Intercorp Financial Services Inc

NYSE:IFS

Earnings Call Transcript 2021-Q1

[Operator]

Good morning and welcome to the Intercorp Financial Services First Quarter 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

[Rafael Borja, InspIR Group]

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its first quarter 2021 earnings.

We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro and Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo. They will be discussing the results that were distributed by the company on Wednesday, May 12. The results of our webcast, video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website ifs.com.pe to download the copy. Otherwise, for any reason, if you need any assistance today, please call a group in New York at 212-710-9686.

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. Please be advised that forward-looking statements may be made during this conference call. These do not account for economic circumstances, industry conditions, the company's future performance or financial results. As such, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation or report issued last Wednesday.

It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services for his opening remarks. Mr. Castellanos, please go ahead, sir.

[Luis Felipe Castellanos, Chief Executive Officer]

Thank you very much. Thank you. Good morning and welcome to our first quarter 2021 earnings call. First, I want to thank everyone for making the time to attend our call. I hope you and your families remain healthy and safe during these times, that in many instances continue to prove to be very challenging. Let me give you a brief overview of the health and macro situation in Peru. On the sanitary front, we continue to face vocalized lockdown measures across the country. The second wave has hit Peru very hard with number of cases and deaths going above the first wave. However, the implemented measures were not as strict as it was implemented 1 year ago. In the recent days, health alert levels had softened, and it looks like the second wave is starting to decrease. So now most businesses in Lima and in several regions of the country are allowed to operate at increased capacity, although not yet at normal levels.

COVID-19 cases has started to go down and the vaccination plan is on it's early stages. Today around 5% of the population has been vaccinated so far for around 1.5 million people, but we are seeing the speed of vaccination increase, which is very positive in our view. Economic activity in the country has continue to recover and will start to show improved important base effects from this moment onwards.

GDP figures for the month of March will be out tomorrow and growth is estimated to have reached almost 20% on the banker strength public investment, better terms of trade and higher private consumption. We continue to see -- to foresee a low double-digit growth in GDP in 2021. Supporting this view, the Central Bank held it's monthly monetary policy meeting last night and kept its policy rate at an unchanged rate of 125%, in consideration of the limited underlying inflationary pressures.

Since our last call, Congress finally approved a capital interest rate for the financial system. We do not expect a major impact on our banking business from these measures, but do think it will have negative effect in the financial inclusion and bankerization origination process of Peruvians.

Legal procedures are in place to declare the anti-constitutional nature of the law. We will follow this process growth. All eyes are focused on the runoff Presidential elections will take place next June 6. The most important bolsters agreed that the margin between the 2 candidates has narrowed significantly, which make it impossible to predict who Peru's next President will be. There will be uncertainty in the days ahead and the strength of Peru institutions may be tested in different ways, depending on the outcome. Under this scenario, IFS' franchise continues to prove resilience. We remain confident that our team has experience and skills to manage through uncertain times as we have done in the past. Our clear strategic focus of measures taken to industrial prices are staking IFS to reach record earnings during the first quarter of this year, with solid results in all of our operating segments.

Our liquidity, capitalization and provisioning levels together with our rich management skills, world-class efficiency level, digital strategy and a strong presence in the minds of our clients give us the confidence that our platform is well positioned to continue helping Peruvians with their financial needs in the future. We continue to be focused on helping our customers during these times and to deploy blowing our resources in an efficient way to maintain the path of profitable growth.

Now, let me pass it on to Michela for a detailed review of our results. Thank you again and please remain safe.

[Michela Casassa, Chief Financial Officer]

Luis Felipe. Good morning, and welcome again to Intercorp Financial Services first quarter 2021 earnings call. This time we have divided the presentation in 4 parts, which include financial highlights, key messages, results by segments and trends and takeaways at the end. I will start with a brief summary of financial highlights on Slide 3 to 5. Main highlights are, our Intercorp Financial Services as mentioned by Luis Felipe record earnings of PEN528.7 million in the first quarter with a return on adjusted equity at 23.7%. Earnings grew in all subsidiaries supported by lower provisions and solid results investments. Strong recovery in revenues mainly due to the insurance business. Our digital trends continue to support IFS strategy. We have continued with a disciplined approach to cost control that has helped efficiency and there are solid capital ratios in all business segments. At Interbank strong recovery in earnings, thanks to lower provisions and higher results from investments.

Key banking indicators are recovery where retail loans resume growth. Strong deposit franchise with 40.1% market share in retail deposits. We have seen cost of funds down almost by half from last year at 1.4% and NIM is still under pressure due to asset and loan mix and excess cash. Cost of risk came at 1.8% in the first quarter below pre-COVID level and we continue our focus on efficiency and branch rationalization at the bank. At Interseguro, profit surge in the first quarter due to higher results from investments and business this activity is accelerating and is above pre-COVID levels, with regular annuities leading the recovery.

It was a solid quarter in gross premiums plus collections up 14.3% on a quarterly basis and 25% on a yearly basis. Strong net gain on sale of financial investments with return on the investment portfolio at 10.4% and Interseguro continues to be the market leader in annuities with 27.8% share. Inteligo had a sound first quarter result with return on adjusted equity at 30.7%. Profits normalize from negative results in the first quarter last year and an all-time high levels in the fourth quarter 2020. There was a significant growth in fee income from funds management and commercialization of structured products. There were cost savings from reduced use of office spaces in lower administrative expenses and assets under management had a strong growth of 6.5% in the quarter and 24.1% year-over-year.

