Intercorp Financial Services Inc

NYSE:IFS

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. And welcome to Intercorp Financial Services Third Quarter 2019 Conference Call. [Operator Instructions]

It's now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, please go ahead.

[Rafael Borja]

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its third quarter 2019 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Juan Pablo Segura, Chief Financial Officer, Interseguro; and Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo.

They will be discussing the results that were issued yesterday. There is also a presentation to accompanying these results. If you didn't receive a copy of the presentation or the earnings, it's 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 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.

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, 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 of forward-looking statements, please refer to the quarterly report issued yesterday.

It is now my pleasure to turn the call over to Ms. Michela Casassa, Chief Financial Officer of Intercorp Financial Services, for her presentation. Ms. Casassa, please go ahead.

[Michela Ramat, executive]

Good morning, and welcome to Intercorp Financial Services Third Quarter 2019 Earnings Call. First, let me comment briefly on the macro environment. Despite political volatility related to the dissolution of Congress, the Peruvian economy has proven to be resilient, although we could witness some volatility in the coming months related to the election of the new Congress, but we expect Peru to maintain its sound macro stability and moderated GDP growth.

In this context, both monetary and fiscal policies have recently aligned towards a more expansive posture. On one hand, the Central Bank capped its reference rate by 20 basis points to 2.25% last week, the second cap this year. On the other hand, the Minister of Economy and Finance announced approximately PEN 13 billion solid budget to be executed between November and December of this year, which is expected to boost public investment.

This, together with a better performance of certain primary sectors, has led market consensus to expect around 2.5% GDP growth for year-end and 3% for 2020.

Moving on, the financial systems had a good quarter. At the banking system, gross loans grew 7.3% year-on-year, driven by increases of 11.6% in retail loans and 4.9% in commercial loans, according to the SBS. Other consumer loans and credit cards grew the most in retail banking, while in commercial banking, corporate loans performed better year-over-year.

The insurance system saw a 10.2% year-on-year growth in total assets in the third quarter, with net premiums earned growing 9.9% when compared to the third quarter of last year. Under this environment, we believe that IFS has a solid performance.

Now let me start the discussion with an overview of the quarterly performance on Slides 1 and 2 of the presentation. The main highlights are: IFS third quarter results increased 5.8% year-over-year and 9 months results increased 8.5%; year-to-date return on adjusted equity at 18% and adjusted risk on adjusted equity -- return on adjusted equity, sorry, at 18.8%, which excludes, on one side, the impact of mark-to-market on investment from Inteligo; and on the other side, the increase in IFS equity due to the primary offering of shares and the gains from the secondary sales of treasury stocks in the New York Stock Exchange last July.

Total revenues at IFS increased 11.4% year-over-year in the third Q with an efficiency ratio which improved 20 basis points in the quarter and in the year. We've seen a positive evolution of our digital transformation indicators, and the relevant net income, which is the base for dividend distribution, has reached PEN 1.4 billion in the 9 months ended September, up 15.6% year-over-year.

At Interbank, we had a strong quarter with a 19.8% return on adjusted equity with the adjusted net profit increasing 6.7% on a quarterly basis when excluding the release in provisions of the second quarter and increased 19.4% year-over-year.

12.3% year-over-year loan growth with a 17.2% increase in retail loans. Retail deposits grew 13.9% year-over-year, gaining 50 basis points in market share in the year. Adjusted cost of risk decreased to 20 basis points in the quarter, and the core equity Tier 1 was up 80 basis points on a quarterly basis and yearly basis.

At Interseguro, solid quarter in earnings with return on adjusted equity at 14.9%. Net profit increased 3.5% on a quarterly basis and 70.5% on a yearly basis. Growth in individual life and retail insurance was offset by a market contraction in private annuities in a challenging competitive environment in the regulated markets. The net insurance underwriting result improved 20.8% on a quarterly basis and 15.7% year-over-year, and the return on -- return on investment increased 20 basis points to 6.3%.

At Inteligo, the quarterly results are impacted by PEN 11.2 million negative mark-to-market investment due to market conditions. Assets under management and loans grew 2.2% and 20.7% year-over-year, respectively, and fee income increased 11.3% in the quarter and 11.9% in the year.

