Intercorp Financial Services Inc

NYSE:IFS

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to Intercorp Financial Services' First Quarter 2018 Conference Call. [Operator Instructions]

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, please begin.

[Rafael Borja, executive]

Thank you and good morning, everyone. On today's call, Intercorp Financial Services will discuss its first quarter 2018 earnings. We're very pleased to have with us Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Christian Stockholm, Chief Financial Officer of Interseguro; and Mr. Mario Caballero, Chief Financial Officer of Inteligo Group. They will be discussing the results that were distributed early this morning. There is also a presentation to accompany these results. If you didn't receive a copy of the presentation or the earnings, it is now available on the company's website, ifs.com.pe, to download a copy. Otherwise for any reason, if you need any assistance today, please call i-advize in New York at [phone]. I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken.

It is now my pleasure to turn the call over to Mrs. Casassa, Intercorp's Chief Financial Officer, for her presentation. Mrs. Casassa, please go ahead.

[Michela Ramat, executive]

Good morning, and welcome to Intercorp Financial Services' First Quarter 2018 Earnings Call.

First, let me start on the political and macro side. After months of political turmoil, Pedro Pablo Kuczynski resigned as president of Peru on March 21, and was succeeded by Vice President Martin Vizcarra on March 23. We are optimistic that Mr. Vizcarra will on one side, continue applying market-friendly policies, and on the other side, will face less confrontation from Congress as his cabinet recently received the vote of confidence. We also believe that the reforms his minister of finances have announced in the plan to boost economic will likely increase fiscal revenue and encourage improvement in the efficiency of public spending, allowing an increase in public investment, especially in the one destined to the reconstruction process in the north coast of the country. As Prime Minister César Villanueva explained to Congress, the government's budget for the reconstruction plan is over PEN 25 billion, of which PEN 8 billion are planned to be executed this year.

In this context, GDP growth expectation for the year stand now between 3.2% and 3.5%, mainly driven by a recovery of domestic demand as public and private investment are expected to perform better. Public investment should pick up, mainly as a result of the previously mentioned plan as well as by investments related to the Pan-American games and Lima second metro line. Private investment is also expected to grow due to a faster execution of mining projects in the context of high commodity prices and favorable international conditions. Furthermore, on March 12, the Congress approved a law, by which construction companies involved in the Lava Jato scandal or the local construction cartel are allowed to continue operations with private and public clients and with banks under certain conditions, allowing the construction sector to continue being a contributor to GDP growth.

In line with this, the financial system growth has shown first signs of recovery. As of the first quarter 2018, the banking system's net profit grew 18.8% year-on-year, significantly above the 1.1% growth registered in the first quarter of 2017. Loan growth has picked up, reaching a 6.6% growth year-over-year, driven by a 7.5% growth in retail loans and 6.2% growth in commercial loans, according to the SBS. In retail banking, credit cards and mortgages showed high growth year-over-year, while in commercial banking, the corporate and the small and micro segments were the ones which grew the most. As we will discuss later on, Interbank clearly outpaced the system's growth, especially in retail banking.

As shown in Page 2 of the presentation, this first quarter 2018 has seen a 22% year-on-year growth in IFS earnings, resulting in a 19.1% return on adjusted equity. At Interbank, strong first quarter in terms of earnings, driven by higher loan growth than the market and declining cost of risk and supported by a better performance of the credit card portfolio; clear focus on digital transformation, with some key indicators showing solid growth.

At Interseguro, improvement in the first quarter earnings, driven by synergies with Sura almost completely accomplished; and reduction in earnings volatility due to an accounting methodology change, by which discount rate impact on technical reserves is now accounted through equity. Moreover, it is important to notice that we are treating Interseguro figures as an insurance segment, thus, including the cost of the bond for the financing of Sura acquisition.

At Inteligo, strong profitability in the first quarter with fees growing 6.5% quarter-on-quarter and 13.6% year-on-year.

Let me now give you a short summary of the main accounting changes introduced during this first quarter. First, at Interseguro, we have restated the figures, moving to equity instead of P&L the impact from changes in discount rates in the calculation of technical reserves, thus, reducing the volatility in results. It is important to mention, though, that there is an additional accounting change under IFRS we are currently evaluating for a calculation of technical reserves that will further align us with international standards and better reflect Interseguro's performance. This change could potentially be introduced in the next quarter.

Second, at IFS, we have implemented the new IFRS 9 accounting standard, which has 2 main methodology changes. First, loan loss provisions are now calculated based on expected loss model, which classifies the credit portfolio in 3 stages and assigns expected losses for 12 months for credits in stage 1 and expected losses lifetime for credits in stage 2 and 3.

At Interbank, as of January 1, 2018, we have accounted additional one-off allowances of PEN 145 million through equity.

Second, there are 2 categories for classifying investments: nonstrategic or short-term investments with changes being accounted in P&L, and strategic or longtime investments with changes being accounted through equity. Referring to Page 4 of the presentation at Interseguro and Inteligo, we had a negative impact in this first quarter coming from mark-to-market of investments representing PEN 5.2 million in Interseguro and PEN 7.6 million at Inteligo. Excluding such effects, risk-adjusted equity for Interseguro and Inteligo would have reached 7.5% and 26.4% respectively.