Now this record quarter has been mainly driven by investment results at Interbank and Interseguro, but we are very happy to see a recovery in most of our core and recurring results which include, first, the recovery in the quarterly growth of retail loans with an acceleration of mortgages and personal loans. Second, an inflection point in credit cards in April, where we have seen our first month of growth since the beginning of the pandemia. Third, there was an important growth in insurance premiums, and fourth, our recovery in fees coming from increased activity with clients at Interbank and Inteligo.

Now, I will focus on the key messages we would like to take home from this -- you to take on from this call on Slide 7. There are 6 messages which we will cover in detail in the following slides. First, we continue to see a macro recovery. Second, we have a strong balance sheet with liquidity and capital levels substantially better when compared to pre-COVID levels, and moreover we have manageable dollarization levels in the balance sheet. Third, activity has continued to recover as mentioned before in all 3 operating companies. The digital trends continue to be better each month and support IFS strategy, which translates into growth of clients and business. The fifth message relates to cost of risk, which is below pre-COVID level and last, that we continue with our focus on efficiency and branch rationalization.

So now let's move to Slide #8. The first key message is about the recovery in the macro field. In March, we have seen a strong recovery in most of the GDP indicators, favor by the reopening of the economy and the base effect from last year, when activity was depressed by the first round of strict measures to contain the pandemic. As a result, the performance of leading indicators linked to domestic demand such as semen sales, electricity consumption and public investment suggest, that the economy performed strongly in March, particularly, public investment as you can see in the bottom left corner. Government strategy to reactivate the economy through the execution of public investment resulted in a new historical record of almost PEN7 billion executed in the first quarter this year and almost PEN4 billion only in March 2021. These was mainly explained by progress in works related to the reconstruction which changes program, the line 2 of the Lima Metro and the rank up in [technical difficulty] Expectations on economic activity continue to recover up to March, but so a deterioration in April, mainly due to the uncertainty related to the outcome of the elections.

In the same way, volatility in the exchange rate, soles dollar reaching 3.84 last week, but today it is back again to around 3.7 soles per dollar.

On slides 9 to 11, the second message relates to liquidity, dollarization and capitalization. On Page 9, during the first quarter, we have continued to see an increase in our total deposit base at Interbank of 4.6% driving the yearly growth to 33%, which has helped our loan to deposit ratio to stand at a low level of 89% this quarter, and below the system coverage. Moreover, the loan to deposit ratio in both currencies is at healthy levels with the loan to deposit ratio in soles at 105%, well below the 118% of the system. Up to March, there has been an improvement in liquidity in the financial system due to the funds coming from the private pension funds as well as the unused portion of the funds coming from Rectiva Peru program. We have been able to benefit from this situation and to have gained additional 40 basis points market share in total deposits in the quarter and 20 basis points market share in retail deposits. In April, and after the first pause for the second round of the Presidential elections, we have seen a tightening of liquidity in the financial system and at Interbank. There was an outflow of dollars from the system which decreased liquidity in that currency. As of the end of April, the total liquidity of the system in both currencies remains good and the loan to deposit ratio for Interbank is up 91%, well, better than pre-COVID levels which were above a 100%.

We continue to have ample liquid assets with PEN28 billion at Interbank out of which PEN18 billion are cash and equivalents and around PEN1 billion are IFS standalone, out of which around PEN300 million are cash and equivalents, which would cover or could cover IFS current obligations for more than 3 years.

On Slide 10, our loan book has a manageable level of the realization, with no exchange risk as the remaining commercial loans in dollars correspond to export companies with no currency risk. Only 23% of total loans is comprised of dollars and only 6% of retail loans and 1% of small businesses.

On Slide 11, we continue to have a solid capital position at all 3 operating companies of IFS. Our total capital ratio as of the end of March was 17% at Interbank compared to 16.3% of the system as a whole and the minimum of 10.6% required by the SBS for Interbank. This means that we have over 600 basis points buffer in our total capital ratio. Our core equity Tier 1 ratio was stable at 11.5%. Our Interseguro, our solvency ratio stands at a 163%, well above the 100% required. While at Inteligo, our capitalization ratio is 30% again well above the 8% required.

On Slide 12, mostly operating trends at IFS have continued to show positive developments in activity this quarter as well as for April this year. At Interbank, debit and credit cards turnover has recovered to pre-COVID levels of 106% after reaching a peak in December at 113%. New disbursements of payroll deduction loans to the public sector employees are growing 15% versus pre-COVID level, while mortgages have registered a new record month in April and are growing 43% versus pre-COVID levels.

Total fees for Interbank are at 83% of pre-COVID levels with commercial banking fees recovering faster than retail fees, mainly thanks to new business coming from the aggressive Reactiva loan system. In the case of Interseguro and Inteligo, the recovery was much faster. With gross premiums in April this year at 107% versus pre-COVID levels in asset under management at plus 19% in April versus February last year.