Now let's have a look at some additional key performance indicators on Slides 3 and 4. IFS reached earnings of PEN 335 million in the quarter and PEN 1,037 million in the first 9 months of the year. Total revenues continued to show a good trend with 4.9% growth in the quarter and 11.4% when compared to the same quarter last year. The same is true for net interest and similar income with a growth of 2.9% in the quarter and 13.3% when compared to the same quarter last year. These trends are similar when looking at the first 9 months figures, with total revenues growing 9.4% and net interest and similar income growing 10.3% year-over-year, as you may see in the appendix slides. Efficiency ratio for IFS improved 20 basis points in the quarter and the year, down to 34.6%.

At Interbank, efficiency ratio remained stable in the quarter and improved 280 basis points in the year, down to 39.2%. When looking at the first 9 months performance, IFS efficiency ratio was almost stable at 34.4%.

IFS return on adjusted equity was 16.8% in the quarter and 18.1% when excluding, on one side, the impact of mark-to-market and investments from Inteligo, as previously mentioned, and on the other side, the increasing equity due to the primary offering of shares and the gains from the secondary sale of treasury stocks in the New York Stock Exchange. During the first 9 months, IFS return on adjusted equity was 18%, and 18.8% when excluding the impacts previously mentioned.

Moreover, as of September 2019, the cumulative unrealized gains of around PEN 420 million at IFS level are impacting return on adjusted equity downwards by 90 basis points.

NIM at Interbank remained stable in the quarter and increased 20 basis points in the year. The yearly increase is mainly due to a 30 basis points improvement in NIM on loans up to 9%, mainly thanks to the portfolio mix, with higher growth coming from credit cards.

Risk-adjusted NIM improved 10 basis points in the quarter and decreased 10 basis points in the year. The quarterly increase is mainly due to an improvement in the adjusted cost of risk of 20 basis points in the quarter, in turn, explained by improvements in both credit cards and commercial loans. When looking at the first 9 months figures, risk-adjusted NIM decreased 10 basis points to 3.9% with an adjusted cost of risk at 2.5%.

Total capital ratio for Interbank stands at 15.4%, with core equity Tier 1 ratio up 80 basis points in the quarter to 11.4% as of September 2019, mainly thanks to the sale of shares in the New York Stock Exchange and despite the strong growth registered by the bank, especially in the retail portfolio with higher risk-weighted asset density.

At the insurance segment, gross premiums plus collections decreased 7.7% in the quarter and 4.4% in the year mainly due to a market contraction and to aggressive competition on rates in the annuity business, which has been partially offset by growth in the life insurance business and in the retail insurance business. Cumulative figures for the first 9 months show a 13.6% growth in gross premiums plus collections. The lower origination of annuities has helped the adjustment of technical reserves to decrease, thus improving the net insurance underwriting result by 20.8% on a quarterly basis and 15.8% on a yearly basis due to lower technical loss.

Return on investment in the insurance portfolio improved 20 basis points in the quarter and in the year, up to 6.3%, helping earnings and risk return on adjusted equity to improve during the quarter. In the same way, return on investment improved 50 basis points in the first 9 months to 5.7% -- from 5.7% in the 9 months of 2019 up to 6.2% in the 9 months ending September this year.

At our wealth management segment, assets under management grew 2.2% in the year. Despite the negative mark-to-market, fee generation was strong, growing 11.3% in the quarter and almost 12% in the year. Return on adjusted equity for the 9 months was 22.4% or 26.4% when excluding mark-to-market.

On Slide 5, IFS relevant net income, which is the base for dividend payment, reached PEN 1.4 billion as of September, a 15.6% increase when compared to the same period last year, which included extraordinary gains at Interseguro after the completion of the merger with Sura. Interbank registered PEN 963 million, Interseguro PEN 328 million due to very strong results in local GAAP and Inteligo PEN 131 million.

