Intercorp Financial Services Inc

NYSE:IFS

Earnings Call Analysis

Intercorp Navigates Peru's Tough Macro Climate

Intercorp Financial Services (IFS) has had a challenging third quarter in 2023 amidst a deteriorating macroeconomic climate in Peru, with expectations for economic recovery dimming and GDP growth projected to be nearly flat. Despite these headwinds and an increased cost of risk, particularly in consumer loans, IFS continues to see growth in customer numbers and revenue. Digitalization efforts are progressing, and they maintain solid market shares in key business lines. IFS' efficiency remains a strength with a ratio at 34%. Insurance premium growth and market share are up, while investment results stay robust. Payment volumes have decelerated, yet partnerships like Izipay and PLIN are advancing. The return to targeted profitability and growth is anticipated post-credit cycle and macro improvement. New guidance suggests a cost of risk between 4.2% to 4.8% and a lowered ROE forecast of 8% to 10% for year-end.

Revenue Growth and Portfolio Risks

The company has reported a healthy 7% year-over-year growth in total revenues, led by a 9% increase in banking and a notable rebound in Wealth Management after facing a downturn a year ago. Although payment revenues grew by a modest 3%, this signposts a positive but varied top line progression. Concurrently, there has been a 5% cost of risk for the bank, reflecting updated provisions for potential losses including those from moderate El Niño impacts.

Digital Transformation Progress

Digital offerings are central to the company's strategy, with 75% of retail customers interacting digitally over the past month, revealing a 5-point jump from the previous year. This demonstrates the successful adoption of digital banking services by customers. Additionally, a sharp improvement was seen as digital self-services soared from 75% to 86%, indicating a forward momentum in the company's digital journey despite a dip in Net Promoter Score (NPS).

Segment-Wise Performance

Banking has increased its market share in retail deposits and commercial loans. There's been a significant rise in market share in payroll inflows and sales financing. However, the momentum in the banking sector has moderated with a 9% growth in the top line and stable net interest margin (NIM) at 5.6%, signifying a need for cautious optimism. The insurance segment shows a robust 18% growth in premiums, whereas Wealth Management reports an 8% growth in assets under management but remains impacted by market conditions. Payments have seen growth in both merchant numbers and volumes, especially in Izipay merchants and transactional volumes, although with signs of margin pressures from increased competition.

Cost Management and Efficiency

The organization has shown effective cost control, manifesting in solid efficiency levels. Despite challenging conditions, such as an inflationary environment and the El Niño impact to customer risk provisions, the company has managed costs judiciously.

Strategic Outlook Amid External Volatilities

The company acknowledges the headwinds from the decelerating Peruvian economy and the increased consumer risk. Yet, they maintain confidence in their market share growth strategy and expect opportunities in the payment ecosystem to add value. External factors like El Niño pose a risk, with potential zones impacted representing up to 12% of the retail and less than 5% of commercial portfolios. If El Niño's severity increases, additional provisions may be required.

Future Projections on Profitability

Expectations are set for a gradual recovery in profitability, hinging on the economic rebound and moderated market volatility. Optimism is tempered by the unknown extent of El Niño's impact, while ROE is anticipated to improve, potentially reaching double digits as conditions normalize.

Risk Management in the Face of Climate Phenomena

In anticipation of potential El Niño events, the company has factored in a moderate impact of 100 basis points in their cost of risk. Proactive stress-testing measures and readiness to adjust provisions indicate a strategic approach towards risk management and financial resilience.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for holding and good morning, and welcome to the Intercorp Financial Services Third Quarter 2023 Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. [Operator Instructions]It is now my pleasure to turn the call over to Ms. Valentina Porto of InspIR Group. Ma'am, you may begin.