On Slide 13, we are showing the quarterly evolution of IFS total revenues. We have seen a strong recovery in revenues coming from other income from investments mainly at Interseguro, but also at Interbank and Inteligo. Quarterly growth of 0.8% is driven by a 27% increase at Interseguro, which more than offsets decreases of 3.1% and 33% at Interbank and Inteligo. Yearly growth in revenues of 19.4% was mainly driven by Interseguro and Inteligo which more than offsets a 4% decrease in Interbank revenues. The diversification of IFS businesses has definitely played an important role in the yearly recovery of revenues. The banking business continues to recover in a more gradual way mainly due to the pressure in net interest income and NIM coming from low yield Reactiva loans, excess cash, portfolio mix and a smaller contribution of credit cards in a low rates environment.

Moving on to slides 14 and 15 and the fourth key message. On Slide 14, our KPIs in the digital transformation continue to show positive results supporting IFS strategy. Digital users as of April are 78% of our customer base, up 31 points in the past 2 years. 100% digital customers who are clients that do not use branches or contact center any longer, and who use digital channels plus ATMs and corresponding agents only for cash-in and cash-out have reached 57% in April, up 30 points from March 2019. Digital sales have also continued to see a rapid increase. At Interbank, retail digital sales reached 53% in April and at Interseguro, SOAT digital sales reached 77%, both increasing sharply in the past 2 years.

We have continued to see an important number of new digital accounts being opened for individuals. As of the end of April 55% of new retail saving accounts were opened digitally and new digital client acquisition of retail customers reached 42% compared to 12% in March 2019. Our investments to build our digital capabilities during the last years has played to an advantage for our customers and operations operations under the current circumstances.

On Slide 15, we have reached more than 4 million retail customers in more than a 110,000 businesses. Our retail client base has increased almost 15% CAGR in the past 2 years where our commercial client base has increased 39% each year for the past 2 years. Our 100% retail digital customers have grown at a CAGR of more than 60% in the past 2 years, reaching 1.3 billion. PLIN, the P2P payment feature among multiple banks operating with cell phone numbers is already active in more than 3.5 million users as of April in only 1 year, 40% of which use Interbank as key account. Tunki, 100% digital solution for payments relaunch on February last year has surpassed 1 million users as of the end of April.

The fifth key message refers to the low level of provisions registered during this quarter, with a cost of risk of 1.8% even below pre-COVID levels. The 3 positive trends described during the last conference call, have continued to develop further during this quarter.

On Slide 16, the first positive trend is that outstanding rescheduled loans have continued to decrease. As of March, outstanding rescheduled loans were PEN9.2 billion or 22% of the total loan book. This number represents a 28% decrease versus the peak of June last year. This is true for both commercial and retail portfolios. Moreover, the number of total clients rescheduled has also decrease as the new inflow has been marginal during this last months.

On Slide 17, the second positive trend is, that we have continued to see an improving payment behavior among Interbank clients. As of April 2021, 99% of our total retail portfolio has already had a payment due, 67% of the retail portfolio has not been rescheduled and is registering a very good payment behavior. 98.9% of clients are paying their instalments, only 0.1% has requested an additional relief and only 1% has not paid. Summing up new request of relief and not paid, this represents a 1.1% as of April, which compares to 1.5% as of January.

Of the 33% of the retail portfolio, which has been rescheduled as of April, 97% of clients are paying their instalments, only 0.4% has requested an additional relief and only 2.6% has not paid. Again, summing up new relief request and not paid, this represents a 3% as of April which compares to a 3.8% as of January this year. A similar payment behavior has been observed for credit cards as of April, with percentage of payments at almost 98% for the 55% of the portfolio that has not been rescheduled, while almost 98% for reactive reschedulings, 93% for unilateral reschedulings and around 95% for structural reschedules.

As for SME is concerned, the outstanding rescheduled portfolio is small and below PEN750 million, out of which 96% of clients have been paying they installments, out of the 92% that have half payments already due as of the end of April.

On Slide 18, the third positive trend is a quarterly reduction of provisions. Cost of risk for the quarter was extraordinarily low at 1.8%, which compares to the 3.1% of the fourth quarter last year and the 3.4% of the first quarter 2020. This level of cost of risk is below pre-COVID level of 2.2% for the full year 2019, mainly due to the low cost of risk in retail, which today has a lower contribution coming from credit cards, which is the product with the higher cost of risk in the portfolio. This is reflected in the low cost of risk for repaying the quarter which was 3.4% down from 6.2% in the fourth quarter and 5.5% in the first quarter last year, and also below the 4% full year cost of risk 2019 pre-COVID.

Commercial banking continues to have low levels of cost of risk, thanks to our small participation in the small business segment and was 0.5% in the quarter.

Finally, the last key message on Slide 19 refers to the discipline and proactive management, of course, we have been pursuing before and after COVID started. This quarter costs are flat when compared to the previous year as activity has recovered and we start to see increases in the variable costs, especially at the bank. We have registered a very low efficiency ratio of 30% at IFS well below our guidance of 35% to 37%, mainly thanks to the positive impacts on revenues previously described. At Interbank, efficiency ratio is up 39% where we have accelerated our branch optimization program starting 2016 and have those additional 52 branches since the pandemia started, reaching total reduction in number of branches of 30% from the peak in 2016. As mentioned during the last conference call, expenses will start to increase during the next quarters as the level of activity continues to recover driving variable costs and some additional expenses start to materialize related to our commercial alliance with Rappi in IT investments. Guidance remains at 35% to 37% cost income ratio for full year for IFS.

