Inter & Co Inc

NASDAQ:INTR

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and thank you for standing by. Welcome to Inter&Co. Second Quarter 2022 Earnings Conference Call.

Today's speakers are João Vitor Menin, CEO; Alexandre Riccio, VP of Finance; Helena Caldeira CFO; and Santiago Stel, Strategy and IR Officer. Please be advised that today's conference is being recorded, and the replay will be available at the company's IR website. [Operator Instructions]

Now I would like to welcome one of your speakers for today, Mr. João Vitor Menin, CEO. Sir, the floor is yours.

[Santiago Stel, executive]

Thank you, operator. Good morning, everyone. Santiago Stel, Chief Strategy Officer is here starting and jumping directly to Slide 2. This is our first earnings call with Inter&Co. as the listed entity in the NASDAQ. We are profound proud and sense of accomplishment by having achieved this major milestone of moving our listing venue from Brazil into the U.S. We're the first ever Brazilian company to execute this transaction, and hopefully, we paved the way for many others to follow.

It's important to mention that this achievement is a result of a strong effort that took 2 years to materialize. As most of our strategic decisions is meant to create long-term value to all our stakeholders in our mission to simplify people's size.

Moving to Page 3, I'd like to highlight some of our main achievements of the quarter. We surpassed the 20 million clients marked with approximately BRL 1.5 billion in gross revenues. Our loan portfolio and our funding base reached BRL 19.5 billion and BRL 25.9 billion, respectively, delivering strong year -- strong growth year-over-year.

We continue improving our unit economics with our monthly ARPAC, net of cost of funding, expanding to BRL 32 in the quarter. Our cost income ratio reached 72%, reflecting the strong focus on operational leverage.

As we mentioned later, under IFRS, we used provisioning under the methodology of expected credit losses, which impacts our P&L as we perform provisions upfront. Despite that, we were able to deliver a profitable quarter with BRL 16 million of net income.

I'll now pass them back to João Vitor Menin, our CEO, will provide an overview of our strategy and recent developments.

[João Vitor Nazareth Teixeira de Souza, executive]

Okay, Sergio.

Thank you. Good morning, everyone. Great to be with you on this new earnings call. The phrase we choose to describe this quarter is staying away from the comfort zone. Though always true at Inter, particularly in this quarter, have been listed in NASDAQ and launched our global accounts. This phrase could not be more timely.

As mentioned many times before, our goal has always been to eliminate the friction people suffer while transacting and as a result, simplifying people's lives. This is consistent with our history since we started as a digital bank. Just a few examples on that.

So we were the first bank to become 100% cloud-based. First to launch a free complete and digital accounts in Brazil. We were also the first financial institution to launch the first full e-commerce platform back in 2019. And finally, the first Brazilian entity to migrate from B3 to U.S. We are convinced that we are still at the early days of our history and expect to continue delivering innovative solutions to our clients.

The result of this amazing journey has been that way, have attracted over 20 million clients so far. We achieved a funding base of almost BRL 26 billion, we delivered gross revenues of almost BRL 4.7 billion during the last 12 months. The natural consequence of this disrupt growth is seen on our market shares, which those to at very fast from our goals, we're starting to see the benefits of our consistence and dedication.

As it can be seen on the right-hand side of the page, our market share across products has become meaningful and relevant, which as usual later starts translating into positive operational leverage.

On Page 8, now I'll comment how I see the future of the business. There are a few strategic guidelines I'd like to share today. We expect to: first, continue delivering disrupted growth, which will translate into increasing market share; second, growth will continue to be diversified across product both on the fee and interest income strengths; third, we expect to continue improving our operational leverage as we gain more scale and became more efficient; fourth, we aspire to have a self-funded business plan from a capital perspective using our excess capital plus the organic capital created with our positive profitability; last but not least, from a business perspective, we aspire to maintain our cutting-edge innovative mindset and look forward to maturing our business in the U.S., a market where we see a massive growth potential for our platform.

Finally, on Page 9, we do all of this with a strong focus on main world-class ESG standards. This is not new for us, I think we've done so since our very first days, we were born ESG, as I mentioned before. The reflection of this commitment is on our MSCI ESG rating. We have been up great twice from B on 2019 to BBB recently. Details of our ESG initiatives can be found on our annual report.

With that said, I'll pass the word to Alexandre, who will cover the business section.

[Alexandre De Oliveira, executive]

Thank you, João, and good morning, everyone. I'll talk about the highlights of our business verticals during the second quarter. We're proud to say that every vertical evolved well, and I'll give some color to this evolution.

