Inter & Co Inc

NASDAQ:INTR

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and thank you very much for waiting. Welcome to Banco Inter's conference call to discuss the earnings -- the second quarter of 2020. We have CEO of Banco Inter with us, Mr. Vitor Menin; then the VP, Alexandre Riccio De Oliveira; and the IR officer, Helena Caldeira.

This event is being recorded. [Operator Instructions] This conference is also webcast live. It can be accessed through ri.bancointer.com.br.

[Operator Instructions] We'd like to inform that this call has simultaneous translation into English provided to the foreign investors in this company.

Before we proceed, we'd like to mention that forward-looking statements that may be made during this call regarding the company's business prospects as well as projections, operating and financial targets are based on the management's expectations about the future of the company as well as information that is currently available to Banco Inter. Future considerations are not an assurance of performance and may involve risks and uncertainties and premises. They refer to future events, and therefore, depend on circumstances that may or may not occur.

I'd now like to give the floor to Mr. João Vitor Menin, CEO, who will start the presentation. Mr. João Vitor Menin, over to you.

[João Vitor Nazareth Teixeira de Souza, executive]

Good morning, everyone. Thank you for coming and participating in our conference call earnings release. It's a great pleasure to have you with us attending this conference and also to share our results, the highly satisfactory values we have reached.

First of all, this was an untypical quarter not only for Banco Inter but overall for all companies in Brazil and worldwide, a very tough quarter, marked by the pandemic with terrible consequences, many people died. It claimed many lives, and we were very sad.

Now when you consider the company and its business perspective, this was a very positive quarter for us. In fact, we were happy in spite of all the bad developments in every month. I mean the live figures that were sent one of our directors made an interesting comment that we never used the word record so many times before. This was about the information that we shared with our Board of Directors. And indeed, we have beat many records. And we've used -- already discussed our 5 avenues, including credit in the Marketplace and our insurance part. So when we talk about the new normal, this was now corroborated the strategy that was designed 4 years ago. We now are disruptive in a digital platform that is much more than a simple banking service. When you see the integration of all the departments, Marketplace, the pandemic and the insurance also because, of course, many banking branches are now closed. We are now at the forefront. We are a company of the future.

As for the pandemic this quarter, we even tell our shareholders that the result was a little worse, it could have been a little better. But we are still proud to say that we made over BRL 5 million from donations in Brazilian individual to institutions that are helping fight the pandemic, and Banco Inter has -- is really proud to participate in such initiative.

Now let's look at the indicators for the quarter. First, sorry -- as for the growth of our business, we're still adding clients at a very fast pace. And then the average number of products that our customers has had been increasing quarter-over-quarter. And then we have, of course, financial revenue.

I've been saying that we wanted to reach a greater level than the banking spread, and this is, indeed, taking place. We have over 40% of growth in this, and also our service revenue shows that our platform that have been designed, it is getting more implicitly more robust.

In addition to the notion of platform, we also say that the value that is added to shareholders and the company is not the adding up of these 5 avenues, it's much more exponential. It's not just 1 plus 1 plus 1 plus 1 is equal to 5. There's much more value being generated for those following quarters, and it means exponential growth. I'll give you one interesting example about the value of this platform. We have this partnership with Liberty Seguros. We are now monetizing on individuals and the premium that we get from insurance. But also, we're also monetizing the companies that are using insurance.

As for the platform and how crucial it is to our success, whenever we add more products, innovate or improve the 5 avenues, we have -- we start to create a barrier that's almost unbeatable. It's hard, of course, to acquire clients. We have to have increasingly better CACs or CapEx. But it's like Apple. I'd like to make this comparison. You start with one product and then you decide to buy another. And then after a while, people just remain there. You need a great cellphone for people to feel like leaving the Apple platform, and for Banco Inter, we'd like to think along similar lines. I mean we consider the number of clients, we have over 5 million. They have insurance, credit, loans, investment and so on and so forth. And this is so nice because people are motivated to remain here unless they had something else. It was much, much, much more opened in our services for them to feel like leaving the bank. That's why the platform is so important.