Now let's have a look at IFS' key performance indicators on Page #5. At IFS, net profit was PEN 290 million in this first quarter, representing a 19.1% quarterly return on equity, or 20% when excluding the negative impact on mark-to-market previously mentioned. Efficiency ratio showed a further improvement versus previous quarter of 140 basis points, reaching 35.3%, and 420 basis points versus previous year, mainly due to the synergies with Sura.

NIM at Interbank has remained relatively stable in this first quarter, and risk-adjusted NIM has strongly improved to 3.9% in this quarter from 3.8% in previous quarter and from 3.3% in the first quarter of 2017, mainly thanks to a sharp improvement in cost-of-risk, which stands now at 2.5%, representing a decrease of 20 basis points in the quarter and 90 basis points in the year.

Gross premiums plus collections at Interseguro have increased 13.8% quarter-on-quarter or 35% year-on-year, thanks to Sura, with a return of investment of 5.7%, which still needs to consolidate over our total portfolio of PEN 11.3 billion.

Fees from the financial services at Inteligo have grown 6.5% quarter-on-quarter and 13.6% year-on-year, despite a decrease in volumes, which have been impacted by the repatriation law implemented by the government.

Total capital ratio has further strengthened, reaching 17.5%, with core equity tier 1 ratio at Interbank reaching 10.2% as of March 31.

On Page 6 of the presentation, relevant net income for dividend generation at IFS have increased substantially, more than 70% year-on-year or 200 million, reaching 473 million in first quarter compared to 272 million in the first quarter of 2017. This substantial increase was mainly due to growth of 84 million year-on-year at Interbank and of 126 million at Interseguro.

Please turn to the following pages for a brief overview of the quarterly net earnings of IFS' 3 segments. Starting with Interbank at Page 8, first quarter net profit reached PEN 246 million, a 26.6% increase year-on-year, mainly thanks to a recovery of top line growth, coupled with an improvement in cost of risk and controlled expenses. First quarter return on adjusted equity was 20.7%.

Net interest income grew 8% year-on-year with a relatively stable NIM and a strong improvement in risk-adjusted NIM, up 60 basis points year-on-year to 3.9 at Interbank, thanks to a 23.5% decrease in loan provision expense, which improved cost of risk 90 basis points year-on-year down to 2.5%.

On Page 9, we want to show you some of the first results of our digital transformation. The first phase of our digital transformation was mainly focused on building capabilities that will allow clients to perform their day-to-day transaction digitally and afterwards, to be able to acquire products and services digitally. The idea is that clients should be able to interact with the bank 100% on a digital basis through an improved customer experience. We have been able to speed up the process of capabilities development, applying new agile methodologies. Now we are entering a second phase in which we are increasing our efforts for educating clients to foster usage of our existing transactional capabilities, and also to buy products online, while completing the full set of digital capabilities.

For these reasons, we have been substantially increasing our IT investment, which as of 2018, will be 3x the number invested in 2015. This has also allowed us to decrease the number of branches, which stands today at 272 from a peak of 290 in January 2016 and from 282 branches in March 2017. Digital customers, which include clients that interact with the bank through our mobile or Internet banking, have reached 43% as of March 2018 from 32% in March 2017, representing a 40% increase year-on-year in number of digital customers. The percentage of transactions performed off branches has continued to increase, reaching 94% as of March this year from 89% as of March 2017. Still, due to the cash economy present in the country, a large number of plain-vanilla transactions including deposits, withdrawals, payment of utilities and credit cards is performed in branches, which means that we need to continue educating clients via our efforts in branches and contact centers to migrate to our already existing digital solutions.

The percentage of functionalities available on our digital channels, which include transactions, sales of new products and self-service features, has continued to increase, reaching 94% as of March this year from 89% as of March last year. We continue to focus our efforts on trying to digitize client interactions and to improve the customer experience of our clients with the development of new and enhanced functionality through our 22 [ squads ] working with agile methodology. Digital sales and sales service interactions have increased their penetration to 15% on March this year from 4% on March last year, growing more than 250% year-on-year. We are now able to digitally open new accounts, sell credit cards and loans through credit cards, increase credit card lines, among other products sold. In terms of self-service functionalities, an example is credit card installments through mobile banking, which have reached a penetration of more than 85% in just 7 months and have driven the number of total installments to grow more than 4x in the same period. Moreover, we have launched some functionalities that are only available in our mobile banking, which have gained traction in clients in few months, including Smart, a feature that allows clients to organize and take control of their expenses, which has reached more than 20% of digital customers in 4 months; and our digital piggy bank, a feature to save money in one swipe within an existing savings account at preferential rates, which has reached a penetration of 4% of our digital clients in 6 months.