Starting on day-to-day banking, we have stellar growth on cards. Total processed volume increased by 70% year-on-year, with credit cards having a stronger growth than debit cards. In terms of number of cards used, we reached BRL 6.4 million in the quarter, which represents a 56% increase year-on-year. On credit, our gross portfolio increased by 55%, reaching BRL 19.5 billion. Our originations during the second quarter were nearly flat from a year ago at BRL 4.7 billion.

We strategically decided to decelerate credit underwriting, monitoring the performance of the portfolio and the macro environment. We expect to reaccelerate once we see the proper conditions to do so, leveraging on our expertise and significant excess capital.

Moving to Page 12, I'll talk about insurance and investments. On insurance, we achieved revenues of BRL 35 million in the quarter. That's a record again and a growth of 64% year-on-year. On active insurance policies we surpassed the 1 million mark, nearly doubling from a year ago.

From an innovation perspective, in the insurance front, this quarter, we launched a product called [Foreign Language] or [ Doctor Inter ] in English. It's a product that enables our clients to have easy and fast online doctors' appointments through our app.

Moving to investments. We've reached BRL 36 million in revenues in the quarter. That's a 116% increase year-on-year. And we ended the quarter with BRL 53.4 billion in AUC, very good number again.

From a product standpoint, this quarter, we launched the Inter Invest portal bringing more financial and investment education to our clients.

Moving to Page 13. I'll talk about Inter Shop, our e-commerce vertical and about cross-border services. On Inter Shop, our gross revenues more than doubled as compared to 1 year ago, reaching BRL 113 million in the quarter. We achieved these revenues with GMV growing 56% year-on-year. The impressive gross revenue growth came as a result of a significant expansion in our take rates.

On a gross basis, take rates expanded to 11.4%, meaning a 4.2 percentage point expansion. On a net of cash back basis, take rates expanded by 3.6 percentage points. We continue expanding our network of retailers that are selling to our platform, having finished the quarter with more than 900 active sellers.

On Cross Border Services, we ended the quarter with more than 141,000 active global accounts, reaching $383 million in volumes transacted. We're truly excited with this vertical as we think it has the potential to become a truly special and distinctive business.

We see immigrants in the U.S., very underserved and overcharged, similar to clients in Brazil when we started our digital retail bank. And we see our super app as a very strong product fit to simplify these clients transacting needs and, therefore, simplifying their lives.

Additionally, we're also encouraged with the early success of our global accounts as it is used by our Brazilian customers that use the account for traveling and investing abroad.

With that said, I'll pass the mic to Helena, our CFO, who will cover the financial section.

[Helena Caldeira, executive]

Thank you, Alexandre. Jumping straight into Page 16. Here, you can see that our gross credit portfolio reached BRL 19.5 billion. This represents an expansion of 56% on a year-on-year basis. On a quarterly basis, the growth has been intentionally more modest as we have tightened our underwriting models.

As Alexandre said, we expect this deceleration to be temporary, and we will reaccelerate towards the beginning of next year and when we see a better macro scenario. It is worth noting that consistently through time, our loan mix continues diversified across multiple products, decreasing concentration and risk.

Moving to Page 17. Our asset quality remains strong. Starting from the left, you can see from the total credit portfolio that 73% remains collateralized. You could either buy real assets, invoices or payroll loads. In the center of the page, our coverage ratio shows a healthy and stable trend, standing currently at 129%. When we see NPLs on the right, our total NPL ratio is 3.9% of the total portfolio, a slight increase mainly explained by the increase on card NPLs that reached 7.9%.

Going to Page 18, we show that our funding reached BRL 25.9 billion, increasing 47% year-on-year. On a quarterly basis, it grew 12%, nearly double the growth of the loan book. Worth mentioning that we have more than doubled the distribution of third-party Selic during the past 12 months, with the balance not spending at nearly BRL 4.4 billion.

Given the rate environment with distinct clients naturally more focused on higher-yielding assets, such as time deposits, LCI and in products from our investment platforms. Our share of demand deposits remain very strong, and it is a key credit advantage, particularly on an environment of increasing rates. This is only possible, thanks to being a fully licensed bank, which allows us to take on demand deposits.

On the right side, you can see our All-In funding costs as a percentage of Selic that reached 61% in the quarter, is still one of the lowest of the industry.