Now let's have a closer look at some additional indicators by segment in slides 21 to 27. On slide 21, we are showing a recovery in most of our key banking indicator with the exception of NIM, which is still under pressure. NIM decreased 70 basis points in the quarter, down to 3.7%, but NIM after risk improved 10 basis points in the same period. The low level of NIM in the quarter is due to a number of factors; First, the portfolio mix with a lower contribution of credit cards; second, Reactiva loans at low yields; Third, excess cash invested at low returns and four, the low rates environment.

NIM should start to recover in the next quarters as credit cards resume growth as we have already seen in April. We have a reduction in the excess cash, which we also have seen some extent in April, and Reactiva loans start to mature in a greater extent. NIM would have reached 4.8% in the quarter when excluding Reactiva and excess cash effect. Total fee and other income, had a strong growth of 25% in the quarter, mainly driven by strong investment results. Other expenses decreased 2.5% in the quarter and 2.8% when compared to 1 year ago with the efficiency ratio for the bank at 39%.

On Slide 22, our year-over-year loan growth was 12.3% mainly thanks to the Reactiva loans disbursement. The quarterly growth was small this quarter, but there are some positive trends in mortgages, which continue to accelerate, growing 3.6% this quarter and payroll deductible loans to the public sector employees growing 2.9% this quarter.

Credit cards and other personal loans decreased 5.8% in the quarter, but have seen an inflection point in April, where credit cards have registered a positive number for the first time since the beginning of the pandemic and other personal loans have continued to accelerate growth. These positive trend of April should translate into a positive figures for the following quarters. Commercial Banking grew 36% in the year but was flat in the quarter.

On Slide 23, total deposits grew 2.5% in the quarter and 35% year-over-year with retail deposits growing 1.5% in the quarter and 25% in the year, gaining 40 basis points market share year-over-year, to a record 14.1% as of March.

Due to bank, which include the Central Bank funding for the Reactiva Peru program has decreased 7.6% on a quarterly basis, but has increased 70% of a yearly basis in line with the funds we have lent to our clients. Cost of funds has continued to decrease reaching 1.4% in the quarter, a reduction of 20 basis points in the quarter and 130 basis points on a yearly basis. This positive development came from several factors, slight decreases in market rates, our better funding needs and the higher funding coming from the Central Bank.

Moving on to Interseguro on Slide 24 and 25, quarterly premiums continue to show a strong growth of 14% driving the yearly growth to 25%. All business lines grew with mandatory annuities is leading the growth in premiums. Interseguro remains market leader in annuities with a 28.7% market share in the quarter. We're looking at the April figures, the recovery was more evident as premiums have grown 2x when compared to April 2020.

On Slide 25, Interseguro's investment portfolio decreased 4.6% on a quarterly basis mainly due to sales in the fixed income portfolio, but grew 13% on a yearly basis. Results from investments had a particularly strong performance this quarter, coming growth both from a reversion of provision for impairment loss and other investment income. Thanks to these trends, the return on Interseguro's investment portfolio was extraordinary high at 10.4%, well above the previous quarter level.

Moving on to our wealth management segment on Slide 26. Inteligo posted strong revenues in the quarter, but below the extraordinary high level registered in the last quarter of 2020. Fee income had a particularly positive trend this quarter, growing 22% driving the yearly growth to 14.7%.

On Slide 27, Inteligo's asset under management reached PEN22.3 billion in March, a strong 6.5% quarterly increase and 24% increase on a yearly basis. Loans have also seen a positive trends, growing 3.8% in the quarter and 7% year-over-year. Earnings PEN87 million for this quarter are below the extraordinary high level of PEN155 million of the fourth quarter, that represent a solid quarter for Inteligo with a 30% return on adjusted equity.

Moving on to Slide 28, we are providing a comparison of our results with the operating trends expected for 2021 which we have shared during our last conference call. As we mentioned that time, 2021 will be a year of rebuilding the portfolio at Interbank to foster growth in the coming years. Interseguro and Inteligo should continue to grow despite an extraordinary good year for both companies in 2020.

First, talking about capital, we expect Interbank capital to remain at sound level, well above regulatory requirements. As of March, total capital ratio of 17% and core equity Tier 1 ratio of 11.5% are well above the guidance and the regulatory requirements. Second, profitability. IFS return adjusted equity came at 23.7% this quarter and should be above the 14% for the full year 2021, as per guidance. Third, loan growth at the bank for this quarter was relatively flat, but trends point out a recovery for the coming quarters. Fourth, revenues grew 0.8% on a quarterly basis, mainly thanks to other income. NIM was 3.8% in the quarter, still below the yearly guidance of 4% to 4.3%. The pressuring net interest income and NIM is mainly coming from 3 factors as previously described. The full year effect of almost PEN7 billion solid Reactiva loans had very low rates. The impact of mix on average yields due to the decrease in the credit portfolio and the increases in mortgages. Third, the excess cash invested at low returns and fourth, the low rate environment. Related to cost of risk, it came below the guidance at 1.8% in the quarter below pre-COVID levels and we are keeping around 2% guidance for the full year. Talking about the efficiency ratio at IFS, it was 30% in the quarter, better than our 35% to 37% guidance.