In Page 10, moving to loan growth. At Interbank, performing loans grew 2.5% on a quarterly basis as a result of increases of 2.8% in retail loans and 2.1% in commercial loans. The positive news is that credit cards grew 4.7% on a quarterly basis, reaching a 7% increase on a yearly basis, consolidating the recovery and growth registered during the last quarter of 2017, and allowing us to gain 90 basis points market share in credit cards in this quarter, mainly targeting good credit profile clients within our existing portfolio.

Performing loans grew 8% year-on-year due to increases of 10.6% in retail loans and 5.2% in commercial loans. Retail loans grew year-on-year, mainly due to increases of 13.5% in mortgages and 10.5% in other consumer loans and thanks to the recovery of the credit card portfolio previously mentioned. We have been able to increase our market share in total loans by 10 basis points on a quarterly basis, and by 20 basis points on a yearly basis.

On Page 11, our large deposit base has helped us to account a strong improvement in cost of funding of 20 basis points on a quarterly basis and of 30 basis points on a yearly basis, down to 2.6%, mainly thanks to the cap in soles rate and to a more efficient funding structure, which has seen more expensive commercial and institutional deposits decreasing 8.2% on a quarterly basis, thus, decreasing market share. It is worth to mention that deposits now represent 76% of total funding. Moreover, in January this year, we issued a new dollar-denominated 5-year bond for a total amount of $484 million at 3.375% where we combined $200 million of new money with a liability management transaction. As of today, we have [struck] to soles a total of $250 million of these transactions for a soles equivalent 5-year rate of 4.8%, improving our asset and liability position.

On Page 12, asset quality has improved substantially in the first quarter, with cost of risk decreasing 20 basis points on a quarterly basis and 90 basis points year-on-year, down to 2.5%. This improvement in cost of risk is mainly coming from retail banking, which has registered a decrease in cost of risk of 40 basis points Q-on-Q and 150 basis points year-on-year, and particularly to credit cards, which have seen an improvement of 320 basis points on a quarterly basis and 600 basis points on a yearly basis, thanks to an improvement in the risk profile of the client portfolio, to a better behavior of clients, to the different actions we have been undertaking in improving underwriting and collection processes and to the recovery in volumes. Moreover, in the first quarter of last year, we also had the negative -- the first negative effects from the Nino phenomenon, which does not appear in the first quarter of this year.

NPL ratio has remained relatively flat Q-on-Q and year-on-year at 3.2%, with retail at 5.1%, down 10 basis points Q-on-Q and down 20 basis points year-on-year; and credit cards at 6.3%, down 30 basis points quarter-on-quarter and down 60 basis points year-on-year. NPL coverage ratio is now at 130.8%.

On Page 13, we are also showing the trend in the local GAAP costs of risk figures. When looking at SBS comparable figures to the system, Interbank past due loan ratio improved 20 basis points to 2.7% on a quarterly basis, while the system average increased 10 basis points up to 3.1%. The coverage ratio strengthened to 183%, also thanks to the voluntary provisions registered in local GAAP face potential losses for the construction companies.

When looking at the PDLs breakdown, we can see within retail that consumer credit PDLs have improved [indiscernible] 10 basis points down to 2.2 and is below the system average of 2.5%. But the most important trend is the further improvement in the credit card PDL ratio, down 80 basis points to 4.8% in this quarter, even below the system average of 4.9%. Mortgage PDL ratio has increased slightly, 20 basis points up to 3.9%.

The trend in cost of risk in local GAAP is very similar to what we previously described for IFRS 9. Our cost of risk in local GAAP of 2.6% in this quarter, excluding the effect of the voluntary provisions for the construction companies, remains above the system average of 2.2%, mainly due to the portfolio mix with the higher incidence of our retail and credit cards when compared to the system and to the other big 3 banks. Normalizing the effect of our portfolio mix, our ratio would be 2%, going below the system average for the first time in many quarters.

In Page 15, as of the first quarter, Interbank's capital ratio of 17.5% was more than 500 basis points above the risk-adjusted minimum capital ratio requirement established at 11.9% and above the system average of 15.8%. Core equity Tier 1 ratio has continued to improve during the quarter, reaching 10.2% as of March 31.

Please turn to the following pages to discuss Interseguro's results. On Page 17, gross premiums and collections in the first quarter increased 13.8% on a quarterly basis and 35% on a yearly basis. The quarterly growth was explained by increases of 31 million in individual life and 13 million in disability and survivorship, partially offset by decreases of 10 million in annuities and 8 million in private annuities. Retail insurance remained relatively flat quarter-on-quarter. The yearly growth was mainly explained by increases of 20 million in individual life, 29 million in disability and survivorship and 9 million in private annuities, partially offset by decreases of 4 million in annuities and 4 million in retail insurance.

In the fourth quarter of last year, Seguros Sura's individual life premiums were adjusted by 22 million negative due to the adoption of Interseguro's cash-based accounting policy. Without that adjustment, the fourth quarter gross premiums and collections would have been 193.8 million. Annuities and private annuities decreased in the first quarter, due to a market contraction, with a stable market share at Interseguro at 24.5% as of March 2018.

