would like to clarify that any statements during this conference call about the company's future business perspectives as well as projections, operational and financial goals are merely predictions based on the management's expectations and based on current information. Future considerations are not a performance guarantee because they involve risks, uncertainties and assumptions related to future events that depend on circumstances, which may or may not occur.

I would now like to give the floor to Mr. João Vitor Menin, CEO, who will begin the presentation.

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you. Good morning, everyone. It's a pleasure to be here with you to talk about our results. This is our ninth conference call at Banco Inter since we had our IPO in 2018. I think everyone knows that this was an atypical quarter, right? And it was different from anything we had before in Banco Inter. And I can show a clear example of it.

Every company and everyone and every country is going through this moment. And this was a black swan, and we're facing it in 2 ways. First, we were very sad. We saw that there was an impact in health care and in the economy of our account holders and for Brazilians overall. But fortunately, we were able to take very good measures to help our account owners and Brazilians to overcome this in the best way possible through banking products and through the different activities we carried out in the last days. Our website has an explanation about these measures, and I would recommend you to go and read it.

As a CEO, on the other hand, we saw this atypical quarter as a new way of working. When we look at what we achieved, how we got prepared from the beginning, now we are seeing the results of that. This is a stress test, and it was carried out before in financial institutions during crises, for example, in 2008. And this is the best stress test that we could have for our company. And we got a very positive result out of it. What I can tell you is that the most important things in a financial institution, which are capital and funding, we did very well. And we worked in order to have that. We were not only lucky. We had our IPO or follow-on. And now we're at the Basel Index around 30%, one of the most high -- one of the highest in terms of Brazilian banks.

We've also worked since 2016 with our digital retail model, so we can have funding diversified among millions of Brazilians. In the credit portfolio, we also got prepared for more uncertain moments. Our collateral levels are around 95% of our credit portfolio.

So leaving capital funding and our credit portfolio aside, these are very important factors for every bank. We can talk about the macroeconomic scenario. And I think we got through this quarter, completely adapted to what people are calling the new normal. When we realized we didn't have to close any branches, we didn't have to dismiss any employee or furlough any employee because they were not working in any branches, we were very happy. It's very clear that the digital model, the platform model is completely adapted to this new normal. And moreover, in this first quarter, besides the positive stress test that we went through in adapting to the new normal, we were able to deliver innovations still and that's a quality that Banco Inter has.

Now some of them are important regarding our Marketplace, which was launched in December. In the first quarter of this year, we launched our end-to-end product, where with one click, our clients can buy products and services. We recently launched a completely new product, Intercel, which is a cell phone carrier. We believe that we're going to be very successful to bring in our over 400,000 employees who top up their phone lines with us to use Intercel. And this is already available in our app. If you look at the app today, you can already buy the SIM cards and the most appropriate plans for your needs.

Regarding performance, we had a very good performance, and it was very high in terms of our service revenues. We've often said that we dream of reaching 50% service revenues versus the total revenues for the bank. And this is happening quite quickly. We had an expansion in our service revenues this quarter. And this is basically running along with our idea of being a platform. We're no longer only a digital bank, but rather a digital platform.

Regarding growth, which is a strong characteristic of Inter, again, for this quarter, we had excellent growth even despite March being compromised by the coronavirus outbreak and by how much people were scared of the new reality. We had record account openings during the quarter. Scale is essential for this game we're going into. So growth is becoming more and more important. We need to be able to maintain that level of growth. So one example of this scale is our credit card carrier, Mastercard. For this quarter, we were able to negotiate our deal with Mastercard. It was an excellent renegotiation, which substantially improves the economic factors of the product, which is credit card issuance.

Finally, in this release, we have a new message about our 5 main growth avenues, which are banking, banking services, what people do every day; loans; investments; insurance; and the marketplace. I often say that if we were to grade anything, we would give an A to our banking platform because it's unique in Brazil. It's complete digital and free. But the best thing is that we have a lot of room to grow in the other 4 avenues: loans, investments, insurance and marketplace. And as you were able to see in our release, the figures for these other 4 avenues have been very satisfactory. We're growing in engagement in the number of customers and new products in each avenue.

