Inter & Co Inc

NASDAQ:INTR

Earnings Call Analysis

Stellar Quarter with Record Revenue and ROE

In a striking quarter, the company replicated its Brazilian success in the U.S., leveraging scalable tech for a global app, focused on Brazilians abroad. Client base rocketed nearly 4x to 2 million. Record revenues of BRL 2.1 billion were driven by fee expansion, despite lower inflation nudging net interest income growth to 2%. Monthly ARPAC hit an all-time high, gross margins soared, and efficiency ratio improved to 52.4%. Net income surged to a historic BRL 104 million, with ROE at 5.7%. The firm reported a robust CET1 ratio of 23.7%, marking its first organic capital creation.

Strategic Growth and High Revenue Performance

The company has reported a successful quarter with significant growth in both gross and net revenues, reaching BRL 2.1 billion and BRL 1.3 billion respectively. This growth has been mainly attributed to the expansion in fees from various sectors such as interchange, e-commerce, insurance, and banking revenues. Despite a lower inflation rate affecting the net interest income (NII), which grew by 2%, the company expects an acceleration in the next quarter as inflation normalizes.

Record Margins and Client Acquisition Strategy

The company's monthly average revenue per active client (ARPAC) achieved an all-time high at BRL 48, driven by a substantial increase in the client base and a robust client acquisition and activation approach. With consistent efforts towards app personalization, the company anticipates this positive trend in ARPAC to continue, resulting in improved gross margins per active client for a fourth consecutive quarter to BRL 35. Notably, the net interest margin (NIM) also showcased strong performance, with NIM 1.0 at 7.8% and NIM 2.0 at 9.2% for their respective portfolios.

Operational Efficiency and Cost Control

Effective cost control initiatives have enhanced the company's expense trends, with personnel expenses reflecting the increased profitability through accruals for bonuses and profit-sharing agreements. Furthermore, the efficiency ratio marked a record low of 52.4%, indicating a solid improvement led by revenue growth. In terms of the sales, general, and administrative (SG&A) expense base in relation to net fees, there has been notable advancement reaching 73%, setting a new high with an aim to fulfill the company's return on equity (ROE) objectives.

Exceptional Profitability and Capital Ratio

The company achieved an impressive ROE of 5.7% with a record net income of BRL 104 million, highlighting an 80% improvement in pretax income from the previous quarter. The capital adequacy was demonstrated with a 23.7% CET1 ratio, indicating the company's first organic capital creation while reiterating that the capital is comprised entirely of high-quality core equity without reliance on hybrid instruments.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, and thank you for standing by. Welcome to the Inter & Co's Third Quarter Earnings Conference Call. Today's speakers are Joao Vitor Menin, Inter's CEO; Alexandre Riccio, Senior Vice President of Retail Banking; and Santiago Stel, Senior Vice President of Finance and Risks.Please be advised that today's conference is being recorded and a replay will be available at the company's IR website. [Operator Instructions]Throughout this conference call, we will be presenting non-IFRS financial information. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information are available in Inter's earnings release and earnings presentation appendix. Today's discussion might include forward-looking statements which are not guarantees of future performance. Please refer to the forward-looking statements disclosure in the company's earnings release and earnings presentation.Now I would like to yield the floor to Mr. Joao Vitor Menin. Sir, the floor is yours.

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you, operator. Good afternoon, everyone. I'm pleased to announce another record-breaking quarter in our history. We believe that we have successfully entered a virtual cycle that lead us into a sustainable, growing and profitable business model. Once again, we can affirm that our results are no longer a glimpse as we said a few quarters ago, but a clear testament of our long-term profitability potential.When I reflect on the states in our history, I see 3 clear phases. The first, which was until 2021, focus on growth, creating the full ecosystem of products and gaining market share while creating deep primary relationships with our customers. The second, which took place during 2022 when we had our platform in place and started to prioritize monetization, building the foundations for a business model that was built to last.Now in the third phase, with the foundations in place, we started 2023 with strong momentum. We continued improving our profitability while reaccelerating our growth profile. As I mentioned before, we have entered a virtuous cycle as we can see on this slide, driven by our innovative DNA in the center. We built a best-in-class financial Super App, delivering the broadest digital offering with a top-notch UX that continuously attracts new clients. As these clients engage more deeply with us, we are generating higher revenues that yields growing profits, making it a sustainable business model. This dynamic then restarts to the beginning by reinforcing our innovative DNA and the cycle keeps moving on and on.To conclude, I believe that the importance of this quarter goes beyond the amazing numbers we are reporting. It represents something far more relevant. We are in the right direction to meet our 5-year North Star, which we named the 60-30-30 plan. The commitment to the 60-30-30 is already generating significant value to our stakeholders, which we believe is the only way to build a company to last.Let me elaborate a little more on that. First, to our clients, by disrupting the industry offering the best value banking services. Second, to our employees with a great place that foster creativity and growth. Third, to regulators, developing technology and bringing efficiency into the financial system. Fourth, to our community with eco-efficient business model. And last but not least, we're generating value to our shareholders by delivering sustainable long-term profitability.Before passing the word to Alexandre and Santi. I will highlight some of our record-breaking numbers of the quarter. We delivered an impressive combination of record figures, which we believe proves we are on the path to sustained profitability. From a financial perspective, our gross revenue had another record quarter, surpassing BRL 2.1 billion, 39% higher than last year. The combination of top line growth and cost control enabled us to achieve another record efficiency ratio of 52.4%. On the bottom line, we had our highest ever profitability level with a pretax income of BRL 145 million and post-tax income of BRL 104 million. We also achieved a record-breaking ROE of 5.7%.When we look at the operational side, we also see a series of milestones. For the third quarter in a row, we attracted 1 million new active clients. We also continued increasing our activation ratio, reaching 52.7%, the highest level since 4Q '21. Our monthly ARPAC increased once again, reaching the record level of BRL 48. And finally, we had a great quarter in terms of transacted volumes, expanding our TPV to BRL 219 billion.Now I'll pass it to Alexandre and Santiago, who will deep dive on both fronts. Thank you.