On Pages 6 and 7, we continue to see a positive evolution of our digital indicators. Digital users, which includes customers who interact with the banks through our digital platform over the number of customers who have touched the bank in the last 3 months, has reached 61% in September 2019, up from 50% in September of last year, representing a 43% increase year-on-year in the number of digital users.

As of the end of September 2019, digital users amount to 1.2 million clients. 100% digital customers who are customers that do not use branches any longer have also continued to increased, reaching 26% as of September 2019 compared to 20% 1 year before. The percentage of total transactions performed away from branches has remained stable at 95%, but with a higher participation of Internet and mobile transactions at 78% from 76% 1 year ago.

Digital sales reached 41% as of September, up from 28% in September last year. And digital acquisition of retail customers has continued to grow from 5% of new retail customers in September 2018 to 28% in September this year.

On Slide 7, saving accounts open digitally reached 36% in September compared to 6% 1 year before, while business accounts, or Cuenta Negocio, opened digitally reached 52% up from 34% 1 year before. Extracash loans linked to credit cards that have sold digitally reached 23%, up from 12% 1 year before, and SOAT car insurance policies sold digitally reached 62% compared to a 49% 1 year ago. Moreover, during the third quarter, we have continued to launch new functionalities in our digital platform such as the 100% digital loans and the P2P payment using cell phone numbers through our app.

Now let's take a look at each subsidiary's performance in detail. On Slide 9, you can see improvements in most of the key indicators at Interbank. As previously mentioned, NIM remained stable in the quarter and improved 20 basis points in the year, reaching 5.8%, while risk-adjusted NIM improved 10 basis points in the quarter up to 4% due to the improvement in the adjusted cost of risk of 20 basis points, down to 2.6% in the quarter.

Total other income continued to grow strongly at 5.4% in the quarter and 21.5% year-over-year, with fee income growing nicely at 6.4% in the quarter and 16.1% in the year. The increase in the yearly fee income is mainly due to the strong increase in credit card related fees, which is partially offset by other decreasing fees related to the migration to digital channels and to lower activity in contingent credits and corporate finance in the commercial loan book.

Other expenses grew 9.3% year-over-year and 4% in the quarter with a stable efficiency ratio on a quarterly basis, but an improvement of 280 basis points in the year due to the operating leverage we continue to register at the bank with total revenues growing faster than expected.

The main items impacting the yearly increase in other expenses are: first, expenses related to the digital transformation, which include technology and amortization, which increased PEN 9 million year-over-year or 13%; second, personnel expenses that grew PEN 16 million or 10.4%, which includes incentive related to commercial activity and mandatory profit-sharing expenses; third, variable costs related to credit cards for an additional PEN 6 million or 18.8% year-over-year growth.

On Slide 10, our year-over-year loan growth has been similar than recent quarters, but slowed down versus the beginning of the year from 17.3% as of the first quarter this year to 12.7% in the second quarter to now 12.3%, mainly due to a slowdown in the growth of the commercial banking loan book, in line with the market dynamics.

Still, we continue to grow faster than the market at 12.3% compared to the 7.3% of the banking system as a whole, with retail growing at 17.2% year-over-year and 3.4% in the quarter, and commercial banking growing 6.9% year-over-year and recovery this quarter by growing 3.2% quarter-on-quarter, mainly due to an expansion in the corporate loan book. We continue to be #1 in retail credit cards as of September with a 27.1% market share.

Our market share in retail loans was stable on the quarterly basis at 18.9%, and increased 10 basis points in commercial loans leading to an increase of 10 basis points in the total loans market share, which reached 12.5%. The yearly growth in credit cards continued strong at 25.3% with a stable risk profile of the portfolio and lower cost of risk in the quarter. Despite these positive trends, it is worth noting that we have started to see some deterioration in the market as well as a deceleration of growth in the last couple of months, which could have an impact in the near future.