On Page 19. In terms of revenues, I'd like to mention the following highlights. Our total gross revenues were close to BRL 1.5 billion, which would mean a run rate of BRL 6 billion in a year. Over a year -- year-over-year, the gross revenues grew 130% and in net terms, 80% -- 80%. Growth in fees continue to outpace growth in NII having grown 91% and 73%, respectively, in year-on-year terms and 9% and 6%, respectively, in quarter-on-quarter terms.

On the right-hand side graph, you can see in how our revenue streams continue to be highly diversified. We consider this another competitive advantage as being highly diversified in test of being a [ mono odorliner ], allowed us to be redeemed by not depending on a short list of products.

Going to the following page. We show here our unit economic analysis from the revenue side. Starting from the left, the longevity of our clients show how our client base is still very young at Inter. On the orange bar, -- on the orange part of each column, you can see that a year ago, only 49% of our clients have more than one year at Inter. And now this ratio stands at 58%.

In the center of the page, we have our ARPAC analysis by cohort. Please note that we [ show are back ] net of cost of funding given that we think this better reflects the revenue-producing capacity of our clients. From the cohort of 1Q 2018 to 2Q 2022, client is not for reducing monthly net revenues from BRL 5 to BRL 10 in an initial quarter to around BRL 50 on the latter quarter. We see that on a cohort by cohort analysis, it takes shorter amount of time to produce a given level of privities, which we see as a reflection of our clients adopting our products at a constant rate.

On the right-hand side, you can see our ARPAC, not cohorted, but instead on a quarter-on-quarter basis. Our bank grew relative to the same quarter last year by 16%. And we see that this compression over the last 2 quarters has mainly to do with the increasing of cost of funding.

Moving to Page 21. You can see here that our costs serve per active clients now stands at BRL 13 on a monthly basis. On the right-hand side, you can see that our cost income ratio improved over the last quarter from a peak of 93% to about 72%.

As mentioned before, we are highly focused on improving operational leverage as we continue gaining economies of scale from the investment done thus far in our platform and [indiscernible].

On Page 22, this quarter, we started seeing the result of the repricing of our loan portfolio. Despite still increasing reference rates, we were favorable of increasing our net interest margin by 20 bps when compared to the first quarter of this year. We look forward to continue increasing NIM as the repricing of the longer duration portfolios also materializes.

Finally, on Page 23, on net income, Inter&Co. delivered a positive result with BRL 16 million in gains in the quarter. We also had the client as a reference Banco Inter net income under BACEN GAAP. Please note that this is no longer the lease expanding. And this is now Inter&Co -- That is now Inter&Co We provide in our earnings release report, a detailed table on how to convert and reconcile the financials from Banco Inter to Inter&Co.

I'll back the word back to João for some final remarks.

[João Vitor Nazareth Teixeira de Souza, executive]

Okay. Helena, Xandre and Santi, thank you for joining me on this call. I'm very excited to what -- with what we have ahead for the business. And I would like to comment -- the comments on 3 specific aspects of the business going forward before we jump to the Q&A section.

First of them, operational leverage. This is a major priority for me personally. I would say that we have the scale, we have the tech, and we have the team in place to absorb a much larger bottoms business.

Second, despite of the macro, again, in spite of the macro and highly positive on credit cards. I'm convinced that we master the secret sauce of cards by improving 3 key factors: first, the underwriting and the price. The second, a very good UX anyway for our clients using this product. And lastly, collections. We have improved a lot our collections for the past quarter. I have personally spent lots of time on this product and we can now say that I'm highly confident this is a very good month for our group. It's profitability the potential to add value to our pursuit, to our ecosystem is huge.

Last but not least, the global accounts. We the best products for Brazilian, both living and traveling to the U.S. That was another of our innovations and again, being the first bank to launch this product.

With that said, I'd like to open for questions. Many thanks to all the audience.

[Operator]

[Operator Instructions] Our first question comes from Yuri Fernandes, sell-side analyst from JPMorgan.

[Yuri Fernandes, analyst]

Hello, João, Helena, Santiago, everybody. Thank you, and congrats on the better-than-expected results, very solid trends on fees, and we really like it.

I have a first one regarding NPLs. My question is, is the worst behind for you? NPLs in gap, they are about 20 bps quarter-over-quarter. I guess, under IFRS, it's up about 40 bps and we still see some worsening on the credit cards, maybe 100, [ 100 ] bps we're seeing. But I guess, given the level of expectations, this was good. And when we check for renegotiated loans, portfolio sales, all those things seems to be very low this quarter, right?

So my question again is, what is your view for NPLs? What is your view for cost of risk? What should we expect for the coming quarters? That's the first one.