[Alexandre De Oliveira, executive]

Thank you, Joao, and good afternoon, everyone. I'll start talking about credit and our funding capabilities. Jumping to Page 10.I'll pass through some important highlights regarding credit. This quarter we were able to accelerate the growth in our loan portfolio, growing by 7% and remaining focused on high ROE products, such as our FGTS loans, which once again grew more than 20% and home equity, which grew nearly 10% and reached a market share in originations of also 10%. The most interesting factor of this quarter was on credit cards, which reached a growth of 13%. This is the result of continuous improvement in the credit underwriting processes, active portfolio management, the success of Loop, amongst other factors. When we look at pricing on the top part of the page, the all-in yield, excluding real estate loans, which is the dotted line, continued its quarter-over-quarter improvement.Now moving to Page 11, we'll talk about improvements in our asset quality metrics. What we see in this slide is the result of our ongoing efforts to enhance our credit underwriting processes and collection strategies, reaching a more precise data-driven model. As a result, we're delivering flattish NPLs, both on a 15 to 90 days and above 90 days basis. When we look at the cohorts of NPLs of credit cards, we continue to see a sequential improvement, forecasting a positive trend for the upcoming quarters. Finally, the NPL and Stage 3 formation also have shown stability.On Page 12, we can see a very positive improvement on the cost of risk metric, which decreased by 30 bps. This improvement was driven by our active risk management mentioned in the previous slide. Despite the decrease in cost of risk, our coverage ratio increased 200 bps to 132%. Always worth mentioning that around 70% of our portfolio is collateralized, thus presenting a lower-than-average risk profile. Overall, these results give us confidence for the quarters to come.On Page 13, we can see once again that we have one of the best-in-class funding franchises in the industry. Our deposit growth accelerated to 11% this quarter, almost twice the growth level of last quarter. In total, we reached a funding base of around BRL 40 billion.In Page 14, we see that we continue delivering an impressive cost of funding, which is now 61.4% of CDI, including all interest-bearing liabilities. We're confident in the sustainability of this cost of funding profile for the quarters to come. Our deposit base is diversified in more than 14 million retail customers that trust us with their savings and transactional balances. Our average deposit per client grew by 4% to [ BRL 2,600 ] despite the accelerated growth in our activation rates.Now let's move forward and talk about our transactional platform session. As mentioned in the beginning, we're reporting our third consecutive quarter bringing 1 million new active customers, achieving 15.5 million. Our activation rate showed another quarter of strong progress, increasing by 49 bps. This milestone, combined with the lowest CAC since the third quarter of 2020 is a direct outcome of our commitment to leveraging better client profile targeting, new customer journeys and communication strategies. We're constantly deepening our understanding of customer profiles and feeding this new knowledge into our algorithms to optimize the new cohorts.In terms of volumes, you can see that our TPV reached an impressive BRL 219 billion, mostly driven by credit and PIX. This is the highest credit TPV growth in a quarter since the second quarter of 2022, combined with a more balanced mix between credit and debit transactions. This contributed to a greater interchange revenue growth this quarter. In a cohort basis, as presented in the right chart, we can see that the newer cohorts are starting at higher levels and growing at a faster pace than the other ones. We're proud about this performance, which is a strong evidence of better quality in client ads and activation.Moving forward to our other verticals, we can see the power of our financial Super App ecosystem. On e-commerce, we reached 2.9 million clients who conducted over 10 million transactions in the quarter, another record. We also have BRL 870 million in GMV, leveraged by our interday in July 7. Our net take rate in the quarter was 8.7%. Combining this, we reached a record-breaking gross revenue in this vertical of BRL 124 million. On insurance, we had a great quarter, reaching more than 322,000 sales and 1.6 million active clients.And finally, on investments, our simpler and accessible product offering resulted in an impressive 74% year-over-year client growth, reaching 4.2 million, along with a strong AuC that increased to BRL 83 billion. Talking about our global solutions, we experienced another quarter of strong success. We achieved over USD 270 million in deposits and AuC. We continue replicating our Brazilian offering in the U.S. by taking advantage of our scalable technology to create a best-in-class global app. The strong adoption of these products is a result of the continuous UX improvement and our focus on Brazilians who travel, invest and/or are immigrants in the U.S. The client base grew nearly 4x year-over-year, reaching almost 2 million.Before passing to Santi, I would like to comment that in the U.S., we're replicating our #1 competitive advantage that we have in Brazil, which is our unique cost of funding. Now Santi, please go ahead. Thanks, everyone.