Finally, what makes us confident for the next quarters is that we have the technology we have, the creativity to replicate the banking avenue success for all other 4 avenues and really build a Super App, the digital platform that we intend to build, which is modern and which matches these new times we're living in. We're convinced that our business model is a winner. And that's very important.

I'm going to let Alexandre, our CFO, speak and he's going to tell us about our operational results for the quarter. And then Helena, our IR Officer, will speak a bit, and we'll open for questions. Thank you, everyone.

[Alexandre De Oliveira, executive]

Good morning, everyone. I'd like to thank you for listening into this call. Once again, we have a great number of listeners, which really makes us happy about the engagement we have in our business. So we're going to talk about the avenues João Vitor mentioned before we go into figures.

I think it's important to mention that a few days ago, we had our fourth anniversary from the moment we opened our digital retail when we started issuing Mastercards and started opening accounts through the app. This took place in April 2016, meaning that a few days ago, it was our fourth anniversary. From then, we created what we believe is one of the best platforms for financial or nonfinancial services in the world. We have products, which are uncomparable. It's very complete and we reached very interesting levels in the past years. We went from 8,000 accounts, which was our position in 2016, to 5.5 million clients. Fewer than 1,000 investors to over 600,000 investors. And in the last years, we created the entire technology to put online an open digital investment platform. We went from 0 digital insurance to over 75,000 insurance owners.

Credit. We have millions of Brazilians in our credit portfolio with credit cards and so on. And our Marketplace, although it's the youngest part of our company, already has over 350,000 active customers in the first quarter of 2020. So a very nice figure. These figures are impressive, but the great thing behind them is that this is only the beginning. We still have a lot to grow and a lot to deliver. And we know how to do it. We're quite driven so that we can grow in each one of the 5 avenues.

So to talk about numbers, we're also going to follow the 5 avenues. I'm going to talk about expanding our customer base, engagement, day-to-day banking, investments, insurance, marketplace and finally, credit and loans. So to talk about our client expansion, we reached 5 million customers. We're around 5.5 million right now. 175% growth year-on-year -- excuse me, 155%, and our CapEx is close to BRL 20 million, which is close to what we wanted. This is an active base. 70% are mature, and we understand that this is a global benchmark with all the studies we made for engagement. And 40% of the customers have been using us as their main banking platform as well as nonbanking platform.

In the first quarter, we had 891,000 new accounts, which is a record number, and we also reduced our cost of service. For the quarter, our cost was diluted much more than our revenue, showing the continuity of the efficiency gain trend we have in our company. Despite the growth we've had, despite hiring employees and so on, our cost of service per client went from BRL 226 in the first quarter of last year to BRL 129 per client per customer. So this is really an efficient machine that we have right now. And there's much more to come.

Talking about day-to-day banking. 205% increase in cash deposits reaching BRL 2.6 billion. And this continues to grow after the crisis showing the confidence of our clients. The average balance is at BRL 1,044 per client, which is a sign of confidence and that we're beginning -- that we're beginning to be the main bank for the clients, not the secondary bank. Our floating revenues reached BRL 19.2 million, which is also great. And it shows the strength of retail funding, which helps us with credit.

Card revenues are also a part of the transactional part of day-to-day banking, and they also went up significantly from BRL 12.9 million in the first quarter of 2019 to BRL 46 million in the first quarter of 2020. This highlights the importance of the new bill we had with Mastercard, as was mentioned by João Vitor.

In the Marketplace, we also had a great highlight. I have to remind everyone that in our fourth quarter 2019 call around 3 months ago, we mentioned that we were a bit slower than our goals for the segment. But this game is turning around. In April, we overcame our projections for May, 27 million sales in April, which brings us a yearly volume of BRL 320 million with relevant engagement in our bases. So the Marketplace is already becoming a reality in the bank, and that's very interesting.

In terms of investments, once again, year-on-year, over 200% growth in our base, up to 601,000 investors, so it was disproportionate to the number of customers, over 12% of investor customers now. And it's also important to say that at the end of the quarter, we had nearly 200,000 investors using home brokers. So we were one of the only platforms that was not unstable during this moment in which individuals were migrating to the exchange because of the drop in assets. Well, revenues were consistent, BRL 12 million, an amount 6x higher than our revenue in the -- in PAI, in the investment platform.