And if I may, a second one regarding margins. We have been talking a lot about loans repricing. We see your credit card repricing, your personal loans like payroll and things like that. My question is, what should we expect for NIMs going forward for NII for you in the second half and more importantly for 2023? Thank you. And again, congratulations.

[João Vitor Nazareth Teixeira de Souza, executive]

So Yuri, João Vitor speaking. Thank you for the question. I'll cover the first one. Helena will cover the second one.

So actually, you stole my phrase. I do really believe that the worst is behind on NPLs. Important to mention, first, as you -- most of you know, we have a very collateralized portfolio. So this is very good for the business for Inter itself. But going to the unsecured credit portfolio, which are basic, the credit card. We don't have personal loans. I would say that you mentioned that 20 bps increase on the NPL 90 days plus VAT on a gross adjusted basis, we would have printed a 6.5% -- roughly 6.5% NPL. So we stopped growing at the same pace, and therefore, the NPL plus 90 spiked a little. So it would be a very good quarter in the gross adjusted base. So this is one thing.

The other thing, we'd like to say that the NPL is about the NPL formation. So we're still getting these NPLs from older cohorts for older underwriting. But more importantly, we like to track very real-time KPIs such as the first payment this fall and [indiscernible] late 30 to 60 days. We believe that is a better measure for the ability of our clients to repay their credit cards.

And the good news for the past 40 to 60 days, we see an improve on these 2 specific metrics, which make us comfortable that, as you mentioned, the worst is behind. Of course, we don't have an alpha here against the market. If everything goes really bad, which I don't believe so, we might see some deterioration. If things go better, faster, on the macro, we might improve even faster than we imagined.

But we are excited with what lays ahead in terms of NPL and in terms of the delinquents for our credit portfolio. So this is about NPS. And Helena is going to cover the NIM trend.

[Yuri Fernandes, analyst]

If I may, João, just before we go to NIMs. So the message is the new NPL formation should somewhat remain stable from this quarter, right, in the very short term and potentially improving for us, right? Like so BRL 180 million, BRL 200 million. This is the level for [ formation ] you get?

[João Vitor Nazareth Teixeira de Souza, executive]

And again, the good news on that is the first payment default and that is delayed 30 and 60 days, which really measure the capacity of the current clients to repay our -- actually to pay our credit card statements.

[Yuri Fernandes, analyst]

And I imagine this is the trend you are seeing in July and August, right? This improving..

[João Vitor Nazareth Teixeira de Souza, executive]

Yes, most of it. Yes, for the last -- I'd say, 30 to 45 days.

[Yuri Fernandes, analyst]

Go ahead, Helena. Sorry, to interrupt you.

[Helena Caldeira, executive]

No problem. Thank you, Yuri. So on margins end, as you said, we've been repricing the loan book, we repriced the, that credit card that you mentioned, we increased rates from 7.7% in the revolving rate in the first quarter to 14.7% in July. We will only see the effect of this increase of the last increase in the revolving credit only in this third quarter. So our expectation is that NIM will continue going up as we reprice the remaining of the loan book, of course, the short-term duration ones such as credit cards, SMEs and agri business. It's faster to be seen.

And with the real estate loans and payroll loans, taking a little longer for us to actually see the increase in NIMs as we increase the rates there.

Specifically for next year, we also understand that with an improvement of the macro scenario with inflation slowing down in the second half of the year, there is -- the market is already forecasting a start of decreasing in interest rates from next year onwards. That could also be very positive for -- for NIMs in 2023. So -- that's what -- that's our outlook for NIMs, an improvement in general going forward.

[Operator]

And now the next one comes from Pedro Leduc, sell-side analysts from Itau BB.

[Pedro Leduc, analyst]

Yes. Great. Thank you so much for hosting the call and taking the question. First, just as a follow-up on the credit card, Vitor, you mentioned the worst seems to be behind the sites of data. Wondering what the lessons learned were here and once you're more comfortable in expanding this line again in maybe 2023, how should you tackle it differently, with new models, new segmentation, new client approach, more targeted, just liking to hear your lessons learned here from this credit rollout that you're now taking more carefully, but definitely want to expand it again probably next year.

[João Vitor Nazareth Teixeira de Souza, executive]

Okay. Leduc. Thank you for the question. So first, -- we do like the credit card business. This is one thing. We don't dislike it. It's an important portfolio -- portfolio is important for engagement, for retaining the clients and it can also be a profitable business.

Of course, when we have a headwind such this one that we have and still have due to the macro, we need to be more updated, to have more caution to [ truck ] back to business. We are disruptive. So we're gaining market share, gaining fast. So at this time, we need to slow down a little bit.