[Santiago Stel, executive]

Thank you, Alexandre. Good afternoon, everyone. Now I'll walk you through the financial section. Jumping into Page 21.Here, we can see revenues, which had another great quarter, reaching also record numbers. As mentioned at the beginning of the presentation, we achieved BRL 2.1 billion of gross and BRL 1.3 billion of net revenues this quarter. The growth was mainly driven by fee expansion, which resulted from the strong performance of interchange, e-commerce, insurance and banking revenues. In terms of net interest income, the lower inflation in the quarter impacted NII, resulting in a growth of 2%, though we're seeing acceleration in the fourth quarter as inflation returns to normalized levels.Now moving to Page 22. Here, we can see the unit economic metrics. Our growth monthly ARPAC reached BRL 48, an all-time record. This is impressive in our opinion as we continue adding a strong number of new clients every quarter. The strong ARPAC, combined with a stable cost to serve has led us to improve our gross margin per active client for the fourth consecutive quarter, reaching another record of BRL 35. We expect that this trend will continue improving as the new approach of client acquisition, activation and the app personalization continues to move forward.Jumping to the NIMs on Page 23. Here we can see that our NIM 1.0, which considers the full portfolio, including cash receivables that do not accrue interest known in Portuguese as [ avista ], reached 7.8%, our second highest level ever. Regarding NIM 2.0, which considers only the interest earning portfolio [ in reached ] 9.2% this quarter. As mentioned before, we observed lower inflation levels in the third quarter, which are now normalizing to the current one. Additionally, we had more renegotiations triggered by the [ Decentrola ] program, which despite impacting NII had a positive effect on cost of risk. Finally, our repricing strategy continues ongoing. And in addition to a shift in underwriting mix, we expect to continue improving the implied rates of our portfolios.Moving to the expense side on Page 24. Here we can see better trends in the last 3 as a result of our cost control initiatives. As our profitability increased, our personnel expense line reflected an increase in compensation associated with accrued bonuses and profit share agreements. The other expense lines remain roughly in line with the prior period as a consequence of multiple initiatives to optimize our cost structure. With this disciplined focus on expense management, we still see a strong opportunity to continue delivering economies of scale.Moving to Page 25. To summarize the work that we are doing on the operational leverage front, these 2 charts provide good insights. On the left-hand side, we can easily see the remarkable increased gap between the growth levels in net revenues and expenses. And on the right-hand side, I would like to highlight another great quarter of improvement in our efficiency ratio, which once again is a record low of 52.4%, meaning 100 bps better than the prior quarter. Unlike in the prior 2 quarters, on this third quarter, the improvement in efficiency was led entirely by revenue growth.On Page 26, we are actively monitoring at Inter what the percentages of the SG&A base related to the net fees. As you can see in the chart, the ratio has been nicely evolving during the past few quarters and now stands at 73%, our all-time high. The continuous improvement in this ratio is a key component to meet our ROE goals.In terms of profitability on Page 27, we couldn't be more proud of what we achieved. We're able to deliver a record-breaking ROE of 5.7% by printing our best-ever net income of BRL 104 million. On a pretax basis, we reached BRL 145 million, which is more than 80% higher than in the prior quarter.Concluding our financial section on Page 28, we recorded a 23.7% CET1 ratio this quarter, our first ever organic capital creation. As mentioned in prior calls, our capital is fully comprised of top quality core equity with no hybrid instruments. Now I'll pass the mic back to Joao for his final remarks.

[João Vitor Nazareth Teixeira de Souza, executive]

Thank you, Alexandre and Santi for highlighting all the important topics of our another record-breaking quarter.Before moving to Q&A, I would like to summarize these impressive results quarter in one phase. We are building a business model to last by adding value to our stakeholders. Our core competitive advantage, which are cost of funding, cost to serve and strong fee income remain as strong as ever. We are delivered solid growth, leading to strong market share gains, disrupting the status quo. Our state-of-the-art technology is like no other and set us apart from our competitors, offering the best UX and integrated banking experience in the market.I would like to close by thanking [indiscernible] for the amazing work done this past quarter. We will now start the Q&A. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Flavio Yoshida from Bank of America.

[Flavio Yoshida, analyst]

I actually have 2 questions on my side. The first one is on the net interest margin. So you guys already mentioned the impact of lower inflation that ended up impacting the NII. But I was wondering what happened here. I mean, you guys were doing a great job on the repricing process and announcing the shift in the loan portfolio mix towards a higher ROA product. So we're not expecting a NIM reduction in this quarter. So what really happened here? And what should we expect going forward? And then my second question is on expenses, specifically on personnel expenses, right? So there was a strong increase compared to the previous quarter, even considering the headcount reduction, right? So according to our calculations, the cost per employee increased more than 40% year-on-year. So I would appreciate if you guys could share some color here.