As previously mentioned, moving to Page 18, starting this quarter, discount rate effect of technical reserve was restated from net income to other comprehensive income, reducing the volatility in bottom line results. Total premium earned less claims and benefits resulted in PEN 78.9 million loss in the first quarter, decreasing PEN 26 million quarter-on-quarter and PEN 32 million year-on-year. Both performances were mainly explained by higher annuity claims due to the merger with Seguros Sura, partially offset by a higher technical margin in individual life also associated with the acquisition of Seguros Sura's portfolio.

In Page 19, we can see the details of Interseguro's investment portfolio that now reaches PEN 11.3 billion, relatively stable quarter-on-quarter, but registered an increase of 100% year-on-year due to incorporation of Seguros Sura's investment portfolio. Results from investment in the first quarter was PEN 160 million, a strong increase versus the fourth quarter and the first quarter of the previous year, representing a 5.7% return on Interseguro investment portfolio, below the 6.4% reported in the fourth quarter of 2017. The quarterly result has been impacted by a negative PEN 5.2 million mark-to-market on securities, without which the return on investment would have been 5.9%. Still, we expect a further improvement in the return on the combined portfolio in the coming quarters.

On Page 21, we will see Inteligo's results. Inteligo's net interest and similar income in the first quarter was PEN 24 million, a 6.4% increase when compared with the fourth quarter. The quarterly results was explained by a decrease in interest and similar expenses as a result of lower expenses related to deposits and obligation, partially compensated by lower income from Inteligo's loan portfolio.

Net fee income from financial services was PEN 33 million, an increase of 6.5% quarter-on-quarter, mainly due to higher income from funds management and a decrease of total expenses, partially offset by lower income from brokerage and custody services. When compared with the first quarter of 2017, net fee income from financial services increased by 13.6% year-on-year. The result was mainly attributable to an increase in funds management and brokerage and capital services income.

Inteligo's other income reached PEN 0.5 million in the first quarter, a 98% decrease quarter-on-quarter, mainly explained by a 60% decrease in net gain on sale of securities and a PEN 7.6 million loss in net trading attributable to the implementation of IFRS 9. Other income decreased 94% when compared to the first quarter of 2017.

Other expenses in the first quarter this year decreased by 54% when compared to the fourth quarter of last year, mainly due to an adjustment to impairment loss on available-for-sale investment this quarter. Other expenses decreased 4.9% year-on-year mainly explained by the previously mentioned adjustment in impairment loss, partially compensated by higher salaries and employee benefits and higher administrative expenses.

On Slide 22 looking at Inteligo's key performance indicators, assets under management plus deposits reached PEN 14 billion in this first quarter, a decrease of 1.7% when compared to the previous quarter, mainly impacted by the reparation law enacted by the government. Inteligo's loan portfolio reached almost PEN 1,300 million in this first quarter, a decrease of 2.7% quarter-on-quarter and 21% year-on-year.

Revenues generated by Inteligo were PEN 57.9 million, a 28% decrease quarter-on-quarter and 14% year-on-year. Inteligo's bank fee income divided by assets under management remained stable at 1% in this first quarter.

Inteligo's net profit was PEN 40.3 million, mainly driven by a contraction in other income due to IFRS 9, while annualized risk-adjusted return on equity was 22.3%, or 26.4% when excluding the PEN 7.6 million negative mark-to-market on securities.

Now we welcome any questions you may have.

[Operator]

[Operator Instructions] And your first question comes from Carlos Rivera with Citigroup.

[Carlos Rivera Zermeno, analyst]

My first question is regarding credit growth, particularly in credit cards, a very strong recovery quarter-over-quarter especially when we consider the seasonality 7% loan growth year-over-year. So what should we expect by the end of the year? Is this 7% something that you can accelerate? And would this have a positive contribution to your NIM guidance for this year? And my second question is related to the sale of treasury shares held at subsidiaries. If you could just comment a little bit about what is driving these, what is the target level there, if we're going to see more of these sales?

[Michela Ramat, executive]

Carlos, and thank you for your question. First related to credit cards, the first quarter in which we started to see the recovery in volume growth was the fourth quarter of last year, in which we reported a year-on-year growth, if I'm not wrong, of 1-point-something percent. Basically, what has happened there is that after many, many months of tightening of our credit and their standards -- our credit standards and changing a little bit the risk profile of our client base, we have started to resume growth a little bit more aggressively this quarter. What we have been doing is targeting our top credit risk profile clients within our existing portfolio, and this has driven the growth that you see this quarter. Of course, this is like, if you want, a first impact effect after many months of not growing, so we don't expect to repeat 4.7% quarterly growth every quarter this year, okay? But we do expect to see a little bit higher growth than the 7% year-on-year that you see here. Basically, yes, this is going to improve the -- if you want, the revenue generation at the bank level, okay, but not necessarily NIM, which we still expect to be stable as we are targeting better risk profile clients, so not necessarily with higher rates. What you will continue to see, though, is the improvement in risk-adjusted NIM, which has been very strong in this quarter and year-on-year and which should continue to be the case in the coming quarters. Not sure if this covers your first question.