On Slide 11, retail deposits continue to grow nicely, reaching 13.9% year-over-year, allowing us to gain 50 basis points of market share in the last month, reaching a record 13.5%. Total deposits grew 1.9% in the quarter as a result of increases of 2.9% in retail and 1.1% in commercial deposits. Growth in bonds was mainly explained by 2 bond placements in the international markets in September for PEN 312 million and $400 million, both due in October 2026. This effect will be offset with the execution of a make-whole redemption of the 5.75% senior notes due 2020 corporate bonds, which already took place at the beginning of November. This liability management transaction has already been completed, generating a one-off negative effect of around $9 million, which will be reported in the fourth quarter but which, at the same time, will help us improve our cost of funds going forward as we have replaced a 5.75% coupon bond with a 3.25% coupon bond in dollars.

Average cost of funds improved 10 basis points in the quarter, down to 2.9%, with a loan-to-deposit ratio at 103.8%, well below the system average of 105%.

On Slide 12, we are showing the evolution of the stock of provisions over total exposure or expected loss. This trend shows that the risk profile of the bank has remained relatively stable over the past 6 quarters since the implementation of IFRS 9 and despite some quarterly volatility in cost of risk.

On Slide 13, cost of risk was 2.6% in the quarter. The quarterly improvement of 20 basis points from an adjusted 2.8% in the second quarter to 2.6% was mainly due to 2 effects: first, a 10 basis points improvement in the cost of risk of the retail portfolio from 4-point -- 4% to 4.3%, mainly coming from credit cards, which improved from 11.9% to 11.1% in the quarter, thanks to some seasonal -- seasonality of the portfolio; and second, a 30 basis points improvement in the commercial loan book from 0.7% in the previous quarter to 0.4% this quarter. The nonperforming exposure under IFRS criteria improved both during the quarter and when compared to the previous year.

When looking at Stage 2 and 3 over total exposure, the ratio improved 90 basis points this quarter and 230 basis points year-over-year, down to 9.5%. This means that over 90% of the bank's total exposures sits now on fully performing Stage 1 IFRS classification. When looking at Stage 3 and refinanced loans, this ratio was 3% as of September 2019, a 10 basis point increase in the quarter and 20 in the year. Total NPL coverage ratio, which measures the coverage of Stage 3 and refinance loans, remains strong at 126.4%.

On Slide 14, as of September, Interbank's capital ratio of 15.4% is 380 basis points above its risk-adjusted minimum requirement established at 11.6% and above the systems average of 14.9%. The quarterly decrease in total capital is mainly due to higher risk-weighted assets from intangibles and to the elimination of a $30 million subordinated bond, which was called for early redemption in July this year. Core equity Tier 1 ratio has strengthened 80 basis points in the quarter and in the year, reaching a record 11.4% despite the strong growth registered in the past 12 months in loans and in risk-weighted assets.

The quarterly improvement in core equity Tier 1 was mainly thanks to the proceedings from the IPO, giving us ample room to continue growing.

Moving on to the insurance segment. As previously mentioned, we've had a solid quarter in earnings with return on adjusted equity at 14.9% in the third quarter, above the 13.6% reported in the last quarter.

On Slide 16, gross premiums plus collection in the third quarter decreased 7.7% and 4.4% year-over-year, excluding Seguros Sura gross premium from disability and survivorship contract that expired in December last year. Growth in individual life and retail insurance was partially offset by a market contraction in private annuities and competitive pricing challenges in the regulated market, for both quarterly and yearly performance, which we currently see normalizing.

On Slide 17, net insurance underwriting result, resulting in minus PEN 62.9 million in the third quarter, an improvement of PEN 16 million on a quarterly basis and PEN 12 million on a yearly basis. The quarterly improvement was mainly explained by a PEN 26 million decrease in adjustment of technical reserve, partially offset by PEN 7 million lower net premiums and PEN 3 million higher net claims and benefits incurred.

Net premiums reached PEN 157 million during the quarter, a 4.2% decrease in the quarter and 9.4% decrease in the year. The quarterly decrease was in line with the trends previously explained.

Adjustment of technical reserves decreased PEN 26 million in the quarter, mainly due to lower origination of annuities in the quarter while net claims and benefits incurred, which refer mainly to the pensions paid for the stock of annuities, increased PEN 3 million on a quarterly basis, along with increase in the size of the annuities portfolio.