[Santiago Stel, executive]

Santiago here. I'll take your question. Thank you for asking. So on the first one regarding NIM, first, let me clarify that the NII did grow this quarter from BRL 802 million to BRL 818 million, and that is after a very strong growth that we exhibited in this last quarter. So we are at a high base, we grew on top of that. That BRL 818 million that we reported this quarter is 50% higher than a year ago. Now going to NIM specifically, there are several factors playing out here. On the negative side, we did experience lower inflation, which impacted our real estate loans that have revenues linked to the inflation index, IPCA, that are around BRL 20 million of NII delta -- negative delta this quarter. The second point is that we had greater volume of renegotiations of portfolio this quarter in the context of the Decentrola program and the awareness that, that program created. That's close to BRL 30 million of impact. So those 2 pushed the NII down relative to what we were having in the prior quarter and what we expect to have in the next one. And then on the positive side, we had a continuous optimization of the reserve requirement playing the full 3 months. That's the [ Conta Compontos ] or Loop program that we announced on the last quarter. And we had a continuation of the improvement in our loan mix as the higher ROE products continued to grow faster than the lower ones and they gain representation in the -- in our loan mix. So all that together, on NII, the numerator grew less than the average earning assets, the denominator, the fundamentals of our trend to expand net income margin, continue to be strong, leveraging on our funding franchise and the improving ROE-driven grade portfolio. So we don't see that we are deviating at all on the repricing strategy. We continue doing it actively. We're also seizing opportunities like the Conta Compontos [indiscernible] or the renegotiations now, and we stay true to our mission to deliver double-digit NIMs. Now going to the second question on personal loans. Given the strong bottom line result this quarter, we did accrue boosting of some profit bonuses and profit sharing for employees and executives. Excluding these factors, personnel expenses growing 5% this quarter, given our number of employees continue to reduce organically and now stands close to 3,300 employees. The average salary of employees is growing as we're increasing the performance and talent level of employees across the organization. And we think that going forward, the expense on personnel expenses will be highly correlated with the bottom line. Final comment worth noting that we don't do any adjustment on net income related to expenses of salaries, personnel share base, they are all in. So the bottom line considers all these expenses in the metric. Thank you, Flavio.

[Operator]

The next question comes from Rafael Frade from Citi.

[Rafael Berger Frade, analyst]

Two questions here. One is a follow-up on some comments about renegotiations. Just to be clear, how this BRL 30 million impact the NII, if it's related to discounts. I understand that other banks maybe classify this as cost of risk. So just to understand a little bit this dynamic of renegotiations on the NII in the quarter. And second, if you could comment on fees. So you have a very strong performance quarter-over-quarter. So try to understand here is there is some one-off here or if it's a base that we can use as a reference going forward.

[Santiago Stel, executive]

Thank you, Frade, for your questions. So starting with the one related to renegotiations. So renegotiations were done over interest income, so accrued interest income. So it does impact that line. This has been done this way for a long manner because the discounts are done or accrued interest. So that impacts interest income. We do think we will continue having a bit of that in the fourth quarter. We are looking at the integral or the full economic impact in the P&L of this. So when we look at it together with the impact on asset quality, it's clearly a net positive. And to give a bit of broader context on this, Frade, as our written-off portfolio has grew significantly, we started to debate whether to continue with our written-off portfolio sales, the [ HA ] portfolios that we have historically been doing, we typically give discounts on those that were plus 90%, but these ones that we're doing in the context of the program are close to 40%. So this has much better performance on the P&L, and we see great results from the clients anticipating payments as soon as the agreements are done. And then going on to fees, increase in fees was BRL 100 million this quarter. The main driver of that was growth of interchange of credit cards. This is driven as a consequence of the increase in the loan portfolio of cards in particular, which had 13% growth, the second highest in our portfolio, followed by insurance revenues, close to BRL 10 million additional. On MasterCard, we had extra performance of close to BRL 20 million as a consequence of beating the performance metrics that we have with them. Inter Shop performed very well and delivered growing GMV for the first time in several quarters, and that generated an additional BRL 10 million of revenue. So it's a combination of factors. We do see fee as a key component of our strategy. We always say that it's one of the 3 competitive advantages that we have, which are cost of funding, cost to serve and a high percentage of fee income, which continues to be around 1/3 of the total net fees. And this is the way it's explained, that we are happy with the performance and expected to continue delivering that way.

[João Vitor Nazareth Teixeira de Souza, executive]

Frade, here Joao Vitor, just to complement on Santiago's answer. I have been telling other shareholders and everybody for a while that the fee income is very important for our business. By delivering growth on fee income and a sustainable fee income, our fee income is here for -- that's going to be here for a while. We're not charging the BRL 10 on the peaks in those type of things. We will always have a big percentage of our fees on top of total revenues. And with that trend, we will always be able to improve our ROE going forward. So I myself, I'm very, very dedicated to improve our types of fees on Inter Shop, on insurance, on the expansion to U.S. through FX. So this is a very important revenue generation for Inter. So I do believe that it will keep being important and also I see room to keep improving on a percentage base going forward.

[Operator]

The next question comes from Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

Can I just have a clarification on the NIM discussion that we had earlier in the call. There was a negative impact on the real estate portfolio of about BRL 20 million, you mentioned, from lower inflation. Is this something that we should see in the coming quarters as well? Or do you think the adjustment is largely done by now? And my second question is on asset quality. Asset quality so far is stable, but we noticed that you reaccelerated the growth in the credit card portfolio. So how do you think about the asset quality in the credit card portfolio now? Do you see improvements enough for you to be encouraged to expand your loan portfolio there? And how confident are you with your -- the improvement in your origination that you made in the past quarters.