[Carlos Rivera Zermeno, analyst]

Yes. Just a follow-up there, if you could give us any sense of this improvement in the NIM adjusted for risk, how much do you think it could expand this year?

[Michela Ramat, executive]

What we have seen this quarter, and you see it in Page #8 is that risk-adjusted NIM for the bank is 3.9%. This has improved 10 basis points this quarter from 3.8%. But when you compare it with the first quarter of last year in which the level of cost of risk especially was higher, now due to a different portfolio and to El Niño, that number was 3.3%. So the improvement there has been of 60 basis points, okay? So basically then also, you see on that same slide that that is also coming from the improvement of cost of risk that we see in the bank, which is mainly driven by the improvement in cost of risk of credit cards. If you take a further look at -- let me just go to page -- one second, I'm going the other way around -- Okay, at Page #12, when you look at the cost of risk of the different products and in the bottom right-hand graph, you can see the development of the cost of risk of credit card. That cost of risk has really dramatically improved. And you can see also the same trend in the PDLs ratio in local GAAP reaching 9.4% cost of risk this quarter and comparing it to a 15.4% cost of risk in the first quarter of last year. The cost of risk of credit card last year, I mean, was at high levels during all the 3 first quarters. So you will see this trend going on in the next 2 quarters, where we started to see an improvement in the cost of risk of credit cards was actually during the last quarter of 2017. And that has been the case now up to this quarter and also to these first months of the second quarter.

[Carlos Rivera Zermeno, analyst]

Okay, so you see probably some stability around the numbers that we've seen in this quarter projecting towards the end, and that would give us kind of the improvement?

[Michela Ramat, executive]

Yes, something like that.

[Carlos Rivera Zermeno, analyst]

Okay, and we can move on to the second one.

[Michela Ramat, executive]

Yes. Related to the sale of treasury sales, we did 2 sales of treasury sales. One was in the last quarter of last year, and the second one was in this first quarter. Those sales of shares are not impacting actually the IFRS figure that we're reporting, no because those gains are going directly through equity. So you don't see those impacts in the earnings that we are reporting here. And basically, if you remember, we announced some time ago a share buyback program now at that time at which the price of the share was really, really low. So we acquired some shares at the bank and at IFS. And then starting last year now with the recovery of the price, we decided to sell a portion of those shares and a second portion this year. We still do have some shares at Interbank portfolio, but so far, we don't have plans to sell them, unless maybe I don't know, the price is the correct one or a buyer appears. But we shouldn't see that much of those impacts in the coming quarters.

[Operator]

And your next question comes from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

My first is really a follow-up on this loan loss provision decline that we've seen, and specifically as you showed on Page 12, this level of cost of risk for credit cards at 9.4%, down from 12.6% in the fourth, and as you said, over 15% in the first quarter. Is part of this lower cost of risk related to the implementation of IFRS 9? Or is this just based on the delinquency that you see for -- and the losses that you -- well, I guess it is now based on the losses that you expect. But how would that have differed, if you hadn't implemented IFRS 9 is my first question?

[Michela Ramat, executive]

Okay, and thank you for the question, Jason. First, let me bring you back 1 second to the local GAAP figures, okay, what we are showing in Page 13. When we look at our local GAAP figures with no changes in any methodology or how we account provisions and PDL, you can see very similar trends, okay? So basically if you look at Page 13, the upper right-hand graph that you see there which shows the loan loss provision, at local bank, the cost of risk -- at local GAAP, sorry, the cost of risk for the first quarter is 2.6%. Here we are excluding the voluntary provisions we did for the construction companies, you see the note there. With that, that number would be 4%, but it's like a different item. And that 2.6% cost of risk compares to 2.8% for the fourth quarter of last year and compares to 3.3% of the first quarter of last year, okay? This trend here comes hand in hand with the trend that you see in the PDL ratio. Have a look at the PDL ratio, first total Interbank, it has improved to down -- to 2.7% this quarter. And when you look at the breakdown of the PDL by the different businesses, you can see that the strong improvement in the PDL ratio is coming from credit cards. And you can see that, that number has gone down from 5.5% in the first quarter of last year, where we were well above the system average of 5.1%, down to 4.8% this quarter, even a little bit below the system average of 4.9%, okay? So basically, this improvement that you see in the PDL ratio, which is the regular way of accounting this PDL ratio with no changes in the methodology, this is really coming from an improvement in the credit risk profile of the credit card portfolio, okay? And this is as I was saying, now a combination of many things. On one side, the reduction on the actual absolute value of provisions, and this is coming from a better risk profile of the portfolio and many things that we've been doing. And also for [indiscernible], this is a ratio is also coming from the increasing volume that we are seeing in credit cards. So let me just -- an additional thing, and on top of that, that trend when you compare it to IFRS 9 really is very similar. It is true that IFRS 9 is forward-looking. It can accelerate a little bit some of the trends. But in our particularly case, when we look at what is happening in credit cards, it's not necessarily something not that is related to what is going to happen, but more than what has already happened with our portfolio, which you also see reflected in the local GAAP figures.