Another very important point I'd like to stress is -- well, the issue of the 5 avenues. These 5 avenues work hand in hand and then there's our interbank. On July 7, we had a specific day for -- with offers that were exclusive to our customer. And we have BRL 30 million in earnings. How did we achieve this? We used the strength of the people who do day-to-day banking. We also used the structure that we already have for people to find and -- look for and find the products. And then we did something that's completely new in e-commerce and e-banking. And this -- so when we integrated credit, day-to-day banking and Marketplace, we achieved phenomenal success. We repeated this on Father's Day with amazing results, BRL 25 million in 2 days. So we are increasingly more convinced that the short connection between these 5 avenues is really powerful.

As for innovation, we have been growing fast. And although we have delivered a lot in the last 4 years, and I can -- it's really -- it's fair to say that we have the most thorough and evolved or developed digital platform in Brazil, but we keep evolving. In the last 2 months, we have delivered 2 very nice products. So our account holders now can have the Super App in the Shell gas stations. And finally, a product that was ready that we have held up with the pandemic. And this is our travel platform, which will be released as of next Monday. So people can buy air tickets, both domestic and international. And also later, they will be able to make hotel reservations. And this is an additional service that will make our customers increasingly more loyal. And as for the value of the 5 avenues, recently, we have noticed that we now acquire clients through our digital account that's a thorough and a free platform, online platform, but we also have clients that want to try our e-commerce and our investment platform with an open fund platform also those that want to try our Intercel or those that want to have insurance. So we now have more tentacles, if you will, trying to grab clients or win clients over both in Brazil and abroad.

Now as for the relationship between platform use in acquisition of new customers. Well, we've been growing really fast in the number of customers, but then there's also an even greater growth in engagement than we had before. When you consider the use of Inter services, it's even greater, the number of the use of our services. As CEO of this company, people ask me about the 5 avenues and what their position is, like, which one has the greater -- the greatest potential growth number. Well, 4 years ago, when we started it all, and we focused on day-to-day banking with 3 complete digital accounts, in the last 4 years, we've also developed credit services, payable loans, real estate credit, SMEs, credit cards. And last year, we focused a lot on our insurance platform, which is also crucial to our customers, which phenomenal growth, insurance has been growing considerably in this pandemic. Some players are -- brokerage players have shared with us that insurance sales have been falling, but for interbank, if everything is totally digital, we have beat records more recently. We had a partner, which is -- who invested a lot. And this is our marketplace. So we are now up, now increasing and growing in practice. So we have a model that's ready to scale up and achieve much more.

And finally, halfway through last year. We had our open platform -- investment platform, PAI. So we are also compensating and providing remuneration for that. And there was this growth of 2%, which is an amazing speed or rate. And we have account holders who have shares under custody, stock under custody. So this is also another important focus for our investment platform. I think we have a lot to grow from now on. Still, in a TV campaign which is unprecedented for Banco Inter, I'm really excited about it. And then our investment platform, we used the 3.0, 2.0 was -- 1.0 was the bank branch; 2.0, autonomous agency and now with the app and all the digital platform that is so transparent. This is the 3.0 model. And I'm really excited about this new frontline.

Now in closing, about our platform, of course, we will also changing our brand. We'll keep our name, of course, Banco Inter. Inter has a lot to do with interconnection, interlinks. But we will remove off the -- take off the brand. I mean we are still Banco Inter, and it will still be there, of course, but I think that the word Inter is a really good connection with everything, and you'll learn more about this new trend later.

Now finally, but my final point is that we are a digital company, a tech company, but also a company of people. We're disruptive, we're about investing in future, but the greatest raw materials is people. It's not hardware, it's software or people. We have 1,750 employees. And this is a well-adjusted team. How does it work? We work smoothly and amazingly. We really worked well together, and the team is well aligned and energized. So there's integration between the team members, and there's a lot of motivation. As a result, Inter will remain an innovative, disruptive company. We will have new products ahead. We can't stop. There will be more growth. So this is the cherry of our cake. We have an amazing team. They have all the right ingredients with a lot of integration and this high motivation level.