On Slide 18, in the third quarter, Interseguro's investment portfolio reached PEN 12.3 billion, which represents an increase of 1.7% in the quarter and 8.6% on a yearly basis. Results from investments in the third quarter were PEN 191 million, which represented a 6.3% return on Interseguro's investment portfolio, improving 20 basis points during the quarter and the year.

Please turn to the following pages to discuss our wealth management segments results.

On Slide 20, Inteligo's net interest and similar income in the third quarter was PEN 26.6 million, an 8.3% increase when compared to the second quarter, which was largely attributable to interest generated by excess liquidity from new deposits acquired during the third quarter.

Net fee income from financial services was PEN 41.3 million in the third quarter, an increase of 11.3% when compared to the previous quarter. On a yearly basis, net fee income from financial services increased 11.9%. Growth in fee income was mainly explained by rebalancing activities implemented in client portfolios throughout the year and brokerage fees generated by go-to-market operations, primarily IPOs. Consequently, fee income divided by assets under management increased to 0.9%.

Inteligo's other income reached minus PEN 8.9 million in the third quarter, a decrease of PEN 9.4 million on a quarterly basis and PEN 32.3 million year-over-year, attributable to negative mark-to-market valuations on Inteligo's proprietary portfolios throughout the year. Excluding the negative impact from mark-to-market investments, other income was PEN 2.3 million in the quarter.

In sum, revenues generated by Inteligo were PEN 58.5 million, a decrease of 5.1% Q-on-Q and 32.2% year-over-year. Excluding the negative impact on mark-to-market valuations due to market conditions, total revenues would have reached PEN 69.7 million.

On Page 21, assets under management reached PEN 18.1 billion in the third quarter, a 2.1% decrease quarter-on-quarter and a 2.2% growth year-over-year. During the quarter, new account openings were partially offset by withdrawal from custody clients.

Inteligo's loan portfolio reached PEN 1.6 billion in the third quarter, a 3.4% increase on a quarterly basis and 20.7% on a yearly basis. Other expenses reached PEN 34.6 million in the third quarter, an increase of 20% on a quarterly basis and 29% on a yearly basis, mainly related to the amortization of assets acquired as part of the Interfondos transaction early in the year. Excluding these effects, which net of consolidated IFS level, other expenses increased 6.6% and 14% on a quarterly and yearly basis, respectively.

Due to these results, Inteligo's reported net profit and risk -- return on adjusted equity in the third Q were PEN 18.9 million and 9.7%, respectively. However, when excluding the asset on amortization from Interfondos acquisition, return on adjusted equity was 11.7% and it reached 17.3% when further excluding the negative impact of mark-to-market valuations in other income.

The cumulative 9 months profits reached PEN 131 million with a return on adjusted equity of 26.4% when excluding, again, the negative mark-to-market and the asset amortization from Interfondos acquisition.

Thank you very much. As you have seen from the number, our core business continues to be very strong. We are committed to executing our strategic plan with a strong emphasis in our digital transformation for the benefit of our customers.

Now we welcome any questions you may have.

[Operator]

[Operator Instructions] We'll take our first question from Yuri Fernandes with JP Morgan.

[Yuri Fernandes, analyst]

I have a first one regarding loan growth. We saw some acceleration on quarter-over-quarter on your growth base, even though the year-over-year is -- it continues to grow at your guidance, right? But going ahead, how much loan growth do you think you can continue delivering in Peru? If you can comment on the economy, on the consumer segment, just for us to have some idea on the volumes.

And my second question is regarding Inteligo. We saw some slowdown on the assets under management on the unit, and the results, they were impacted by mark-to-market on that, too. So what should we expect for the profitability of Inteligo? And what should we see for the AUM growth in that division?

[Michela Ramat, executive]

Yuri, thank you for your questions. We will have Luis Felipe answering the first one.

[Luis Castellanos López-Torres, executive]

It's Luis Felipe Castellanos. Regarding growth, yes, we've seen that year-over-year, we continue to grow very strongly, although we have seen that, that growth, as expected, has started to decelerate. We believe we're going to be within the guidance that we have provided throughout the year, whereby we will continue growing on a year-on-year basis basically low double digits, still gaining market share over industry as a whole, but we expect to grow a little bit slower than that.