Insurance. The financial highlights were our net premium of 400% growth when we compare to the first quarter of 2019. And our brokers selling about BRL 100 million in premium on a yearly basis and nearly BRL 7 million in revenue and commissions. Loans, we also had highlights here, BRL 5.6 billion in our portfolio, a 10% growth this quarter. We still have a year-on-year growth around the same level, above 50%, which is our goal. Between 40% and 50% is our growth target for credit. So that was a good result. And I'd like to highlight that in terms of loans and credit, we still are focused in collateral credit. We're confident in the resilience of our credit portfolio. And it will continue to be our priority to have more credit with collateral, which doesn't prevent us from a -- from learning more about our only noncollateral line, which is credit cards.

So just to highlight this side of credit. Despite the crisis, we're being constructive with credit. And we still have not been able to measure anything that makes us change our strategy. As a post-COVID measure, we did some things. We say that we switched off from autopilot. There's a risk in renting credit. So we have to follow that very closely, and that's what we've been doing. But our understanding has been positive of the credit portfolio, including the credit card.

Specifically, I think it's important to mention here that our charge portfolio, despite the crisis, had the best historical performance it ever had in April, which is a good indication. And when I talk about a charge portfolio, I'm talking about charges that are delayed in the credit card universe, which haven't been paid. So that's a good indication that our business is healthy.

Some final highlights, revenue -- service revenue, we reached around BRL 100 million in the first quarter of 2020, 131% growth versus the first quarter 2019. NII revenues were BRL 190 million. So there was a reduction especially because of treasury that generated a result in the first quarter. And if it were not for that treasury result, we would have around BRL 174 million. And finally, this quarter, we reached a net growth of BRL 8.4 million. So it's important to mention again private credit and its impact on that. If not, we would be around BRL 11 million, and our release has an explanation on that.

And to conclude, our liquidity position is stronger than ever. I think it's important to mention that João Vitor talked about testing our model. And over the years, we had been explaining to everyone that our strategy for funding in retail had the purpose to find resilience to face a moment like this. And what happened was exactly what we expected. Funding is growing in cash deposits and CDBs and also in savings accounts. It's important to highlight that. A lot of people are migrating to savings accounts. So liquidity is strong and capital position as well.

Just to highlight what João Vitor said, it's one of the strongest in any Brazilian bank. So that puts us at a strong position to withstand the crisis and to continue our growth strategy and our business expansion. So once again, thank you, especially our over 1,650 employees, and I'll let Helena speak and discuss some important points with you. Thank you.

[Helena Caldeira, executive]

Good morning, everyone. And thank you for joining us with one more earnings call. I'd just like to give you a brief message on how the Investor Relations department has adapted during the quarantine. We had to change the format. We had to change our meeting schedule, our travel schedule and replace them with video conferences, which are carried out in all kinds of platforms like WebEx and Zoom. And they've been working very well. We think it's important to be close to you right now. So we had to change things quickly just as the economy changed quickly.

So we're also planning a virtual Banco Inter Day. We want our executives to communicate to over 175,000 investments that we have among analysts, foreign investors so that we can show how much our platform is growing. And this is based on the models João said. The bank is focusing on other avenues. So I'd just like to leave that invite open so that we can use this moment in which we're distant to come closer and get connected to each other.

That was basically my message. So we can now open for questions.

[Operator]

[Operator Instructions] Our first question comes from Thomas Peredo, BTG Pactual.

[Thomas Peredo, analyst]

Good morning, everyone. I have 2 questions to ask. The first is if you could give us some color on how you're seeing revenues evolving in the future. We saw that your performance in your revenue went up with your new agreement with Mastercard. So how should we see that in the future? Does that have a nonrecurrent effect in this quarter that we should disregard? So if you could give us some more details on how this is doing, I would appreciate it. And my other question is about the Marketplace. Your performance in April was impressive. It was over 2x the daily average from the first quarter. So if you could give us some more details on how those volumes are doing now in May and how your strategy is developing, that would also be great.