Thank you for your time. I'll turn it over to Alexandre for us to look at the numbers, the more technical part of our release. And then we will come back for the Q&A session. Thank you.

[Alexandre De Oliveira, executive]

Good morning, everyone. First, thank you for participating in our conference call. It's a pleasure to share a little of our evolution with you. About 6 months after the pandemic broke out and all its impact from a business perspective, we're really satisfied to look back and see that our team achieved delivering, I mean, in the last few months. We have generated the most -- the greatest amount of value. Each department adapted really well to the new modes of operating. This hybrid model, both working from home and at the office without compromising our business. We have, of course, offered our clients important evolutions or developments, including our technological platform, and we've been consolidating as an increase in the [ tech ] company. We have 1,750 employees and about half of them are about IT, data scientists, processing -- data processing professionals either inside our department -- technological departments outside.

Now considering our 5 avenues, our day-to-day banking loans, credit, investment, insurance and Marketplace. I will talk about all of these and also customer engagement.

So let's start with the customer engagement. We had a great quarter. At the end, we had 0.59 million customers, and we are now well above this number. We had an excellent growth bigger. It's 72% year-over-year, and this record led to a decrease. When we think about the number, activation in cross-selling, we have some tables, as you can see, we had the best quarter in reactivation with older cohorts showing that our products, we can bring old customers back. We were inactive. And then we have customers who are -- start active in the platform, so activating in many different cohorts. And this is what we can see for the future. And then, of course, our products make all the difference. We have a lot of engagement, waiting for 4 million logins, and we reduced our cost of service. We had a CTS at BRL 197 per customer in the second quarter of last year to BRL 116 this last quarter. In this, with NPS that is recovering. The first quarter, there was a slight reduction of our NPS. And now we have a great increase, 75 of quarter 1.

Now in terms of customer engagement, in conclusion, we -- it's become a bit -- we have about 6.5 million customers are already for cross-selling. So this is an opportunity that we have in house. So we can do cross-selling or selling in house. That's a great opportunity, and we are well structured to deliver on this front, and we'll be discussing this in the next calls.

Our first business vertical, day-to-day banking. We have BRL 6.6 billion (sic) [ BRL 3.6 billion ] in demand deposits. That's a 41% growth compared to the first quarter and the balance per account, 144 to 1,070, which shows more engagement and shows that we are -- what we are prioritizing. And the revenue, BRL 21 million, although the reduction of the Selic rate.

Then card growth, BRL 42 million. But of course, the pandemic has impacted the number of transactions in Brazil as a whole. And then the evolution of the number of cards that were used. So we launched a new experience in the use of cards and this was very good in addition to cashback.

Then Marketplace, there was also significant growth in July, again, the same volume in the second quarter as in the second quarter, BRL 115 million in July, BRL 123 million in the second quarter. So our Marketplace, the annualized amount is BRL 1.4 billion, which is really cool.

In terms of investment, we had a great quarter in the second quarter. We had about 800 -- almost 800,000 investors. So that was almost 30% growth.

Now insurance, the second quarter was, again, very strong with the partnership with Liberty. So we had 120,000 insured customers and then evolved in our insurance revenue numbers.

In our final avenue, credit and loans, we've also had a significant growth in terms of underwriting and also a growth of 100 -- also a growth of

[Audio Gap]

credit cards has also been doing well. So we've seen a major results in the collection of credit cards with positive evolution. We still, of course, bring intention and watchful of this situation.

And final data, at BRL 110 million, 137% growth compared to the [indiscernible]. We had revenues -- others, it now accounts for about 10% of interest revenue -- service revenues. Then credit revenue, BRL 172 million, a growth of 24%. Our quarter was up BRL 2.7 million, and then 28% Basel.

So I'd like to thank you everyone and also to stress how much we trust our team and that Banco Inter is in the present and the future of Brazilians.

So Helena, over to you.