[Valentina Porto]

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its third quarter 2023 earnings.We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Ms. Claudia Delgado, Chief Financial Officer in Deseguro; and Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo.They will be discussing the results that were distributed by the company yesterday. There is also a 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 a copy. Otherwise, for any reason, if you need any assistance today, please call InspIR Group 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.Please be advised that forward-looking statements may be made during this conference call. These do not account for future 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 on forward-looking statements, please refer to the earnings presentation and report issued yesterday.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 Castellanos López-Torres, executive]

Thank you. Good morning, and thank you for attending our third quarter 2023 earnings call. Let's start by -- with assessing the macro situation in Peru. As we move on through the year, unfortunately, macro conditions have continued to deteriorate. The market expectation for a quick economic recovery has faded out. Businesses and consumers are adapting to the new growth outlook, but conditions have certainly taken a toll in credit conditions in the country.According to the latest survey of economic expectations from the Central Bank, GDP growth is expected to be close to 0 this year and soft in 2024. El Nino poses a risk for a pickup in growth next year, but this will only depend on the magnitude of such climate phenomenon. We have taken certain actions in order to mitigate the possible negative impacts as we will comment during the presentation.It is worth to note that we remain optimistic on the country's midterm prospects as many of the factors affecting growth during the last months, we believe are temporary, including the political turmoil, the social unrest we faced earlier this year, the Yaku rains, the restrictive monetary policies after COVID and even the potential El Nino.On the positive side, inflation has decreased consistently in the last months to such extent that the Central Bank has been comfortable to cut interest rates twice already and possibly for a third time later today. Inflation expectations for the next 12 months now lie very close to the upper limit of the policy target. The government appears to be reacting to the negative business environment and it has started to make announcements of measures to boost the economy. But it is still early to call for a clear recoup of confidence and private investment and a better macro outlook overall.Moving to our business. Even while facing this negative credit cycle period, IFS continues to deliver growth in terms of number of customers and revenues. And also, we see progress in our digitalization efforts. At Interbank, market shares across key business lines remained strong despite moderation in consumer loans. Here, payment behavior has deteriorated owing to the adverse macro variables mentioned. We are digesting increased levels of cost of risk mainly in consumer loans. We remain well-provisioned and well-capitalized. We are committed to helping Peruvians to overcome these challenging times.Separately, market -- global market conditions continue to impact negatively investment results in our Wealth Management business. Our tight management of expenses over the years and particularly during the last quarters position IFS to face the current environment. Our efficiency ratio at 34% is one of our strengths.At Interseguro, we see growth in premiums, accelerating in individual life and retail insurance while consolidating market leadership in annuities. Investment results continues to be solid in this company.Finally, on payments, despite growth in merchants volumes have moderated this quarter. Izipay is working on creating synergies with Interbank, while PLIN continues to accelerate within a fully interoperable P2P system.Summing up, we remain confident about IFS' outlook going forward and we believe that once we overcome this negative credit cycle and current macro conditions, midterm, we will return to our path of target profitability and growth.Now let me pass it on to Michela to -- for a more detailed update of the results of the quarter.

[Michela Ramat, executive]