In terms of the macro front, we do expect that the growth for the year will be around 2.5%, which is the latest indication based on the numbers that the government is providing. And for the next year, we expect it to recover a little bit and being around 2.5% and 3%, hopefully, more towards the 3%. However, as you know, there are some political events that have happened and are kind of changing a little bit the landscape of the end of the year because we're going to be facing congressional elections early next year and that's something new for us and that could have, beginning of the next year, a little bit slower than we would have expected.

[Yuri Fernandes, analyst]

And after those events, did you see some decrease on demand from corporates and things like these? Or now, with like these elections, we could see more investments given like the Congress was so tough with the President. How should we see demands from corporates going on?

[Luis Castellanos López-Torres, executive]

Yes. The overall expectation is that growth at some point should recoup when things start getting normalized, especially in the country. Obviously, we cannot lose touch of what's going internationally, but specifically for Peru, the macro fundamentals continue to be solid. And there's a lot of projects that are waiting to be executed, both on the public side, on the private side as well. So it's really the elections result [ in coming ] all this political uncertainty that we've been having over the last year, probably investments will start to recoup. And if that happens, obviously, there's upside to the expectations that we have presented.

I'm actually coming this morning from the inauguration of the largest shopping -- one of the largest shopping malls in Peru called the Surco project and the levels of activity that we are expecting for that should also help the positive deals on the economy. So as long as investments start piling in, next year should be a little bit better. So hopefully, after the elections, we'll have some water under the bridge and a more positive sentiment will come in and the macro side should be reinforced.

Now let me pass it on to Michela for the second -- to answer the second part of the question.

[Michela Ramat, executive]

Yuri, related to Inteligo, we are still talking about this year. We have not given guidance for 2020 yet. And as far as profitability is concerned, for Inteligo, we are reaffirming the -- I mean, at least 25% return on adjusted equity. And going forward, we should see asset under management recuperating a little bit and growing above 5%.

[Operator]

[Operator Instructions] We'll go next to Daniel Mora with CrediCorp Capital.

[Daniel Mora, analyst]

Congratulations on the results. I have 2 questions. The first one is a follow-on of loan growth. We have seen some deterioration in the commercial segment in the recent quarters, while the retail segment remains strong. So what are your expectations for next year, particularly for the commercial segment considering the political uncertainty in the country?

And the second question is about Interseguro. We saw a quarterly and annual reduction in annuities. Can you provide more color regarding the performance and the possible trend in coming quarters?

[Michela Ramat, executive]

Thank you for your questions. Let's go over the first one, in terms of loan growth and specifically on the commercial loan book. We have seen a very weak commercial loan growth this year in the system, okay, with -- actually, I think the first 6 months of the year, when you were looking at the year-to-date numbers, there was 0 growth, okay? We've seen a little bit of that improving in the third quarter. And actually, we have almost 3% growth in commercial loans in the quarter, and that has allowed us also to grow even faster than that [ and show the ] numbers that I presented before.

So basically, I mean, we are still finalizing our numbers and we will give you guidance in the next quarter, but we are seeing a little bit of a recovery of the commercial loan book growth and activity for next year.

Now there are certain trends that are helping that. One of those also has to do with public spending. I mentioned at the beginning of the call the intention of spending in the last couple of months of the year PEN 12 billion, and this should also be much better next year because remember that at the beginning of this year, we had a very low public investment level due to the elections of the end of 2018, no? So that should also help next year.

And to annuities, let me pass it on to Juan Pablo who can give you a more detailed view.

[Juan Pablo Segura;Interseguro;Chief Financial Officer, executive]

Daniel, thanks for your question. In terms of the annuities market, yes, there -- the annuities market total, and that's including the regulated annuities and the private annuities market, was basically flat quarter-over-quarter and year-over-year. If we skin a little bit how the regulated ones versus the prior ones behaved, the regulated annuities were actually up 5% and mostly from the survivorship and disability type of annuities. In the private annuities market, there was a contraction, and the contraction comes from a lot of movements in the interest rates that all the financial institutions, other than insurance, are giving to deposits in the market.