We have continued with our cost efficiency efforts and branch rationalization program. This ratio was extraordinarily low during the quarter, mainly due to the strong other income and some expenses seasonality. We expect an increase in expenses in the coming quarters mainly due to the recovery of activity, which drives variable costs and further acceleration of our digital investment including building our venture with Rappi.

On Slide 30, we wanted to share with you that we have published our sustainability report for Interbank for 2020, where we outlined the actions taken throughout the year in order to achieve our vision of sustainability. You can find it in our website.

And to finalize the presentation on Slide 31, I want to close this presentation with a brief summary of the 6 message that have been developed throughout the presentation. First, we continue to see a macro recovery in Peru. Second, we have a strong balance sheet with liquidity and capital levels substantially better when compared to pre-COVID levels and moreover, we have manageable dollarization levels in the balance sheet. Third, activity has continued to recover in all 3 operations companies of IFS. Fourth, the digital trends continue to support IFS strategy, which translates into growth of clients and business. Five, cost of risk is below pre-COVID levels and six, we continue our focus on efficiency and branch rationalization.

Thank you very much. Now we welcome any questions you might have.

[Operator]

First, we will take questions from the conference call and then the webcast questions. [Operator Instructions] And our first question will come from Ernesto Gabilondo with Bank of America.

[Ernesto Gabilondo, Bank of America]

Congratulations on your record high earnings for quarter, thanks to verified earnings. My question is on how to think about the earnings for the next quarters considering that this quarter was driven by high market-related revenues, that I think are unlikely to repeat? And that OpEx should be trending up, but on the other hand, you are having very strong economic recovery, so that should help to improve lending dynamics and your NII and improving loan NII and using the excess cash. Also provisions, it seems to be already below pre-COVID levels and you are saying that we should a stack such a risk of 2% for the full year. So would it be right to expect core revenues improving in the next quarters while market in -- market related income and other income normalizing? And where do you see the upside risks on earnings? And then just last question on, how should we think about the evolution of the ROE in the next quarters and the full year, and in which year do you expect the ROE to reach pre-pandemic levels?

[Luis Felipe Castellanos, Chief Executive Officer]

I think you nailed it in your thoughts around the answer. We do think that the market-related results should not stabilize normalize. Obviously, we will be closely paying attention to see if we have additional opportunities. As you know, we are -- we have a big investment portfolio in our businesses, this is what we do. But -- so we'll be benefiting to any opportunity. But the offset to that potential increase of expenses and maybe let's see how the macro factors affect risk, it will be that -- our retail portfolio will start -- has started growing again, so we do expect that to help us in driving more revenues, that's kind of the expectation. It's a little bit difficult to foresee everything that not how everything is going to move around, but that's assumption under what we are executing return to growth, especially in higher margin products that we have already witnessed to the end of March and beginning of April, which will offset the other potential negative trends and been very active in paying attention to additional investment opportunities. Now for more details on the trends, let me pass it on to Michella, so she can count from work around the numbers and the trends that we're seeing.

[Michela Casassa, Chief Financial Officer]

Thank you, Luis Felipe. I guess, as we have mentioned, this first quarter now has seen a big incidents of other income revenue. Also basically, the guidance that we have provided for the full year is soft top-line recovery. And so we're talking about really a marginal growth in this year. We have seen an 0.8% this quarter and as Luis Felipe mentioned, it is possible, not on the following quarter, we will not have such a big contribution from other income, but we are expecting net interest income and also other income to help offset the lower revenues if you want from other income. And this should be coming from the recovery in growth in the retail portfolio. We have shown that this quarter is the first quarter in which the total retail portfolio is increasing and moreover, April has seen the inflection point in credit cards. Also summing up those 2 trends together, second quarter, we should see a better recovery in the volumes of retail loss. We should drive a little bit interest income, but also fee income. Then I guess your second question was related ROE. As you have seen, the level of ROE this quarter is well above the guidance that we provided, but we are maintaining the above 40% guidance in ROE, because of the trend that we have described is also soft top-line recovery in further increase in expenses. And so most likely, we will see quarters with lower ROEs that the 1 that we have registered this quarter. Now -- and the aim is to try to be at more normalized levels of ROE for 2022 depending of course, on the macro environment. I don't know if this is okay Ernesto, if there was something else that you wanted to answer.

[Operator]

And our next question will come from Sebastian Gallego with Credicorp Capital.