[Jason Mollin, analyst]

Okay, that's very helpful. My second question is just putting everything in perspective for the quarter. Because there were a lot of -- with the accounting change, you made an extraordinary provision, as you just said. Is that only under local GAAP, the PEN 100 million?

[Michela Ramat, executive]

Yes, only on local GAAP, yes. Because that was already factored in the adoption of IFRS 9. So you see that through equity and not through results.

[Jason Mollin, analyst]

Okay. So if we think about IFRS reporting and we just think about what we saw that was sort of one-off, if you want to call it that, in the quarter, we saw the impacts that you defined which were small in the investment portfolio. That was probably 12 million or 13 million, if I remember the number. And then you had this 145 million of reserve for loan losses -- loan loss allowance. And then I would put, even though it didn't have to do with accounting change, I would put the 300 -- over 380 million in the treasury gain -- the gain from the treasury shares in that bucket. So when we think about return on equity just with the base of equity you now have at the end of the quarter, and the run rate in earnings, we're not going to have the volatility of the insurance, technical reserve, technical provisions being put through the income statement, how should we think -- does this impact the outlook for return on equity? Or what would you define as the core return on equity in the quarter, excluding all these impacts?

[Michela Ramat, executive]

Let me, Jason, correct you on a couple of things, okay? The impact that you see from changes in accounting, IFRS, et cetera on the earnings of the quarter are actually only the ones related to the mark-to-market, it's only the 13 million, because the allowances for loan losses, you don't see them in the quarter in IFRS, okay? Because that was the first adoption that -- okay? And the gain on sale of securities, you also don't see in earnings because they have gone through equity, not through earnings. So basically ...

[Jason Mollin, analyst]

Got it. That's my point. Let's hold on to that. That's exactly my point. So the book value -- so return on equity has earnings and book value. So these earnings -- if earnings are very little, I really care about book value growth. So [indiscernible] the question.

[Michela Ramat, executive]

So basically, we are showing a 19.1% ROE for this quarter, okay? If I were to exclude the one-off in the mark-to-market, which I mean, this, you really don't know what is going to happen. It could be also negative next quarter, it could be positive. But excluding that effect, that ROE would be 20%, okay? Now it is true -- I mean what we are expecting, looking at these IFRS figures going forward is for IFS to have an ROE of -- I mean at least this 20%, okay? But it is also true that if you look at the local GAAP figures that we are showing in slide number -- hold on, one second.

[Unknown Executive]

Six.

[Michela Ramat, executive]

Okay, I have it here. In Slide #6, okay, which is the relevant net income that we show you, because these are the numbers that then add up for dividend generation at IFS, okay? Number for Interbank are not that different, but they do include the gain on sale of securities, so that will account for dividend distribution. And the second thing that is different is Interseguro that, in local GAAP, has still different numbers due to the gain in the investment portfolio from the combination of portfolios of Sura and Interseguro. So basically what is happening in terms of dividend generation is that as of the first quarter, okay, they increased, if you want and the dividend generation has been very strong. It's around like 100%, no, moving from a 200 -- around PEN 250 million to almost PEN 500 million in the quarter, okay? But again, those numbers have extraordinary figures. And if you look at the ROEs of local GAAP, you still see, no, Interbank around 20, Interseguro around 15 if you normalize the extraordinaries, and Inteligo of more than 20, okay? So combining everything together, this is why we still believe that under IFRS, when we will, I mean, complete the changes in the way in which we account the technical reserve, we should be with an ROE that at least reflects that average 20% going forward.

[Jason Mollin, analyst]

That makes sense. And then maybe you could just comment on the follow-up on the statement that you expect, perhaps in the second quarter, to have another change in how the insurance provisions are booked?

[Michela Ramat, executive]

Okay. There is -- I will try to give it a shot, then maybe if I need help, I will ask Christian also to comment on this. Basically, there is still a slight difference in which -- in the way which we calculate technical reserve, okay, versus a -- I mean, international standards, if you want, or differences in methodology with IFRS 9. When you calculate the reserve requirement, you use an average rate, which is the average rate of your investment portfolio, okay. And for this average rate, you use the average rate for the different maturities of your portfolio. And on the portions of your portfolio where you are not matched, you use an average rate, okay? In our case, that average rate is a risk-free rate which, when you discount the huge amount of the total stock of reserves, no, for many years, have a strong impact of a higher number of technical reserves, okay? We have been evaluating this and we have seen that there are -- I mean other companies internationally that use this risk-free rate plus a premium, no. And if this was the case, the technical loss that we register every time we sell a new annuity would be either close to zero or a positive number. So that would change if you want, will change a little bit the performance of Interseguro. And we'll be closer, if you want, or a little bit closer to the numbers that we see in local GAAP. So I'm not sure whether that was clear, but please let me know if...

[Jason Mollin, analyst]

No, no. That was helpful. That was very clear.

[Operator]

And your next question comes from Alonso Aramburú with BTG.