We -- at Interseguro, we prioritized in Q3 our profitability. We want to keep our IRRs of annuities at a minimum threshold. So we're very disciplined to keep that profitability for Q3 and sacrificing some of the market share that we've had in Q3.

We see interest rates normalizing again, competitors being with less of a gap in terms of the interest rate they sell versus what we do, and we see that has been normalized after that closure of Q3. So we don't see that as a structural problem but something that happens specifically at the end of Q3, and that's why we show in that segment a little bit of a decline. Again, most of it, market share driven because of prioritizing profitability, and market in general, flat quarter-over-quarter and year-over-year and especially impacting the private annuities market.

[Operator]

[Operator Instructions] We'll go next to Alonso Aramburú with BTG.

[Alonso Aramburú, analyst]

So 3 questions on my side. Can you comment on what generated the mark-to-market losses at Inteligo?

Can you also comment please on the cost of risk? And given that you're seeing some deceleration in growth, do you expect your cost of risk also to be a little bit higher over the coming quarters?

And finally, regarding the unrealized gains at IFS, have you realized some of those in the fourth quarter? Or do you plan to do so?

[Michela Ramat, executive]

Alonso, thank you for questions. Let me go over question number 2 and 3, and then I will pass to Bruno for the first one. Cost of risk, I mean, we are showing cost of risk, which is in the low end of our guidance. What we are seeing is retail portfolio that will most likely decelerate a little bit in the next quarters and will most likely have a slightly higher cost of risk. What is true is that what we have seen so far is some things happening at the market level, which translates into provision of local GAAP because of the external alignment. But as we are showing numbers here under IFRS, which is calculating provisions based on expected losses, we have already those effects within our numbers, okay? So I guess that the trend, specifically I would say that in credit cards for the next quarters, will depend on how strong is, if there is, a further deceleration of the demand.

And as far as the unrealized gains is concerned, those unrealized gains are coming actually from -- I mean, from all the companies of IFS and in IFS, we are not planning on realizing those unrealized gains but what we should most likely see in the fourth quarter is a recovery, if you want, of a portion of the negative mark-to-market of Inteligo that seems to be performing better in this last fourth quarter.

So maybe with that piece of information, let me pass it on to Bruno so that he can comment a little bit more on the mark-to-market impact of the second and third quarter.

[Bruno Ferreccio del Rio, executive]

Yes. Basically, the mark-to-market losses on Q3 are due to equity positions on the proprietary portfolio. We do have a larger portion, the majority of our portfolio, in fixed income, but the small equity position has had a negative performance on the third quarter. Even though these are long-term positions for us, so there's quarterly variations, notwithstanding we still think that these should be long-term positive investments for us.

[Alonso Aramburú, analyst]

Okay. And just curious, do you have any positions or any large positions in Chile right now on the equity side?

[Bruno Ferreccio del Rio, executive]

None.

[Michela Ramat, executive]

No. No, we don't.

[Bruno Ferreccio del Rio, executive]

Not at Inteligo, at least, equity positions.

[Michela Ramat, executive]

Yes, nothing...

[Operator]

[Operator Instructions] And we take a question from Carlos Gomez with HSBC.

[Carlos Gomez-Lopez, analyst]

Could you please [indiscernible] Peru [indiscernible] for international equities [indiscernible]?

[Luis Castellanos López-Torres, executive]

Can you repeat this? You're breaking up. We didn't hear your question.

[Carlos Gomez-Lopez, analyst]

Yes. Apologies, the connection is [indiscernible] if you could tell us if the equity investments are investment in Peruvian equities or in other markets?

[Luis Castellanos López-Torres, executive]

No, they are U.S. equity investments, United States, nothing in Peru.

[Operator]

And it does appear we have no further questions. I'll return the floor to Ms. Casassa for closing remarks.

[Michela Ramat, executive]

Okay. Thank you, everybody, for attending the call, and we'll hear each other again in the next quarter results conference call. Thank you. Bye-bye.

[Operator]

And this does conclude today's program. Thanks for your participation. You may now disconnect.