[Sebastián Gallego]

Yes, hi good morning everyone, and thanks for the presentation. As my colleague said, congratulation as well for the strong quarter. I have several questions, maybe, the first 1 a follow-up, on the recovery of credit cards. Can you elaborate a little bit more on that topic, particularly considering a potential withdrawals of pension funds? We have seen this liquidity effect, particularly in Chile, and I'm just wondering how fast or what's actually the best you're expecting for the credit card business to pick up in the upcoming months and how should we think about actual growth on that portfolio? Second question, you mentioned it's about margins, you mentioned that some Reactiva Peru loans will have a maturity, but I understand that the term of Reactiva Peru loans is at least 36 months. I'm just wondering if you could provide more color on how you're seeing the evolution of Reactiva Peru loans? And maybe 1 final question will be on net fees. When we look at operating trends, it could probably be the actual operating trend with the lowest or the slowest pace of recovery, it seems that is currently at 80% as you mentioned in the presentation. I'm just wondering how should we think about net fees going forward? Should we expect to see further recovery or could this be a new normal for net fees?

[Luis Felipe Castellanos, Chief Executive Officer]

Let me go through, like the concept of your first question, and then we'll go to Michela, so she can again well, go through the numbers. But basically, what we're seeing in credit cards is a recovery and it has to do a bit with the recovery of the macro activity, but it also has to do a lot with our risk appetite. And as you know since last year it started, we immediately changed our underwriting standards in order to be much more conservative. That not together with the pace that we saw increased liquidity and some of our customers not taking more credit card loans, and the fact that much of the delinquent credit cards have already gone through our P&L, it ended up with our portfolio in credit cards reducing like by more than 30%, which -- it's very important for us in order to of asset, you consider that as a revenue generator. And we've been okay with that. We've been working in our models. We've been rebuilding our value proposition to our customers, and now, we feel that we can return to growth not only because of the activity as I said, but because we feel that we have more elements now in order to properly assess risk in that portfolio and return to increase risk appetite towards that end. So that will be the main driver of our credit card portfolio. We've done on some work. We have calibrated our models, we understood the current situation of the Peruvian population, so we feel more comfortable going back to search for that growth, and this is again what we do, what we've been doing throughout the last 20 years. Now, in terms of the pace of growth, probably that will be from -- we will start opening gradually because we will still if what we have done has the effect that we are thinking. But today the equation of the customers that we have in the portfolio, the way they're behaving, the profitability that each of them are bringing because of the risk profile that we have and the low provision expenses are related to that -- are related that we are seeing tremendous good behavior in terms of payments from these set of customers that we have. So the equation is paying very nicely, probably lower revenues coming from those customers, but significantly lower provisions as well so of our net income gets benefit from that. So that's kind of the first part of your question. And now, let me pass it on to Michela, so she can talk about margins expectations, then what we're thinking about fees coming forward.

[Michela Casassa, Chief Financial Officer]

Let me just add a couple of things to the answer from Luis Felipe on credit cards recovery. And maybe just to point out that despite the fact that there is going to be more cash available for clients now because efficient funds et cetera. We have also started to see an acceleration in the new client acquisition, so new credit cards. And also basically that also builds up more credit turnover, so that is also going to help the growth. Also, it is a mix of existing clients consuming more, but also new clients. And just to have in mind that the current risk profile of the credit card portfolio is really with a low-risk noise even lower than pre-COVID levels, so there is ample room now to push for more growth, now that we have everything set in place as Luis Felipe mentioned. In terms of margins at Reactiva, having line that we reached almost PEN7 billion of Reactiva loans at the peak last year. But we have seen since last year is 1 side, there are some prepayments of Reactiva loans and those prepayments are coming mainly in as corporate segment and to some extent in the mid-corporate segment as well. No prepayments of course in the small businesses. Moreover, besides prepayments there are some installments that will start to mature or are starting to mature right, now May, June, July, et cetera, that will also decrease the outstanding of Reactiva. Yes, we have the extension of the Reactiva loans that was approved, that that will not impact the full portfolio, actually there are number of things that have to be made for a company to be able to access, to be substantial, so it most likely impact only a portion of the Reactiva loans. Also, what we are expecting is a decrease of these outstanding loans from Reactiva in that, as they disappear from the balance sheet that would also help a little bit. And the last point related to fees. I mean we will start -- we have seen a recovery of fees and as you mentioned, this -- it has been slowlier than other core operating trends. And it naturally it's a mixed number because there are some very positive news in fees, and there are some others that are recovering slowlier. So 1 side, we have fees coming from commercial banking. Fees coming from commercial banking are growing more than 20% year-over-year. So basically we are growing a lot even when compared to pre-COVID levels. This is coming from a number of reasons, for sure the Reactiva strategy paid off, so we have more clients, more cash, so we are having more fees coming from payments, but also a recovery in export fees, and I mean corporate finance fees. So that is something that we have seen, it's a trend that is very stable and growing since January this year, and we hope to continue to see it in the months to come. Then, as you have seen at Inteligo fees have grown very, very nicely. That is also a very positive trend that we are seeing. The portion of fees that is still impacted and that is still below last year, our retail fees and especially fees related to credit cards. Now have in mind that the credit card portfolio decreased more than 30% year-over-year with COVID and in the same way, fees related to credit cards decreased in that proportion. So basically, those fees are growing, and as long as the credit card activity continues to recover, we should see also those fees recovering in the months to come. So putting in all together, I guess revenues are, as the guidance is going to be kind of flattish with lower revenues coming from other income in recovery, in fees and net interest income.

[Operator]

And our next question will come from Jason Mollin with Scotiabank.