[Alonso Aramburú, analyst]

I wanted to go back to the risk-adjusted NIM. You mentioned, Michela, that you expect the risk-adjusted NIM to improve going forward and you also mentioned that the NIM should be stable, so we should expect then that the cost of risk should continue to decline slightly as we move along this year? So basically my question is, is this 2.5% cost of risk, how much lower can it go in the next couple of quarters?

[Michela Ramat, executive]

Alonso, thanks for the question. Basically when I was referring to the improvement, I was referring year-on-year, okay? So basically, the trend that we have seen this first quarter when compared to the first quarter of last year is something that we should continue to see in the coming quarters, okay? But to be sincere, that doesn't necessarily mean that the 2.5% cost of risk we have seen this quarter will continue to improve, okay? When we will look at the year-on-year figures and at the combined and cumulative numbers, okay, those numbers should be around that figure. But I don't expect, let's say, a strong further improvement of cost of risk, okay, versus the 2.5% that I'm showing. Of course, this reflects a little bit of what we are showing in local GAAP. And we will have to see -- I'm not 100% sure of whatever additional impact the IFRS 9 could have, okay? But talking, if you want, into -- what we are seeing today in local GAAP and the comparison to IFRS, I don't expect like a strong further improvement in cost of risk. So the annual figure, if you want, the quarter-on-quarter trend should be more flat, but the year-on-year trend, of course, will still show a lots of improvement, because the cost of risk was still high up to the third quarter of last year.

[Alonso Aramburú, analyst]

Okay. That's clear. And then going back to the NIM then. You mentioned that you were expecting a stable NIM going forward. I mean, we've seen now for some quarters, your actual yield's coming down as you move to a higher quality client base. I mean, is that change in mix over? I mean, do you expect that to continue, and that should continue to give you probably lower asset yields? How do you offset that? Are you offsetting that would lower funding costs? How much more can funding costs go down over the next couple of quarters?

[Michela Ramat, executive]

Okay. I mean basically, what is happening with NIM is there a different forces, no, going together. Of course, the increase in volumes of the credit card portfolio, despite the fact that we are targeting better clients, improves. Because it either -- the weighted average yield of credit cards with good clients is still the higher-yielding product, no, of the bank. But there are certain other yields which are going down. Just to give you an example, with the decreasing rates in soles, no, as the commercial clients don't think about the yields but about spreads, no, the yields of commercial banking has gone down in soles. Given also the low growth and the price war that what's going on in the market, those yields have gone down, no. In corporate banking, and there has been a little bit of, if you want, of that effect also moving to the bigger midsize companies as well, okay, and even to mortgages, I would say. So that is if you wanted the driving forces of the NIM going down, even if credit card, despite the fact that we're targeting good clients, helps NIM going up. The other thing that is helping is the improvement in the cost of funds. As I showed you in page number ...

[Unknown Executive]

11.

[Michela Ramat, executive]

On Page 11, cost of funds have gone down 30 basis points year-on-year, no. Of course, this has been helped by the decrease in rates, of the soles rates. But we do expect that cost of funds either to be stable or to improve a little bit. Because as the decrease in rates were at the end of last year and also the beginning of this year, we could still see a positive impact coming from there. And also we are trying now to make our funding structure more efficient. So basically, this is why, if you consider either a stable-to-improving cost of funds and a stable cost-of- risk this is why at the end of the day, the NIM should be relatively stable. And the risk-adjusted NIM that you see of this quarter could be either stable or with a slight improvement. I think this is more or less what we should see in the coming quarters.

[Alonso Aramburú, analyst]

Okay, and just one final question on the tax rate. The tax rate was -- the effective tax rate at Interbank was higher than in other quarters. I mean, what drove that? And what roughly should we expect as an effective tax rate going forward?

[Michela Ramat, executive]

Tax rate is impacted by the tax-free investments that we do, no? So we have decreased certain short-term investment with the -- with the government in CDs, so that changes the tax rate. But I think we should see a similar tax rate to either an average, if you want, of what you have seen in this quarter with the previous quarter, something in between, but it would really depend on market conditions, how much of our total portfolio we invest in tax deductible investment.

[Operator]

And your next question comes from Sebastián Gallego with CrediCorp Capital.

[Sebastian Gallego, analyst]

I have thorough questions. The first one, can you elaborate a bit more on the voluntary provisions that you -- that IFS made on the construction companies? And what's the outlook going forward on this situation?