But the good news, I'd say that despite of this mark or in this delinquent strength, we learned a lot in the past 2 years or 3 years or so. And as I mentioned during the presentation, I'd say that we see today 3 very important factors for you to master this credit portfolio. Again, of course, the underwriting, the model is very important. And having doing that for a while. And with the right team in place, we believe that we have -- and also with a big chunk of clients in our platform, we believe that we can underwrite in a very good way this product.

The second, it's very important they write UX and UI for the product. I mean, the right product. You cannot have churn on that product. You need to have a very good way for our clients to pay to do -- to renegotiate their credit card -- be also this is very important to have these good UX/UI.

And last about collection. We learned a lot, I would say, on 2022, we set up a specific committee to go through the collection. We know that the right collection makes a lot of difference on the NPL. So I believe that -- this is the one we improved more on 2022. And with these 3 things combined, we get more comfortable with the credit card business. And we believe that when you realize that the market is in good shape. We can keep growing that in a faster pace than we did for this past 6 months or so. So that's my sentiment on this specific project going forward.

[Pedro Leduc, analyst]

And if I may have a follow-up more strategic. Obviously, you have a lot of capital, your self-funding growth, not the true for many other fintech players around starving of cash, starving of cross-selling like you've achieved. So is this an opportune moment for you to step in, further consolidate new avenues or capabilities?

Or on the other side, would you be open to see players who can add value to like one acquirer in the past was supposed to -- are you open for both sides of the table?

[João Vitor Nazareth Teixeira de Souza, executive]

Hey, Leduc. I would say that we are focused on just improving and growing our business. We do have -- I mean, maybe we're the only player, the only digital player in the market that have this full service, this full array of products in one single app. So we don't see an M&A strategy to just put new products on the market or to gain momentum. I believe that we can gain a network across our 20 million plus days of time.

So we have the products, we have the clients -- so it's a matter of time for us to get more momentum and therefore, more ready. So we don't see M&A activity as an edge for us despite having a good base of capital. So we're going to keep focus on improving our business, improving, gaining more market share, as I told you in the beginning. So we want to be a relevant player in most of the verticals, insurance investments, shopping, credits, anyway. So that's our view for the future. So we don't see M&A as that breach for us to get there.

[Operator]

And our next question comes from [ Jeffrey Elias ], sell-side analysts [ autonomous ].

[Unknown Analyst]

Thanks very much. Maybe if I could ask on Inter Shop, you have seen this nice improvement in both gross and net take rate over the last few quarters. What's behind that, is there kind of an easing of the competitive environment there? Or do you have to kind of proactively go out and push together a better take rate?

And then, how much further can that improvement continue? Where do you think the gross and the net take rate can get to in the long term?

[João Vitor Nazareth Teixeira de Souza, executive]

Okay, Jeffrey. João Vitor speaking. So as you might know, I love Inter Shop. We designed that only 2.5 years ago. It's still a baby. But anyway, we're very excited with the performance of it.

I would say that we have learned a lot how to negotiate with the merchants. We have diversified merchants as well. So today have 900 different merchants over there and not only that, when we started, we have only the affiliate programs in our Inter Shop. So we are just referring clients to the checkout in the merchant's website, and therefore, the take rate was much, much lower.

I would say that in the last, I would say, maybe 6 months, 9 months or so, we have been able to increase the volume on the end-to-end platform, where you have the client doing the checkout inside our app, our super app.

We have also improved Inter Foods, which is a subscription for our food platform, which is going very well. And we also launched Inter Trade, our end-to-end capability also for traveling, lodging and so on.

So a combination of all of this has taken -- has improved our take rates, our drastic rate and therefore, our net take rate. I would say that we have been -- we would be growing more than we did on the past 12 months. Of course, we have some macro, the inflation hit the consumer and we saw also the consumer consuming more service than goods. If that didn't happen, we will be growing even more on GMV, but the trend is very good. So we're very comfortable on growing 50% -- around 50% year-over-year as we did on the first 2 years of the business.

So I believe that we have a very well-balanced platform as of today. I'm very excited with the outcome of the [indiscernible] and we still have many levers to pull in order to improve the volume, to improve the rate the drastic rates and also the net take rates.

Just to finalize, I'd like to say that the Inter Shop is all about a more modern consumer finance platform. And we're going to deliver that year-over-year. So thank you very much.

[Unknown Analyst]

And in terms of where the take rate also normalize in the longer term? Any thoughts there.