[Jason Mollin, Scotiabank]

My question on operations have been answered, but I thought maybe a more general question on how the group is preparing itself with this uncertainty. It seems like the market has rebounded from some recent lows with some expectations of a more market-friendly candidate winning. But how is the bank -- you talked about liquidity, maybe that's a good way to phrase it. How are you positioning the bank in terms of liquidity and risk taking, going into this period or during this period of uncertainty?

[Luis Felipe Castellanos, Chief Executive Officer]

Yes, we've been here before and in previous situations similar to this one and we have kind of our playbook for this. So in times of uncertainty, we always reinforce our liquidity position. We have very strong capital position and we've -- the other point of concern is the underwriting standards. We have tightened during the whole last year and we are starting to move on that front, but that's something that we are being very careful still. And lastly, we've always managed our business is kind of currency-neutral, we're -- we've always had the view of being hedged in terms of our operations and our dollar-sol exposure and we continue to do that. I think that's -- those 4 are the main parcel we need to take care of and that's what we're doing now again.

[Operator]

And our next question will come from Geoffrey Elliott with Autonomous.

[Geoffrey Elliott, Autonomous]

The proposals that have come out of the Central Bank on limits to interest rates and fees, can you help quantify what those mean for IFS now you've got a bit more detail?

[Luis Felipe Castellanos, Chief Executive Officer]

Actually the proposal came out, as mentioned in the introduction. We don't think it will significantly affect IFS like, it's only a very small portion of part of our consumer book but very small, that will have to change because of the capital the Central Bank has put in. Where we really have been hit is, there is a restriction in order -- for customers to -- for financial institution to charge, I don't know how you call it Michela, how are we calling it in the -- and describe for this...

[Michela Casassa, Chief Financial Officer]

The late payment fee.

[Luis Felipe Castellanos, Chief Executive Officer]

Yes, exactly. There is a restriction to charge late payment fee and that has been changed by higher interest rate for late payment, okay. So all-in-all, again, the impact will not be big, I think it's less than PEN40 million in all 4 IFS, which is no less than 0.5% of IFS' revenues. However what worries us is that it will not -- it is not a good stay -- you need to create payment behavior for Peruvians. So having that in place, the late payment fee is a very good incentive for customers to pay on time, and we see that in almost any market in the world. So that's one of the things that we think will affect or could affect the payment behavior in the future. And so that is the main concern that we have. It's not of revenues impact right now, it's what could happen in the future if Peruvians don't see this as an incentive to have good payment behavior. But overall, as mentioned, the impact of the law in our operations so far will be extremely limited, almost nothing. And however, as you know, the law has been presented before the Constitutional Court, in order to deter the unconstitutionality of the law and we are waiting to see what happens there. Now we have expectations that it could be reverted, both for the cap of the rates and also for this late payment fee situation.

[Geoffrey Elliott, Autonomous]

And is there anything else bank-specific that's bubbling up either in congress or in terms of proposals from the Presidential candidates that impact you down the line? I know that's been a series of different proposals over the last year, is there anything new out that that we should be aware of?

[Luis Felipe Castellanos, Chief Executive Officer]

As banking-specific, nothing that comes to mind really. We haven't seen many, many ideas around the banking system in the Presidential plans yet, so really nothing that comes to mind other than that has been discussed. We're like reprogramming of loans due to the pandemic, that has been taken care of and a couple of interest rate that has already been taken care of, so nothing really that -- but we are paying attention in any case.

[Operator]

And our next question will come from Yuri Fernandes with JP Morgan.

[Yuri Fernandes, JP Morgan]

So I have just a quick question regarding the other income, right, this was a strong, I guess Michela already mentioned, there were sales of fixed income portfolio. But what else has been driving this? Because, okay, this quarter was record but third Q was very strong, fourth Q was very strong. This quarter, I guess, you saw some evaluation of investment assets. I guess, what I would like to know is, like how sustainable are those revenues? And I guess you said, it will normalize, but will it normalize back to 2020 levels that was too high or would it return to 2018 or 2019 level? I know it's hard because market income, it's very volatile, hard to predict, but I guess, it have been very strong and would be nice to have more color, if this is like -- you were there but this is only income of what driving this on those trading in for you?

[Luis Felipe Castellanos, Chief Executive Officer]

Yuri, yes, it's a little bit hard, but the way I would look at it is, everything related to Interseguro, I would like to -- I would look at historical levels of Interseguro, probably will converge to historical levels of Interseguro. And then that the once from the bank, well, again, with all the liquidity we've had, we are taking a very conservative approach to our investments. Basically, it's all government-related sovereign-related instruments, so it's very plain vanilla, and the results will depend on how that moves. So really we have these results like every month. Obviously the first quarter, we saw an opportunity and we worked around that, but it's tough to predict exactly what will have been in the months to come. So again, I will again look at the previous year's results for the bank and try to think that we will converge on that front. And I don't know if Michela, if you have something to add, maybe a little bit more uncertain will be Inteligo versus so called Inteligo last year -- yes, year-in, year-out, the earnings potential of the way they manager their investments. So again looking at the past successful story of Inteligo might be a good predictor. I don't know Michela, if you want to add something.

[Michela Casassa, Chief Financial Officer]

No, not really, I guess, that's the summary. There could be opportunities in the coming quarters, maybe we could have some other extraordinary levels, but that's not something that today we can assure or have in mind as a certain revenue.