[João Vitor Nazareth Teixeira de Souza, executive]

Neha, Joao Vitor here. I'm going to talk about the growth on the credit card. Alexandre is going to cover later the links. So first of all, we have always been very cautious on credit card underwriting. Everybody knows that at Inter we like to have a very well-collateralized credit portfolio. But I would say that for the past 12 months or so, we have been improving our underwriting process and also our collection process as well. We have, in spite of the market, we have been more excited about this product. You see that our TPV is growing as Santiago also mentioned, we improved the credit limit from BRL 20 million to BRL 25 billion. So it's a big incremental in a quarter or so. And so we are more excited with the credit card business going forward. And not only that, we believe that we have a lot of change on the regulatory framework ahead. And combining what we learned and what we're improving and what we're doing on the credit card together with Inter Shop, we do believe that we're going to have the best consumer finance product available in the market to run this business here at Inter. So I'm very excited with the improvements on the credit card and combining this with Inter Shop initiatives and, therefore, having this state-of-the-art consumer finance portfolio. Regarding the NPLs, we have a gap between what we have underwritten before now. And Alexandre will cover that. Okay. Thank you, Neha.

[Alexandre De Oliveira, executive]

Okay. Thank you, Neha. So on the nonperforming loans and delinquency, as we expected, the asset quality metrics did perform well during this quarter. So cost of risk closed at 5.9%, that's 30 bps better than last quarter. NPL 15 to 90 and 90-plus reported flat figures, which is -- we see it as good news. And also NPL formation was flat at 1.6%. In terms of what's driving delinquency, it continues to -- the bulk of it continues to come from the credit cards, about 90% of it. When we look at the credit cards more deeply, we see improving delinquency on a cohort basis. So like on Page 11 of our presentation, we see that there is a consistent improvement across all of the cohorts that we have. In terms of cost of risk, the reason for this 30 bps improvement is mainly a result of the underwriting models and collection initiatives that we've been implemented. So we've implemented maintenance strategies in the card portfolio. And part of that is increasing limits for high-performing individuals and part of that is to reduce the limits of clients that have deterioration in the credit profile. That tends to be favorable in the short and long term for reduction of cost of risk. In terms of mix, when we think about the overall portfolio, we continue to add FGTS and Home Equity Loans that have better average delinquency levels. So these 2 segments, they represented 8% of the portfolio a year ago, and now they're at 13%. And finally, but important to highlight, our coverage ratio increased 2 percentage points to 132%, even considering that the biggest part of the portfolio has a strong level of collateral. With that said, we're very comfortable with our underwriting machine and the speed that we are evolving. Thanks, Neha.

[Neha Agarwala, analyst]

Could I follow-up on one of the topics? You mentioned about integrating the credit cards with the Inter Shop. Is this something that you already started to pilot or test? Or is it something in the works and maybe something we see in 2024?

[João Vitor Nazareth Teixeira de Souza, executive]

Okay, Neha, Joao Vitor speaking here. As I mentioned, we do believe that the future of consumer finance is the integration of the payments, the installments together with the e-commerce. And yes, we started that already. I would say that we started our [indiscernible] 2 months ago or so. We don't have yet the right trends, the right number for the delinquents on that product. But one the good news are we get a very reduced take rate on that product, and we do get a down payment for the products. So when you combine down payment plus a good take rate, the cushion that you have for delinquency is huge. So we're very confident that this product is going to be profitable going forward. We expect to share more on that NPL ratios maybe by end of the year or 4Q maybe. But again, I'm myself very excited with the way we are combining these 2 things, the commerce and the banking side. Thank you, Neha.

[Neha Agarwala, analyst]

Perfect. And on the NIM, the impact on the real estate portfolio and lower inflation, is that something recurring for the coming quarters as well? Or are we done with that?

[Santiago Stel, executive]

So on inflation, Neha, we're seeing now for the fourth order similar levels that we saw in the first half. So the impact on the third quarter, which actually has 1 month of lag, so that was the last month of the second quarter, June, July and August had lower inflation levels. Now we're seeing normalized levels into the following 3 months. So we are back to what we saw on the first half of the year.

[Operator]

The next question comes from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have a follow-up on the fees, on Frade's question on fees. We know the interchange, growing a lot, like 50%, 60% quarter-over-quarter. But your credit card's TPV, excluding peaks, was growing like 8%. So what drove this different behavior? Usually, TPV and interchange, they tend to follow each other, why interchange is growing faster? Is this because of, I don't know, higher-income clients, higher income cards? I just would like to have more details on the interchange versus TPV behavior. And I have a second question regarding other revenues. Other revenues was also part of the good quarter, right? Like it's growing 60% quarter-over-quarter. And when we look to your financial statement, we see capital gains, other revenues and performance [indiscernible]. Performance [indiscernible] you already mentioned that I think was MasterCard here. But what drove the capital gains and the other revenues. My point about this line is how recurring these other revenue should be for the coming quarters.

[Alexandre De Oliveira, executive]

Hi, Yuri. This is Alex. Thank you for your question. I'll take the first part and defer the second one for Santi. So in terms of the interchange revenues, what we had was a change in mix. So we started growing credit cards again and had a mix flip with credit becoming more relevant than debit. That was the key change, so relatively simple, and drives a lot more interchange fees, which is a good move for us. We are preparing, as Joao Vitor mentioned earlier, to keep on growing on that front with several things, as you mentioned, including Loop. So our loyalty program is starting to kick in, in terms of bringing more recurring spenders to Inter. So I'll pass the word to Santi. Thank you.