[Helena Caldeira, executive]

Good morning, everyone. Before we open the floor to questions, I'd just like to stress that on this release, we have a section about our advancement, ESG. Let me discuss our evolution in the social pillar, which was really highlight at this pandemic period. So our banking services in Marketplace have been helping out -- helping society. Also eco efficiency, our credit card inventory. And we're also very happy that we are now official signatories of the Global Pact (sic) [ Global Compact ]. So we are committed to acting quickly to achieve its goals and to reflect our strategies and operations, respecting the 10 universal principles of the Global Pact. We've also been working for releasing our first annual report at the beginning of next year, but we wanted to share what we've already been doing and evolving.

We can now open the session for our Q&A.

[Operator]

[Operator Instructions] The first question comes from Thomas Peredo of BTG Pactual.

[Thomas Peredo, analyst]

Well, congrats on these great results. I have 2 questions. First, I'd like to understand a little better your revenue of BRL 9 million in the Marketplace with GMV. Maybe you could also share how much of that revenue is Marketplace, and how much of that is included in digital accounts and others. So what are these services do?

And then, please, can you explain how you will work on reducing this revenue? Does this number consider or take cashback into account [indiscernible]. So are you considering cashback, too? Why?

[João Vitor Nazareth Teixeira de Souza, executive]

Right, very good. As for our Marketplace revenue numbers, the situation is, as you may know, many people may know that this is not just a platform. You may buy products and services from our app, and people get cash back. So what are the economics, if you will, of this business? We have a sales volume, which is called GMV. So our platform, they get what we call the market take rate. So we sell the Amazon to Brazil, for instance. So we have an agreement with Amazon to Brazil we get the take rate for Amazon. It may change, depending on the product, 5% to 15%. As for Magazine Luíza, 8% to 12%. It depends on the product. It depends on the sales volumes.

So on top of that GMV of BRL 15 million in July, BRL 120 million in the quarter, we generated BRL 9 million in revenue. That's our revenue number, BRL 9 million. And that's a take rate of 7% -- around 7%. And we believe that this rate is expected to improve to reach 8% or 9%. That's what we see that the take rate, how much the take rate will improve. This is a gross amount. So in addition, there are reductions or, in fact, cashback, and that's 50% in most cases. We may have promotions and maybe increase this cashback number. We may also get less than 50% for some products. This is something we have to be really dynamic about the retail sectors like this in the example that I've given you about our Father's Day and how successful it was, was that we really used this take rate and cashback figures. This is what the rationale of our numbers of our finance is like in our Marketplace.

[Thomas Peredo, analyst]

Perfect. And then cashback, what line has it entered into -- were recorded?

[João Vitor Nazareth Teixeira de Souza, executive]

Well, it goes to expenses. Cashback goes to the expenses column or administrator of expenses.

[Thomas Peredo, analyst]

Okay. Perfect. My second question, can you give us more details on what you're looking at the strategy? Or what are the competitive disadvantages and advantages or advantages that Banco Inter can have compared to other players like Itaú or XP? They also have a very robust digital platform. And then what customers you were intending to address or win over? And of your customers, 6.3 million, how many of these customers would be considered investors with over BRL 1 million?

[João Vitor Nazareth Teixeira de Souza, executive]

That's a great question, Thomas. As I said, at the end of my statement, the structure of investment is endless. It's a whole universe with a huge potential in Brazil. So what is our strategy? First, we were the first social media that have dedicated investment products. So the first one was Twitter. So we have 3 major groups in Brazil. We consider the pyramid. We have private banking, we have the intermediary, personal pay or [ BB ] style, and then you have the base of the pyramid. And the base of the pyramid in Brazil, everyone reports different numbers, 1.5 trillion or 1 trillion. Well, at the base of the pyramid, where most of the asset savings accounts are, they're doing fine. So there -- and why is this? Well, it's easy, it's digital. We give them CDB with a full rate. People apply or invest if they get cash back. For the multi-market fund, we have a very good share there, almost 800,000 investors. We have a very large share in this segment. Now what is the cool part? We decided to address the top and the middle of the pyramid. So we launched the Wealth Inter (sic) [ Inter Wealth ] platform, that's a wealth management platform. So we wanted to be more democratic or more popular, right? Although this is a lot of money, BRL 1 million, we lowered the bar because we wanted to have more people with a portfolio with all of the banking services. And this platform is a result of the migration of our administered or managed portfolios that we bought last year. So I think we're doing fine in this respect.