[João Vitor Nazareth Teixeira de Souza, executive]

Yes. I think that with the same mix of end-to-end affiliate, food, travel, I would say that we're going to be on the same range on the same number. We might improve going forward. And for that, we need to try to get -- I would say, almost -- let's think about that, a 100% of the sales through the end to end, so we should do everything on board inside our app. With that, we can improve the take rate even further.

I don't think that's something that you'll see -- maturing, increase on the next quarter or the next 2 quarters. It's some midterm projects in order to have 100% of the sales inside the app and therefore, to get more take rates from the merchants.

[Operator]

And our next question comes from Tito Labarta, sell-side analyst from Goldman Sachs.

[Daer Labarta, analyst]

My question is on your ARPAC on Slide 20 in the presentation. It's come down a little bit in the last 2 quarters. I imagine just from the higher interest rates and higher interest expense. But -- maybe you can help us think about the evolution of that. When do you think that starts to increase again and looking at some of the more mature cohorts getting to like the BRL 40 or even BRL 50 level, is that a good sort of target that we should consider about where that ARPAC can get to over time?

[Santiago Stel, executive]

Thank you, Tito. Santiago here, taking that question. So on ARPAC, we have 2 use. The static one, which we have historically provided to the market and the cohorted one which is a new one, both are net of cost of funding. And we continue to show net of cost of funding after having done a strong analysis and collecting the feedback from recent investors that is a better metric to analyze the revenue capacity for our clients.

So the main difference is, as you are anticipating it has to do with net of cost of funding impact, which was pronounced in the past 2 quarters.

If we would see on a gross basis, so without reduction of Inter's expense, the exact opposite would have happened, will be roughly at BRL 45 per quarter, BRL 1 each of the last 2 quarters instead of compressing BRL 1 into the last 2 quarters.

And then on a corporate basis, which is the new ingredient that we brought in for this call. And we can see that the cohorts continue in a relatively steep manner despite the net cost of funding. It would deduct the -- ignore the cost of funding impact, the stillness would be even more pronounced. And we think that the BRL 50 that we see on this cohort analysis is the minimum that we aspire to have even though we have many of the products that have been recently launched and are still in the process of maturing.

In addition to that, when you compare the ARPAC to the large incumbent banks, which are much higher within the room to grow is still significant. So at the very minimum, we are planning on having a BRL 50 per month net of cost of funding going forward.

[Daer Labarta, analyst]

Great. That's very clear, Santiago. Just one quick follow-up. So in terms of -- how about just thinking of the higher interest rate environment, when do you think we get an inflection point in that and it starts to increase again? Is that next year, next couple of quarters? Just to get some context in.

[Santiago Stel, executive]

I would say that it will take a few quarters. So on the cohorts, the most recent ones start with a higher weight on fee income than the olders, that start more heavy on credit. And these younger cohorts has a steep curve at the beginning. And so as that happens, we will see the ARPAC improving quarter-by-quarter.

But I would say at the beginning of next year, that increase should be more pronounced as we see the maturity of the cohorts combined with the repricing of the portfolio.

[Operator]

And our next question comes from Mario Pierry, sell-side analyst from Bank of America.

[Mario Pierry, analyst]

Congratulations on the quarter. I actually have 2 questions. First one is on client engagement, right? We're seeing -- you're adding new clients at a good pace. However, when I look at the percentage of active clients, is actually declining. I think it was 52% this quarter versus 58% one year ago. And I understand part of this is explained by the fact that you're more cautious in renting credits but is there something else that we should be concerned about, especially as you have been adding new products to your base? I'm a bit surprised that the engagement has been declining.

And then the second question is related to your customer acquisition cost. It went up again this quarter. I think you mentioned about some supply chain issues on your press release. But can you give us a little bit more color why your CAC is going up?

[João Vitor Nazareth Teixeira de Souza, executive]

Mario. So thank you, João Vitor speaking. So first of all, about the engagement. We're not concerned with the engagement at all. I mean, we don't think that it's a trend of going down. We have to realize that 50% of the clients onboarded maybe 12 months ago. So the pace of growth that we experienced for the past 12 months or so was really big. And therefore, the engagements, take hit.

You have to think that it takes a while for us to engage the new clients. They need to receive their cards. They need to get their credit limit, as you mentioned. So every time that we starts to be more conservative to have a hit on that engagement. And also when you grow faster, the new adoption of clients, we also take a hit.