[Santiago Stel, executive]

Hi, Yuri. So on the other fee revenue question, 100% of these other fee revenues are correlated to business volumes where we excel in cards, insurance and investments, diving on each of these points on PPV of cards, building up on what Alexandre just mentioned, it grew 12% this quarter, exclusively of credit cards to BRL 10.3 billion in a quarter with no particular positive seasonality, just driven by our acceleration in the Credit Card business, while loan portfolio, as you know, growth grew 13%. Another relevant number to mention, which I think Joao anticipated a bit, it's the increase in our credit card limits from BRL 20 billion to BRL 25 billion. This is a 25% increase in our limits in just a quarter, focusing on clients with higher propensity to spend, therefore driving higher TPV. The second point is insurance. This has 2 parts. The first part is related to performance where we've been over-delivering the business goals with our bancassurance partners, both Liberty and Sompo. And for that we accrued recurring revenue. And the second one is related to our stake in Interseguro where we have a profit-sharing agreement. And the more performance the company has, the more we benefit from it. Third and last is investments, where we have a volume-based agreement with B3 that we've been beating quarter after quarter and for which we also receive a performance fee. To put numbers into these 3 components, we have on credit cards close to BRL 20 million on insurance close to BRL 20 million, and the remaining is mainly investments with a bit of Inter Shop as well. So that explains the BRL 50 million delta in other revenues. It's 100% again related to business. And we think this is recurrent. Though some of them are recurrent in every single quarter, and some are recurrent in every single year, but not necessarily in every single quarter, which I understand that make it more, a little bit more complex, but they have occurred in each of the prior years, and they will continue occurring in the future.

[Yuri Fernandes, analyst]

That's very clear, Santi, which one is reflecting capital gains, of those?

[Santiago Stel, executive]

The insurance part, Yuri, the insurance is on capital gains.

[Yuri Fernandes, analyst]

Perfect. If I may, guys, a third one on capital, it was pretty good. Your capital this quarter, your Tier 1 ratio was up almost 100 bps, right, like 90 bps. What drove this? It's basically the new Central Bank credit risk regulation? Or are you optimizing capital somehow? Because in the past, you discussed about doing some things to improve your capital. So just checking if this is more regulation or if this is also Inter doing something on the capital side?

[João Vitor Nazareth Teixeira de Souza, executive]

Yuri, Joao Vitor speaking. We always like to get all the benefits from the context of the market, which are exactly what you mentioned, some change on the regulation, but we are also working at Inter to improve everything from operations and the way we use our capital. And I would say that one of the most recurrent words for the past, I'd say, 12 months or so here at Inter was ROE. So every underwriting, credit underwriting, what was the ROE? What was the ROE? Is it delivery on good ROE for us? Yes. No. And let's not underwrite. So we really changed our mindset on that. You need to remember that before we had, I don't know, 50% CET1 after following on offers we did. And we were not so concerned about the right use of our equity. I would say that, again, for the past 12 months, it's a whole different scenario. So we have been way more diligent on underwriting and get the best use of our equity. That's why I also mentioned in one of the previous questions, we want to see these fee revenues that you also asked, growing consistently quarter-over-quarter year-over-year because this is going to help also our CET1. So using the equity on the right way for the credit portfolio expansion in bringing more revenue fees, we will always have, I would say, the best CET1 on the retail banking industry in Brazil. So that's what we're working hard to achieve.

[Yuri Fernandes, analyst]

Congrats on the ROE improvement in the past quarters.

[Operator]

The next question comes from Eduardo Rosman from BTG.

[Eduardo Rosman, analyst]

I have one question here. In the CEO letter, at the press release, you mentioned that interest is currently ahead of schedule with respect to the 60-30-30 goals for 2027, right? So do you believe it's just a matter of time of doing more of the same to get there? Or do you still need to come up with new products such as overdraft or expand in other geographies such as U.S., right? So it would be great if you could share with us where do you think you are ahead of schedule and what needs to be done for you to get there?

[João Vitor Nazareth Teixeira de Souza, executive]

Rosman, Joao Vitor speaking. Thank you for the question. Yes, we are, I would say, ahead of the budget. But we are still trying to work harder, even harder to try to anticipate as much as we can and to keep being ahead of it. So I believe that on client engagement and client adoption we're doing great. So adding, I would say, 1.5 million, 1.6 million new clients every single quarter with a very good CAC. So they are doing a really, really good job. Also on efficiency, we're able to, I would say, to get most of the fat that we had at the company. So we improved a lot. But also, we're just gone after the vendors, the biggest vendors to renegotiate most of our contracts. So anyway, we're working hard to also improve our efficiency ratio. We still have room to improve that. We're close to 50, but we see this also ahead of the budget. And lastly, on ROE, which is the last 3 of the 60-30-30 projects, we know that we are still far from the 30% mark. But again, we need to consider we have a big buffer of CET1. So we will keep growing our credit portfolio. We can grow our credit portfolio, Rosman. We do have only, I would say, 1.5%, 1.2% of the credit portfolio in Brazil, but we do have 8% of the PIX transactions. We do have a very good cost of funding, actually the best cost of funding on the street. We do have 7 different credit portfolios for us to grow, and we're adding more credit portfolio, such as FGTS, PIX cred. So we're very comfortable that we will average more our balance sheet. And then combined with the fee revenue, which are very good, we'll be able to achieve maybe, who knows, also ahead of the budget of our 60-30-30. So I'm very convinced that it's achievable more than when we launched it, when we unveiled it by the beginning of the year. But again, still a lot of work to be done, but I'm happy that we are improving in our -- the 2 fronts of the plan. So that's how I see Inter performing on that North Star project called the 60-30-30.