[João Vitor Nazareth Teixeira de Souza, executive]

Thomas, this is João Vitor. Thank you for your questions. So first, I'm going to answer your question on the Mastercard revenues and the total revenues for this year. I think we can give a guidance close to what I said. We think nonfinancial revenues, that is the ones that are not from that, will be about 50%, which is great. It's going to anticipate that dream that we had for next year. So that will happen. It should happen. Regarding revenues related to card issuance, we can't talk much about that because there's some confidentiality clauses, but -- about our deal. But what I can say is that we already have a critical mass with companies, with card issuers. Companies are coming to the bank more actively. So we can see, for example, that our deal in terms of monetization generates 60% more efficiency than the previous bill we had in 2018 when we only had 1 million digital accounts. So it's a much higher efficiency.

And to answer your second question, quite contrary. We had a more conservative position with the new deal. So it was quite contrary. We didn't have any nonrecurrent revenues. We actually started a new recurrent source of revenue. We should have had more but since we have this problem, we have to adapt to the new reality with every quarter. So that discusses our revenues for services and Mastercard.

Now to talk about the Marketplace. It's true. We demand a lot of ourselves and for the fourth quarter of 2019, we said that we wished we could have had more in our Marketplace, and that was when we were just beginning. It was just launched, but it's different now. We had a very positive surprise this quarter in April, as Alexandre said, and we're having an even more positive surprise in May. So to put it practically, May will be considerably better than April. Well, but the month is not over yet. It doesn't matter. When we look at the first 15 days, we can see that it will be considerably better than April. And it's like I said, Thomas, we see the other 4 avenues gaining some more weight. We already have a number of clients in the bank, and people are naturally going to start using the Marketplace, insurance, investments. So we do believe that the dream of having a financial ecosystem that's 100% digital is already coming true. Of course, now we need to scale up, get a better performance, optimize our expenses, reducing our costs, which we invested in this wonderful project, but we're very excited about our service revenues, especially our Marketplace.

[Operator]

[Operator Instructions] There's a question from Jorg Friedemann asked via webcast.

[Jorg Friedemann, analyst]

You discussed being stress tested during the presentation. Can you share with us how you see a potential deterioration of your portfolio? We know that collaterals are going up, but this is an unprecedented crisis. So what stress test have you done in minimum capital, which is currently at 28% and LPL and coverage currently at 4.5% and 87%, respectively?

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you for your question. This is João Vitor. So when we talk about stress testing, we're talking about how the entire business model is being stress tested. We didn't carry out a stress test model because we have so much capital leeway that we don't really see the need for a regulatory stress test. We would need to triple or quadruple our credit portfolio in a very short span of time, which is obviously what we're not seeing right now when the economy is not doing so well. So that's what we would need to think about capital reinforcement. So this is not so important for us right now.

Regarding coverage, Alexandre said here that it's not by chance that we always wanted to have a small credit card portfolio, but a larger consigned and collateralized loan portfolio. So we need to have a technology for a stress test. So how do we look at our coverage and position indexes? We have a basis which is [ 2,182 ], and we see what we can have in terms of losses versus our history. Of course, this is an unprecedented moment in which we don't know how Brazilians and Brazilian companies will perform, but with an LTV below 50%, that's very good. Our historical levels are low. And in the case of credit cards, which is the only clean product that we have that depends on people's willingness to pay, it represents only 5% of our credit portfolio. So we're not talking about installments here. We're talking about credit for people who are not paying their credit card bills. So we were at around BRL 1.5 million to BRL 1.7 million in receivables with delays in 2019. And now in 2020, we are at around BRL 3.5 million receivables per month. And our credit card portfolio is around the same size. So if it were not for COVID-19, we would have to remove some provisions because our expected losses are lower than the -- or the actual losses are lower than the expected. So we believe that we're very comfortable where we feel very confident in our credit portfolio. And I often say that we are losing revenue when our margins are smaller, but -- when the situation is good, but when the situation is not so good, then we're better protected. So this is our idea of being more focused on growth, working with safer products. We've always told our investors that we don't want to work with riskier products, which have higher returns. So we feel very confident, even facing an unprecedented crisis. Of course, if we think it deteriorates in the next months, we can have a provision reinforcement, just as we always have. Thank you.

[Operator]

The next question is also from Jorg Friedemann from the webcast.

[Jorg Friedemann, analyst]

Can you tell us what was the impact of the new Mastercard agreement in the first quarter 2020 results? And how will it continue to impact results in the next quarter?