[Operator]

And our next question will come from Andres Soto with Santander.

[Andres Soto, Santander]

My question is regarding digital transformation. You guys have presented an impressive slide with the numbers regarding digital sales, new customers triple out. But I would like to understand from a business perspective, how this translates into fees from being a -- and other operating metrics, again how do you see the journey for monetizing this impressive growth in users?

[Luis Felipe Castellanos, Chief Executive Officer]

We can actually address in many different ways. First, I think that the vision that we have towards digital is very positive. We are executing as you know our digital first strategy, so that's materializing. I guess the way I would put it is, we've been able to manage almost like let's say, a stable operating expenses, but the number of interactions and the number of customers that we have brought into the bank in the last 12 to 18 months have grown significantly. So the pace of the new customers at Interbank is accelerating and we kind of manage different lines probably, IT costs increasing, but looking for savings in other places to keep that stable. So if we were operating under our previous model, having not more than a million customers joined the bank in the last let's say 12 to 18 months, would have cost us significantly more than what we are having. So we're able to kind of keep our efficiency ratio at reasonable levels and that's the end. So that's I think the most important part that I would point out. Second, we are gaining market share in our deposits, especially for the regional franchise. So our acquisition strategy is bringing funds which are very efficient in terms of cost accrual, so that's important. Despite as Michela mentioned, rationalizing more aggressively than any bank in Peru, our branch network, so that strategy is also paying back to us. And then the third part that we -- I particularly don't have an answer right now, but we're starting to see because we've been very focused on volume, more reach and on better services for our customers, will be the actual value being brought in is something that we are started to -- starting to that into focus to measure. And probably in the following months, we'll be able to elaborate a little bit more, how we're capturing value on that perspective. But first, we wanted to have the infrastructure, that possibility in terms of commercial terms to bring in more customers on a digital-only approach, we are seeing that getting traction, now we have to move to the -- so that has been with the same cost base basically, so now we're moving to the next phase, which will be capture more value not only look at savings. I don't know, Michela, if you want to add something more specific on that note.

[Michela Casassa, Chief Financial Officer]

Maybe if I can add something. I mean before COVID, and we have discussed this, I guess, in the past. We were having a super positive operating leverage. So basically we were being able not to increase our revenues much faster than costs, and that goes back to the first point of Luis Felipe and all of the ability to be able to bring much more clients without increasing the cost base. What is happening now is that, we have like 2 different situation between retail and commercial. Actually, I guess we are already seeing the value in commercial banking, because all the clients that we brought last year through our digital account opening, okay, that then also were linked to Reactiva are already bringing revenues. So we have seen the boost in fees. So I would say that is like more clear. In other words, an inflow of clients for digital and now we are at being able to generate more fees. What is happening in the retail side is that, the top-line is today affected by like external factors, so the thing that we'll invest do not have to do a lot with the growth or the number of clients, provision from last year, the low level incidents of credit cards. So as long as that normalizes and the customer base continues to increase, we should go back to that positive operating leverage that we used to have been recovering, and I guess there we will see the value of what we are doing materializing. Andres, I hope that [indiscernible] to answer the questions.

[Operator]

There are no more questions at this time. I will turn the call over to the entire group for any webcast question.

[Rafael Borja, InspIR Group]

We have one question from Johanna Castro, Itau BBA. Could you share with us the reduction of on-boarding cost? What was the cost in 1Q '20 and after to 1 million new customers, what is that cost today?

[Luis Felipe Castellanos, Chief Executive Officer]

I don't know. Michela, can you help me with that or maybe we will have to go to join later. We don't have that detail so far.

[Michela Casassa, Chief Financial Officer]

Yes, I'm sorry, we don't have the numbers right now. We will have to come back to you afterwards.

[Luis Felipe Castellanos, Chief Executive Officer]

Yes, so we will come back to you Johanna on that specific question.

[Rafael Borja, InspIR Group]

We hope we have another question from is that [indiscernible]. What are your perspective on the new rep operations with the stage guaranteed loan portfolio? Should do we expect a great contribution in the banking system?

[Luis Felipe Castellanos, Chief Executive Officer]

Well, I don't know exactly what other banks will do, I will tell you what we're doing. We are already doing big rebranding of our customers at lower rates, and we are not very actively going through the whole program enacted by [indiscernible] because we find it a little bit -- that has too many steps. So we've done our own solution for our customers and it's, as Michela showed, every time we're seeing less and less customers looking for this release. So I think that program we have internally built is being very well accepted by our customers that we're sure. So we don't expect particularly to be high users of the program. But then you asked about the whole system, will -- I cannot answer for the other institutions.

[Rafael Borja, InspIR Group]

At this time, I'm showing no further questions. I would like to turn the call over to the operator.

[Operator]

And I am seeing no further questions on my end here, so that will conclude the question-and-answer session. I'd like to turn the conference back over to Mrs. Casassar for any closing remarks.

[Michela Casassa, Chief Financial Officer]

Okay. Thank you very much again everybody for joining this call. We are very pleased with the results of this quarter and I hope to see you all during our second conference call in August. Bye, everybody.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.