[Eduardo Rosman, analyst]

Great, Joao. If I may, just another topic here, another question because we've been receiving a lot of questions on the payroll lending market. There's another digital bank that has set very aggressive goals for growing in that market. And indeed, they are coming with very low interest rates, right? So we know that you were one of the first ones to offer the product 100% digitally. So what steps can you take it to further accelerate your market share gains? What are the challenges and opportunities that you see in the segment going forward, right?

[João Vitor Nazareth Teixeira de Souza, executive]

Rosman, thank you. Look, we have been underwriting payroll loan at Inter since 2001, okay? So this is not something new at Inter. And I know you covered the space for a while, and we know that the payroll loan is not a commodity. I also just mentioned a few questions ago that we're being very diligent at Inter to underwrite credit portfolio of the right ROE. And also I just mentioned, we have the best funding in the market. And also you know that we are very digital oriented player. Having said that, in a diligent way, I consider Inter the most capable player on the industry to reduce and to have the best cost for the payroll loan. Also, we don't do that with the banking correspondents, which take a big toe on the profitability of the business and also put a lot of pressure on the on the legal claims down the road. So I'm confident that we will be able to keep improving. Of course, we need to always improve the CRM initiative. So to get to the clients that are willing to change and to migrate to Inter, we do know that when the interest rates are high, it's not easy for you to do the migration from one bank to the other, but we are very well positioned. We don't want to do a dumping as we did before already, if you remember. We were doing the best -- the lowest rate in Consignado in the past, and we don't think that is the right way to go. But we have the tools to be one of the cheapest on the market. And I would say that with time, we will conquer more and more and more clients. I would say, a B2C strategy, okay? We own that client. They're going to use our other product and not a B2B [indiscernible] approach. So I'm excited with that product as well.

[Operator]

The next question comes from Jorge Kuri from Morgan Stanley, and I will read it. "I actually have 2 questions, please. First, can you help us understand how your NIM will look like if rates get to 9% as current consensus anticipates? What are the puts and takes here? The second question is, I also wanted to get some guidance on how your cost of risk should move going forward. Your provisions to loans are running at around 6% on a last 12-month basis. What do you think the level should be in 2024 and 2025?"

[Santiago Stel, executive]

Thank you, operator, and thank you, Jorge, for the question. I'll take the first one, and I'll let Alexandre take the second one. So in terms of decreased impact from decreasing SELIC, we do believe that our balance sheet is truly unique, given that we have a differentiated funding structure where free transaction deposits are very high, representing roughly 1/4 of our funding. And as a consequence, we are liability sensitive and we benefit from a reduction in SELIC at least in the short term. To put this into numbers, for every 100 bps of SELIC reduction, our NII growth around BRL 20 million per quarter. And what happened with the reduction of SELIC is that it will start playing out or being visible in our NIM in the fourth quarter. The first reduction occurred in [indiscernible] it takes around 1 month to starting repricing on the liability side. Additionally on NIM, we do see a very strong change in the credit mix as we are continually growing in the higher lines, as I mentioned, FGTS, home equity and credit cards with the lower yielding mortgages we're using. So this combined, it is a positive impact for us. We do need a few quarters for that to be reflected. And it is a key component to our path to allow [indiscernible].

[Alexandre De Oliveira, executive]

Thanks, Santi. Hi, Jorge, thank you for your question. When we think about cost of risk, looking at the past, we came from like around 3% in 2020, 4.6% in 2021. And now last year is when delinquency really spiked in the macro perspective. We got to 5.4%. And this year saw what we call the peak at 6.2% in the second quarter. This quarter, we improved, we came down to 5.9% and have a lot of actions, as we have discussed here before, to keep pushing it down. So [indiscernible] has played a factor. A lot of modeling-based collection, working, a lot of the renegotiation discounts that Santiago mentioned before are also helping improvements in the cost of risk. And the idea is to push it towards the neighborhoods of 5% in 2024 and 2025. The indications that we have, as we look to the newer cohorts is that this is definitely a possibility. So we'll keep working hard on the collection, implementing all the strategies that we can to move it and to achieve this 5% level, which should be -- is very aligned with the 60-30-30 plan. Thank you.

[Operator]

The next question comes from Pedro Leduc from Itau BBA.

[Pedro Leduc, analyst]

I feel that prepared ones have been answered already, but I would like to dig in a little bit into what you've mentioned in the prepared remarks, Santiago, on the renegotiated portfolio that it's partially explaining the NIMs at least visually. Can you remind us how large it is, how much it grew this quarter? And which product line is the renegotiation concentrated in?

[Santiago Stel, executive]

So thank you, Leduc. So the impact was mainly for renegotiation of delinquent credit card portfolios, and that impacted in the NIM, I mentioned around BRL 25 million of difference versus what we had the prior quarter, taking the compression on the NII. That's the impact that we had. And then on the positive side, it impacted the asset quality metric, the cost of risk with a net positive impact on the bottom line.

[Pedro Leduc, analyst]

Can you remind us, Santiago, how large it is nowadays within either your total portfolio or within credit cards, the renegotiated portion?

[Santiago Stel, executive]

So we closed the renegotiation [indiscernible] financial statements, and it went up from 1.6% to 1.9%, the amount renegotiated this quarter.