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you for your question. The results were about BRL 15 million gross. As we said, it was signed this quarter. And actually, we should have had a much better result but it was distributed across a few quarters. So I would say that it would remain in the same level and go up as the number of account holders goes up so let's see. We're having a recurrent level around the same or higher than what we had this quarter. This is what we can say because there's some confidentiality involved. But as I said, we improved our efficiency significantly for our credit card product as we have the new agreement. So we're very pleased with the deal.

[Operator]

There's one more question from Mr. Friedemann.

[Jorg Friedemann, analyst]

Finally, we know that you reached a relevant level in real estate fund quotas in the first -- in 2019. And it brought positive results at the end of the last year, but it reflected in the significant loss this quarter. Can you tell us about this position? What is the position for them? Do you expect to reduce the exposures -- excuse me, do you expect to reduce these real estate exposures in the next periods? Or will this be a new normal in terms of treasury policy?

[João Vitor Nazareth Teixeira de Souza, executive]

Jorg, Helena can give you some more detail into that. But our treasury position, which suffered in market to market is not only about real estate. There were some multi-market funds. But regarding real estate funds, we don't have the intention to do that. We have a carryover and they're very positive, 150%, 160% over the CDI. So we're not interested in doing this right now. This is not only for real estate funds, but also for multi-market funds and debentures. And this is the new normal, not in terms of the impact, but in terms of the amount of credit that we have in our treasury. If you think about it, like Alexandre said, our treasury was not significant before. For obvious reasons, we didn't have many clients. So now we already have a cash of BRL 5 billion. So naturally, we would be exposed between 5% to 10% in VBN, not only in public bonds. We recently brought in Gustavo, our new Treasurer, so what we're seeing is that we need to maintain this position. We should not discard it. Of course, in a normal market conditions, we can have the best market-to-market situation possible. But as we have more cash deposits and extended deposits, then the percentage of CDM versus our total cash will be diluted. So this is what we're seeing from our treasury.

[Operator]

The next question was also asked through the webcast by Larissa Quaresma from Núcleo Capital.

[Larissa Quaresma;Núcleo Capital;Analyst, analyst]

If you could tell us a bit more about Intercel and how will the economic results from this partnership be split?

[João Vitor Nazareth Teixeira de Souza, executive]

This is João Vitor, again. I think Intercel has an interesting aspect. When we talk about expanding our client bases, we need to expand it and also expand the number of products and services they consume and also how monetized specific products are. So as I said, we already have 400,000 people in our bases who top up their phones every month with Banco Inter. So we have a commission for that service. It's a fee of around 4% right now. If we can migrate them and new clients as well to Intercel, where the economic levels are much higher above 2 digits, that's an important gain. So Intercel brings monetization from clients. But more than that, it also brings engagement. We talked about the 5 avenues, about how we want to be more than just a digital bank, but rather a digital platform. So as people have their marketplace with us, their financial services, their loans or insurance with us, their investments, we do have more engagement, which is basically a stronger relationship with our clients, and that's difficult to break away from. It's difficult for a client to step away from this ecosystem to migrate to a different one. To migrate to 3 different platforms, one for marketplace, one for banking and one for phone services. So this is the value of our project and our company. And we think that Intercel, I mean, every Brazilian deals with phone carriers, especially with our digital clients who need to have data. So that was, I think, a good strategy. Again, we started this in January. It's now May, 4 months after we were able to deliver and implement this. It's already in operation in our market. So not only was it a great strategy, but I think the speed of time to market and the delivery was very good. So that's my comment for Intercel.

[Operator]

[Operator Instructions] This concludes our questions-and-answer session. We would now like to give the floor to João Vitor Menin for his final remarks.

[João Vitor Nazareth Teixeira de Souza, executive]

Well, everyone, thank you for listening in. Thank you to our employees, our shareholders, our customers. We have many people with us in this journey, and we still have a lot to develop. Finally, I'd just like to say that we had some other questions via webcast, but to save on everyone's time, as we always said, they will be answered through our Investor Relations department. Helena, our Investor Relations Officer, is here, so we will contact clients to answer your questions. Thank you, and have a good day.

[Operator]

This concludes Banco Inter's conference call. Thank you for listening, and have a great day. And thank you for using Chorus Call.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]