[Michela Ramat, executive]

Sebastián, thanks for the question. Sure. This is something that maybe we commented in the last quarter. What we've done -- and we did it actually also at local GAAP level in January, was to book PEN 100 million voluntary provisions, okay, after an assessment of all the exposure that we had in the construction companies related -- not to the [ clabulas ] Consultora but to the case of Interbank, is mainly related to -- performance bonus. So we're mainly talking about indirect exposure, okay? Let me just hold on one second. I want to get to the numbers. So basically, we did an assessment of all the clients that we were with. And we did an assessment of the risks that we saw coming from this potential issue. And we assessed client by client and project by project. Because here, no, we have different clients with different projects. Some of the projects are almost completed. Some other projects are at different stages. And we, let's say, estimated that the worst-case scenario for a potential loss, if you want, during this year could reach this PEN 100 million, okay? That was the case when we did the assessment, let's say, at the very beginning of the year. What we are doing from, let's say, month by month, is by keeping track of the development of the exposure with these same companies, okay, in a order to be able to see what to do with these voluntary provisions. And what we have seen so far is that the overall exposure on those clients have improved. So it has decreased, okay? Of course as of the first quarter, we have -- kept those provisions because, I mean, is not that the problem is 100% over. But what we will do going forward is to see how things are developing in order to see whether or not we are going to be accounting those provisions and moving them from voluntary to specific provisions, okay? But so far, if you want up to today, we haven't seen any negative development, if you want, in order to have the need to apply those voluntary provisions to specific clients. But we will continue to look further, look at the development of the evaluation that we made at the beginning of the year.

[Sebastian Gallego, analyst]

Okay. My second question is regarding Interseguro. We saw the positive contribution on investment, and we saw a nice increase on net premiums. But can you comment on the specific account on net claims and benefits on -- particularly on annuities? What can we expect going forward? And more importantly, what could be the expectation on ROE for Interseguro under IFRS standards?

[Michela Ramat, executive]

Okay. First, let me comment on the claims which I think was your first question. Of course you see claims going up but this is also the result of the fact that now we have Sura as clients, right? So basically we have the obligation and a higher portfolio of annuities. So the increase that you see there is mainly coming from that. And your second question, which is actually a very good question, I think is related to the profitability of Interseguro. We are showing still a low ROE in IFRS standards that when you of course compare with the local GAAP ROEs, there's like a 10-point difference between one and the other. One of the reasons -- I mean there are a couple of reasons why the ROE of IFRS is still that low in this quarter. A portion of that has to do with the performance of the investment portfolio. You're seeing there is, I mean, a [hiccup] from mark-to-market but also the return on the portfolio is still not at the level, not that we would like it to be in the overall combined portfolio of Interseguro plus Sura. So that portion should help a little. And the second thing that is making this difference between the profitability is what I explained before, it's the technical loss we are registering under IFRS every time we sell a new annuity. So that is something that, to be sincere, I cannot give you the final answer because we are still in the process that I told you before, of finalizing the figures and of seeing whether or not we can make that further change that should better reflect the performance of Interseguro, okay? But the only thing that I can tell you now is that that's 5% that you're seeing this quarter -- should at least be a double-digit ROE, okay? I cannot tell you the final figure yet, but it should be something that is much higher than the number that you see this quarter.

[Sebastian Gallego, analyst]

Okay. And just one final comment and more than a question, it's just feedback. Is there a chance that IFS could just provide reports under IFRS? Or should we expect going forward that IFS may have local GAAP accounting, IFRS accounting and also we see different figures at SBS

[Michela Ramat, executive]

Let me see whether I have understood your question. I mean, we are currently reporting IFS only under IFRS, okay? We do still have an obligation to report to the local authorities for Interbank and Interseguro in local GAAP. So that's why we also need to do these local GAAP. Basically for the bank, as you can see the differences between one and the other are not that material. The company where we still see the differences is Interseguro. And this is also why we're trying to make this further change to see whether we could try to minimize those differences also for us and for simplicity purposes of the analysis of the real performance of the company.

[Operator]

[Operator Instructions] And your next question comes from [ José Block ] with [ ProFuturo ].

[Unknown Analyst]

My question is related to the sale of the 4 million treasury shares during the last 2 quarters. Considering the dilutive effect that this has on earnings per share, did you consider any other options? Or was it really necessary to sell these shares -- to sell these shares?

[Michela Ramat, executive]

I'm not sure whether I understood the sense of the question. Can you elaborate a little bit?

[Unknown Analyst]

Yes, sure. I mean selling treasury stock have dilutive effects on earnings per share, I would like to understand the rationality behind this sale. I would like to know if there was any specific reason why you did this type of position.

[Michela Ramat, executive]

Okay. Let me think. Basically a portion, this portion of those shares, okay, were at Interbank investment portfolios, okay? So basically, I understand your point, when you look at IFS as a company. But for Interbank, those shares are an investment. And actually, given the difference in price, they have meant an -- I mean a return for Interbank. So basically we have made some gains at Interbank level for selling the shares. Moreover this has also helped, if you want in terms of capital, because those shares for Interbank were 100% deductible of capital, okay? So basically when you analyze the share -- the sale of share from the Interbank perspective it makes an complete sense from the things that I've made. Of course then when you do the consolidated numbers at IFS, things are a little bit different because there is no material impact in earnings, okay? And there is no material impact in capital, okay? But there is an internal level. So I would say, that is the answer, I guess to your question.

[Operator]

And there are no further questions at this time. I would like to turn the call back to Ms. Casassa for any closing remarks

[Michela Ramat, executive]

Okay. Thank you, everybody, for joining our call and for the patience with all these changes this quarter. And we will [ listen ] everybody in the next quarter.

[Operator]

And this concludes today's program. Thank you for your participation. You may now disconnect.