At the beginning, when we're growing at a slower pace, let's say, by 2020, 2021 when we grow up. We had a 60% to 65% activation ratio. I would say that our growth going to a more, I'd say, slower pace, we see this [ 52% to 6% ] ratio going back to this [ 6% to 65% ] activation ratio. Of course, by granting more credit limits that I mentioned before, helps on the activation and on the retention, we might also have a tailwind on that.

And therefore, we are confident that having the good products and all of the products and the best platform as we do, we'll be able to go back to the [ 6% to 65% ] activation rate. So we are looking, of course, our stride to improve, but we're not concerned on that.

About the CAC, we did have an increase on the operation of costs, so to ship the cards, to send the cards,to buy the cards, but we didn't have an increase on the marketing expense. On the other way around, I would say that last month, we started to reduce our acquisition costs. We have reduced it around 25%, and we printed almost the same number of times that we have been printing for the past 6 months or so in the first half of the year.

So we're very confident that our acquisition cost, the market acquisition costs will decrease going on. And we believe that when we normalize this cost with cards and shipping and everything, we should have a positive turn around path down. So I believe that we have also -- we have also good news on that front.

[Mario Pierry, analyst]

Okay, João. That's very clear. So basically, the card is a temporary increase should be declining in the activation rate also you do think it should be going higher, right? So -- and you think between 50% and 60% should be your normalized level?

[João Vitor Nazareth Teixeira de Souza, executive]

No, no. I believe that our normal level. We need to start going back to maybe first [ 55% to 6% ], and we have the capacity for sure to be above 6% active clients, I would say -- quite soon. I mean, so maybe some fourth term to mid-term.

[Operator]

Our next question comes from Thiago Batista, sell-side analyst from UBS.

[Thiago Bovolenta Batista, analyst]

I had a question about the interest rates. You had a comment about the increase in the interest rate of credit card loans. But is Inter expected to increase also the other lines, I know that there's some limits for paying loans, but you guys seem to be -- the pricing seems to be lower than average, -- mortgage also. So are you guys seeing room for further increasing interest rates in other lines, not only in the credit card?

[Alexandre De Oliveira, executive]

Hello, Thiago, Alexandre speaking. So as you mentioned, credit card is already done. We're starting to see and the Central Bank data demonstrating that the increase in rates impacting the P&L this quarter, third quarter, we should see the first full quarter of results there, and we are -- obviously, following up on that, I think it's going to be an important move for the P&L.

Now on the other portfolios, it's a constant work that we're doing, okay? So we're focusing a lot on optimizing use of capital on the different lines.

And on payrolls and on the mortgages, it takes a bit longer to do all the repricing, but we're focusing on that. And we're also touching on that on all the SME lines. So -- we can say that in the next months and quarters, we're going to keep improving our spreads and as a consequence on our NIMs.

[Thiago Bovolenta Batista, analyst]

And are you guys seeing any complaint by clients with this increase in its rate or no the clients are setting this increase probably in the credit card you did in a more strong way, but have been okay to do this, increasing these rates or how price sensitive the clients seem to be?

[João Vitor Nazareth Teixeira de Souza, executive]

Okay. So João Vitor, speaking. As you might know, already. We're very, very customer-centric. Of course, we just don't want to keep raising interest rates and to just start charging for withdraws and everything that's not our mindset.

On the credit card specifically we had a big increase, and it's pretty much aligned to the risk reward of the business. That's it. So we realized that we had to move up. But at the end of the day, we are at the same level of the industry. So we haven't seen complaints so far. We [indiscernible] already for almost 2 months, I would say. So didn't have a complaint. So we're proud of that.

People really like to use our business to use our credit card. It's convenient. It's good, as I mentioned, very important, good UX/UI. So we're able to reprice that.

So it was, I think, a smart decision. We do that. We do the big assessment on how to do and what to do and important, we did that mostly on the [ revolving ], which is a very short term, [ alone ]. We didn't increase as much in the installments. We increased but not much because we believe that, therefore, on debt, it's not feasible to have a 15% compound for 12, 24, 36 months. So that's how we address that [ rework ] issue on credit card.

[Operator]

Our next question comes from Neha Agarwala.

[Neha Agarwala, analyst]

Congratulations on the results. How comfortable are you with the -- your originations going forward? Should we see originations in the coming quarters for your overall book remaining more or less stable versus the previous quarters? Or do you think they should be going down?

And what is the level of loan growth? I think previously, we talked about around 50% loan growth for this year. Does that sound reasonable or more or less, how much have you changed?

[Alexandre De Oliveira, executive]

Thank you for your question, Neha. Alexandre speaking. First, on the credit cards, we are very comfortable, as João mentioned on his speech in the first part of the call, we've been working on the product learning, all the dos and don'ts of credit cards.