Now finally, and this is a wonderful thing, and this is one of our -- one of the focuses of our marketing campaign that starts next Monday. And this is the middle of the pyramid, what we call our black segment. As I said -- discussed, our 3.0 platform when you asked about Itaú and XP or digital services. Of course, respect all the other platforms, but they're not really digital platforms. Having a single platform and now talking about different apps, we have a single app for all banking services, credit card like Mastercard Black with cashback, you have your fund platform, you have structured products, you have cashback. I mean people -- the other companies don't provide all of this together. And we've been building this content up over time, we have our eco administrate. So what we have in interbank today is that they have our banking services, your credit cards and investment and then insurance, everything on the same platform without intermediaries.

So this money, that intermediaries were, cash we just returned them to our customers. And this is -- so our focus now is to really went over the middle of the pyramid. We've already addressed the base of the pyramid and the top. So we're now focusing on the middle of the platform.

[Operator]

Our next question, Mr. Henrique Navarro.

[Henrique Navarro, analyst]

I have 2 questions. First, about provisions. The quarter provisions, they're above level. When you compare it to the first quarter, there was this slight fall. And this is what we saw in the balance sheet of banks who've already released their balance sheet. So we see that all banks have this message. The second half of the year will have a much lower volume of provisions in the first semester. So my first question, there is the slight fall in the second quarter over the first quarter, so can we consider this that risk is, in a way, mapped out and included? In other words, you've made all the provisions that were necessary in this and then this will have an impact on the provisions for the second half of the year. This was my first question.

Now the second question. After 2028, we've had a partnership that will be renewed for another 15 years with more economic -- more interesting numbers. Maybe you could give us more details why do you improve a situation that was already very good. So what motivated -- what led you to do this -- work on this?

[João Vitor Nazareth Teixeira de Souza, executive]

This is João Vitor now. Thank you, Navarro. Thank you for your questions. Well, first, it's interesting to discuss all your points. Inter S.A., we have a very unique situation. We, of course, don't have a huge credit portfolio when you compare it to the major banks. But we have -- over 90% of our portfolio that's collateralized so we're not talking about long operations or we have payable loan. And even for companies receivables, from supply chain receivables of large companies and also cards, credit cards. So what about the other 5%? It's about credit cards, 100 -- or slightly more than BRL 100 million, but then we have credit cards, and we are really okay. We may have low fluctuations in the increase or decrease of our provisioning levels.

Now the second point, even in our portfolio, which is not collateralizing, even the ones that are collateralized, strange as it may seem that market is liquid. Families are being able to make their payments. And then you have migration of cash. People need money, but then you -- also there's been this optimization of people's expense patterns, people are spending money differently. So our service debt is now different and very low. So we have a very, very positive prospect for the second half of the year.

And finally, Inter's figures are a little exaggerated when you consider real estate provisions and what we lose, one thing is navigating NPL. And so our provision level, when you consider -- well, at the end of the day, it is even overestimated.

As for Liberty and insurance, the market has been discussing Liberty insurance a lot, but we also had Mastercard. So in 2018, we had this agreement with Mastercard and now with Liberty. So we want to be the largest digital player in Brazil. If I want to be okay in finance, I need to use either bank services. So Mastercard came to us. They wanted to renew their partnership, their agreement so -- and we had better results than in 2018. And we also talked to Liberty because our products were so good and we renewed our partnership. And I think we can improve like over 10x. So companies that want to modernize, they no longer want the old counter, business counter, they want a digital platform. In -- on our app, you can buy 15 different in types of insurance, digital insurance. So when we have our partner, our partners now are saying, wow, this is the time to have a new deal. So I think these 2 major players have been proving that our platform has been growing a lot, and it warrants this. And we are modern and smart and cool. So it's just proof of our success.

[Helena Caldeira, executive]

The next question is a webcast question. [ Igor Costa ] asks, is it possible to acquire insurance products without being an account holder of the bank?