[Pedro Leduc, analyst]

And the second question to --

[Santiago Stel, executive]

Leduc, just correcting, I apologize. I missed the number. It went up from 0.6% to 0.9%, the renegotiated amount, and that's on the notes of the Basel financials.

[Pedro Leduc, analyst]

That's very clear. It's a small number indeed. Second question, perhaps more for Joao Vitor on the U.S. expansion. There's a nice chart where you have the product rollout schedule, the 2 million global accounts, almost. Can you tell us if these are clients in Brazil that you're bringing to global accounts or we're already onboarding U.S. clients itself? I know you're also sponsoring a soccer team there. I imagine it's part of the marketing rollout as well.

[João Vitor Nazareth Teixeira de Souza, executive]

Leduc, it's Joao Vitor here. Look, as I mentioned before, when we started back in 2016, we had a very good product to offer to the market. So the word-of-the-mouth helped us a lot to grow on the Brazilian market. Also, we saw that by bringing this client to have the best cost of fund that helped us to underwrite credit in different portfolios. This is the same thing, the same pattern we see in U.S. in our expansion. We have a very good product so far. Just to be clear, we're not there yet, okay? So we still need to fine-tune the product to have some of the verticals in Brazil that are not there yet, but we believe that maybe another one or 2 quarters, we have the product almost ready. Of course, we are always improving our product also in Brazil, but we're going to have everything almost ready. And I would say that next year would be more like a go-to-market phase for the U.S. market with a better product in place. So with more word-of-the-mouth client adoption instead of just burning cash on [ CACI ]. Of course, we want to start on the easiest way. So we started by bringing the Brazilians -- taking the Brazilians to U.S., for them to transact with our debit card, to use our Inter Shop, to invest in our Inter Seguros. But we believe that with time, we'll be able to bring also Americans and also Latin American individuals that live there in U.S. to use our products. And we're very confident that by having our product as a component, so we can replicate that quite easy for our global app because we have, as I mentioned before, a state-of-the-art IT framework, we'll be able to have, I would say, maybe one of the best financials perhaps in U.S. as we do have in Brazil today do. So very excited with the outcome there. [Indiscernible] surpassed $200 million in deposits. So again, I do believe that we have a bright future for U.S. on the digital banking space.

[Operator]

The next question comes from Thiago Batista from UBS.

[Thiago Bovolenta Batista, analyst]

I have 2 questions. The first one about the PIX finance. I understand that Inter includes the PIC finance inside of the credit card, but I want to double check to confirm if this is the case. And more important, if you can comment on the asset quality trends or the asset quality profile that you believe this product will have, if this is better or worse than the average credit card loans. And also, if the behavior of the users of this is more to make money transfer or to buy things even in the job. And the second question, you mentioned already a couple of times that the numbers is ahead of your budget or ahead of where you guys are expecting to achieve the 2027 growth. It's possible to say already that the bank ROE should achieve double digits in the next year?

[Alexandre De Oliveira, executive]

Hi, Thiago. This is Alex. Thank you for your question. I'll start addressing the first part. So when we think about PIX credit, we launched this product about 40 days ago. Along with it we also launched [ Boletos ], paying Boletos with the credit card. So the approach we're taking to the product is to start from the lowest risk clients and expand through the highest risk clients with different pricing according to the risk profile. See, we're in the early stages of the product, so we don't have yet the behavior of delinquency, but our expectation is to have something very similar to what we have in the credit card, the regular credit cards.

[João Vitor Nazareth Teixeira de Souza, executive]

Thiago, Joao Vitor here. Just to compliment on Alexandre's response to that question. What's interesting about the PIX Credit and PIX Boletos is that we're getting the best use of this very, very innovative platform in Brazil called PIX. What do I mean? The risk profile of the client is the same. So if Thiago is doing a credit card transaction on a shopping mall or doing a PIX transaction, your credit profile is pretty much the same, but the economics are better because we don't need to use the whole payment scheme to make that transaction go through. That's exactly what we're doing at Inter Shop. We have the same credit profile but with a better economics. So every time that we [indiscernible] a consumer finance such as PIX Credit, the Boletos credit, in your own ecosystem, you tend to have a better monetization, a better ROE on that front. So we're very excited with PIX Credit, with PIX Boletos and also with out [ Binopeleter ] at Inter Shop. But as Alexandre just mentioned, we are on the early days of that portfolio. As always, as you know, Inter, we're always taking a conservative approach, but I'm sure that we'll be able to perform very well on this space going forward. And now Alexandre will cover the question on the ROE for 2024.

[Santiago Stel, executive]

So thank you, Thiago, for the question. So on ROE, we gave 2 numbers in the Investor Day back in January. We mentioned that the North Star is 30% by 2027. And we mentioned that in 2023, which is year 1 of that 5-year business plan, we expect it to have a mid-single-digit ROE. We are fully focused on closing this year. Until we close this year, we're not going to give any numbers or share any guidance at all in terms of what we expect in 2024. We do think that the fourth quarter will be meaningfully more profitable than the third quarter, which is basically the continuation of the trend that we're seeing from the first quarter, 1% ROE, 3.5% on the second one, almost 6 on this one. This is despite the high excess capital that pushes the metric down, and we see the continuation into the fourth quarter. We have time to talk about 2024 later once we close this year.

[Operator]

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