And lately, we've observed a strong macro deterioration where we're able to put in test our ability to drive NPLs, to drive the early indicators of delinquency such as the first payment default that João mentioned. And we've been able to see the results of the moves that we do internally, translate into P&L changes and things like that.

So that's important. We've been able to -- early on, reduce the percentage of approval on credit card limits that we were doing on onboarding, getting good results on NPLs as a result of the move. So we have our hands on the wheel and that makes us comfortable to keep on growing and to keep on executing on this product.

Our goal, just on last point on credit cards is to improve our models to be able to do even better selection of clients so that we can improve and increase the approval rate without increasing NPLs. That's one thing that we're working on doing and that we expect to deliver by the end of this year. So just to remind everyone, we were at about between 15% and 20% approval rate on the onboarding. We're close to 10%, and we expect to go back to the 15% level or more without increasing the risk profile of the clients that we are approving.

Yes. And on loan growth, we should be in the same levels that we mentioned in the first quarter in the 40% to 50% level on an overall portfolio level, Thanks, Neha.

[Neha Agarwala, analyst]

If I can ask another follow-up. What are you doing to improve your ability to underwrite credit cards? What changes are you making to your models, are you hiring people from the market to build more expertise? What are the changes that can lead to this improvement?

[Alexandre De Oliveira, executive]

So, Neha, a lot of different things. So the new roles who takes care of the credit models with Felipe that has been with us for a long time. They've been improving a lot the model. They have been bringing new variables and also new people to the team. And as we combine all that, the model improves. And also, as we have more data as time goes by, we can also make the models richer. So that's a little bit of what we've been doing.

And an important point also is to focus on clients that already have engagement with Inter. We've had a lot of success, give increasing limits and giving out limits based on the behavioral models. So it's a good part of what we've been focusing on to keep spending increases and to keep the portfolio increases.

[Operator]

And our last question comes from Rafael Berger.

[Rafael Berger Frade, analyst]

So my question here is just if you could give some details about the strong recoveries that you have in the quarter. So you have something like BRL 150 million in credit recoveries well -- well above the last quarters. So just to give some detail here would be great.

[João Vitor Nazareth Teixeira de Souza, executive]

Rafael, João Vitor, speaking. If you recall, I told you about the 3 states on the credit card business. So first on the right pricing. The second one, you UX/UI for the client and the third one, collection. I would say that one of good legs from this -- I would say, this mass on the unsecured credit portfolio [indiscernible] for this past, I would say, 6 months or so.

For us, it was that we really worked hard to improve our collection process. Not only in bringing people, putting new initiatives, working with more data, being more aggressive, improving the UX/UI in our app to make it more convenient for the client.

So -- it's a big [ legs ] for us, and we're going to keep doing that forever. So it's not something that going to stop doing after the market improves. And this is what -- the main reason why we have this improved on the recovery. Of course, we also expect some more better market trends. So we have more liquidity on the market coming soon with many liquidity coming from the government side. So this should also help.

But we did our homework. We improved a lot the collection. So on these 3 specific factors for a good credit card business. So the underwrite in the UX/UI, in the collection, I would say that 2022 was the year for us to improve on the collection side. And we were able to do this good recovery automation. That's the reason for that.

[Unknown Executive]

We see a question here from [indiscernible] with no microphone. Asking us about ROE and capital consumption. So on ROE, what we see in 2023 is this trend of operating the rest that's what we do saying improving, and that translating into bottom line.

And in terms of capital towards a mid-single digit, we would say, performance and way far from where we want to, but already improving and creating organic capital, which is what we want to do to cover 5-year self-funded plan from a capital perspective.

Our [ CET1 ] remains at 33%, with room to more than [indiscernible] our [indiscernible] -- as with the addition of organic capital creative, we think we can make that capital last comfortably 5 years down the road.

[Operator]

And now we conclude the question-and-answer session. All the other questions sent will be answered by the Investor Relations team.

And now I would like to turn the conference back over to Mr. João Vitor Menin for his closing remarks.

[João Vitor Nazareth Teixeira de Souza, executive]

So thank you, everyone, for joining us today. I'd like also to thank my team, everyone working hard at Inter to make that possible. As I like to say, we're here for the mid long term, not for the short term and very excited to what with what we have ahead of us.

Thank you also for other shareholders that have been supporting us since the beginning. And that's it, see you soon, and we sure we're going to keep working hard to deliver the best value for our shareholders. Thank you, and have a good day.

[Operator]

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