[João Vitor Nazareth Teixeira de Souza, executive]

Well, [ Igor ], this is a great question. We've been discussing how successful our platform has been in the number of account holders in July for 2Q, we had a unique record of accounts or account holders who have access to all our products, insurance, loans or exchange rate. But in our services or on our platform, we don't need to restrict all these services to account holders, traditional account holders. So people may buy insurance on our platform. They may transfer money, pay bills, they may buy products on our marketplace because they get better prices there. They may buy investment products. So like don't we open our platform to non-account holders. So we've done this. I mean, it will start. We will start on the web, and this platform will be opened to non-account holders in September, probably. This is the first move. So we'll open our insurance platform and investment platforms later. That's a little harder to consume if you're not an account holder, but those who are not account holders who have access to our best products on the Banco Inter's platform. We believe that this can grow spectacularly. That will be really cool.

[Helena Caldeira, executive]

We have some questions, webcast question. Can you make comments about the integration with the Central Bank?

[João Vitor Nazareth Teixeira de Souza, executive]

I don't know who asked this question, but let's talk about PIC. Well, we see that regulatory agencies are well aligned with this strategy. And this is not just about Inter. When we launched our digital accounts, it was highly innovative in Brazil. And then we wondered how can electronic money transfers be free. It costs BRL 2. So it can cost more than BRL 0.01. I mean, and this -- I mean, yes, I see it has the same price, BRL 0.10 for 10 transactions. So technology has come and made costs lower, decreased the transaction costs for account holders. So that's a great initiative by our regulatory agency.

And Banco Inter is ready, we have 500,000 account holders. So we follow all the rules as most -- as major Brazilian banks are, and it will be amazing to see this cost reduction in banking fees. So this is really, really happy about this development.

[Operator]

Our next question Marcel Campos, XP Investment.

[Marcel Campos;XP Investimentos;Analyst, analyst]

My question is about short-term profitability. Because we had a year with an inflection curve, and we're expecting some profitability level and things are different now. So how would you -- can you comment on short-term profitability? Couldn't it even hurt your customers leading to losses when you consider this growth in the base or your growth in Marketplace? This is my question.

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you, Marcel. This is João Vitor. Well, in fact, it's a great question. The inflection point is well illustrated as you can see. When we increased or improved the ratio between cost of service and revenue for customers, it's an inflection point mathematically. So it improved in the second quarter -- in the first quarter -- or the first semester, too. So as we did more than we imagined in a number of account holders, we have new -- more new customers. So we have a greater number of customers who won't monetize at first, but we still have our inflection point. It's still there.

As for your question about monetization, if I remember well, if we want to monetize more in the short and medium term, well, we have -- or our DNA is one of providing more competitive, lower-cost services to our customers. And we know they are monetizing specific products as compared to the market as a whole is lower. So we want to have more products to monetize more, not only cards or electronic transfer of funds. Those who will win the game are the platforms that reduce the cost to serve. We want to be a cheap platform, a low-cost platform, providing good services to our customers. This is what we want.

And how do you know we're winning the war? It means that we are serving our customers with more products with a better experience on the app. And 10% of banks serve their customers like this, and if we do this or exceed this, we believe, we're on the right track. So the inflection point gets increasingly greater in terms of monetization and revenue and cost to serve in the short and medium term.

[Operator]

We will now close our Q&A session. The remaining web questions will be answered by e-mail. I'd now like to turn it over to Mr. João Vitor Menin for his final remarks. Mr. Menin, please. You have the floor.

[João Vitor Nazareth Teixeira de Souza, executive]

Well, thank you. Thank you very much for attending. I'd like to thank our employees, our partners, our shareholders. We have 170,000 shareholders, that's a lot of people and about 10% Brazilians to become Banco Inter shareholders. So we're really fully committed to keep working hard, to be passionate, to be innovative, to deliver increasingly more modern services. We may make mistakes, but we're doing the best we can. We're passionate. We have a great focus and dedication to deliver and to get good earnings and results, both to our shareholders and our employees. So thank you, everyone. See you in 3 months' time, expecting to provide even better results. Thank you. Have a great day.

[Operator]

Banco Inter's Conference Call is now closed. Thank you, everyone, for attending. Have a great day. Thank you for using Voitel.

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