Thank you, Felipe. Good morning, everybody, and welcome to Intercorp Financial Services Third Quarter 2023 Earnings Call. Today, we will review 4 sections of our earnings presentation, starting with the macro outlook for Peru.On Slide 3, complementing what Luis Felipe just mentioned, decrease in GDP and in inflation 3 quarters in a row has triggered the first cuts in soles rates in September and October, driving it down from 7.75% to 7.25%. Inflation has decreased from a yearly 8.8% as of June '22 to 4.3% as of October this year and exchange rate has been relatively stable with a slight peak during October, which has reverted in the past days.GDP remains the main concern, as shown on Slide 4. This third quarter has changed the view from a recovery in the second half of the year to a more negative one, driving full year '23 GDP estimates down to less than 1% and internal demand and private investments to negative territory.On Slide 5, during the last weeks, the probability of a strong Nino has surpassed for the first time the moderate view. We are already taking some actions to mitigate future impacts, which include reviewing our infrastructure for the safety of our employees and clients, further tighten our credit underwriting standards in the north and south of the country, reviewing potential impacts on our agro, fishing and transportation sector commercial clients and further focus on cost efficiencies.Additionally, we have already included some impacts of a moderate Nino in our forward-looking considerations for 2024, which has already impacted cost of risk this quarter roughly 100 basis points.On Slide 6, in line with the previously mentioned macro scenario, we have further moderated banking activity by tightening credit standards, which had an impact in credit and debit card purchases as well as in retail and SMEs loan disbursements. Reduced activity in banking and increased cost of risk in the consumer portfolio has impacted the banking earnings and ROE, while investment returns impacted Wealth Management results.With this, IFS earnings are at PEN 195 million and ROE at 8.2%, driving accumulated earnings as of September to PEN 793 million and ROE to 11.3%, as shown in Slide 7. Insurance continued to post good results in the quarter and in the year, while payments continued to grow nicely, but has seen a decrease in margins due to the competitive landscape with EBITDA still growing on a yearly basis. Both insurance and payments continue to gain market shares.On Slide 8, we are giving an update of the main operating trends and changing guidance for cost of risk and ROE. First, we continue to register sound levels of capital with cost with core equity Tier 1 ratio at 11.2% and total capital ratio at 15%. There has been a moderation in yearly total loan growth to 10% as of September and 16.6% in consumer loans and a stabilization of NIM at 5.5% at IFS level.We continue to see good efficiency levels, both at IFS and at the bank level as we are strictly monitoring and managing costs, especially at the bank, which has reached a cost-income ratio below 37% as of September, a strong improvement versus last year, mainly due to the good operating leverage.There has been a further increase in cost of risk coming from consumer lending this quarter, pushing the bank accumulated 9-month cost of risk to 4%, which already includes a first forward-looking impact from a moderate Nino, as previously mentioned. We are changing the guidance for cost of risk to reflect these new trends and the Nino impact to 4.2% to 4.8%, as we expect further increase in cost of risk in the fourth quarter.IFS ROE as of September of 11.8% has been impacted by cost of risk at Interbank and soft investment results at Inteligo. We are changing the guidance for ROE to reflect these trends to 8% to 10% for year-end.Now let's move to the second section of the presentation, which focuses on profitable growth. On Page 10, we see a continuous growth of customer base at IFS or 13% on a yearly basis in banking, 11% in insurance, 9% in Wealth Management and 38% in payment merchants.On Slide 11, good news in top line as total revenues continued to grow 7% year-over-year, thanks to the growth registered in banking of 9%, Wealth Management recovering from negative territory 1 year ago and payments growing 3%. Similar trends in top line when looking at cumulative results for the first 9 months of the year.On Slide 12, we have seen a deceleration in banking fees, mainly related to credit cards and some commercial activity with a recovery in Wealth Management fees and flat fees in payments.On Slides 13 and 14, we wanted to give you more details on the riskiness of the portfolio. 45% of Interbank's portfolio is focused on commercial banking, which continues to behave nicely, mainly due to our conservative approach, which has always focused on low-risk clients and has had a small participation in small and micro companies. This conservative approach has allowed us to maintain a lower PDL versus our peers to balance our higher focus in the riskier consumer portfolio.On the consumer portfolio, we have 3 different risks. First, the unsecured consumer portfolio, which is the one being impacted by the macro scenario in which represents 23% of the total loan book. Second, mortgages at 21% of the loan book; and third, payroll deductible loans to the public sector employees, a low-risk segment, which represents 11% of the total loan book. This quarter, cost of risk of the bank reached 5%, which considers an impact of 100 basis points from a moderate Nino included in the forward-looking update and an increase in the retail cost of risk to 8.1%.Coverage ratio for the retail portfolio remains high at 221% and above pre-COVID levels. Commercial banking cost of risk has seen a slight increase in cost of risk with stable coverage ratio.We have granted an increased number of reschedulings in the consumer loan book to help customers better cope with their payments as we are seeing a deterioration at system level, which includes over-indebtedness of families, sustained high level of food inflation and more contraction of the economic activity. These reschedulings as seen on Slide 14 represent 18% of the unsecured consumer loans as of September '23.Payment behavior for performing loans is different for customers with and without reschedulings. The unpaid portion for regular clients is 2.1%, while it is 14.5% for rescheduled clients for installments mature during September.I would like to start the digital performance part of the presentation by reinforcing and highlighting that we are building 100% digital solutions for our customer journeys, which includes day-to-day banking, savings, financial planning, financing, loyalty programs and marketplace, insurance, Wealth Management and acquiring for merchants through Izipay and IzipayYa as shown on Slide 17.In the following 2 slides, positive news in our digital indicators, which continue to show nice trends when compared to the previous year. As of September 2023, digital customers reached 75% of retail customers who interact with the bank during the last 30 days, up 5 points in the past year. Digital sales reached 63%, up 3% from last year. And our digital self-service indicator has improved sharply from 75% to 86%.NPS has seen a deterioration for the first time in many quarters, mainly impacted by the actions related to risk profile. Insurance and Wealth Management digital indicators show positive developments as well with digital premium still small, but reaching 10%, digital self-service reaching 57% and digital transactions for fund management reaching 43%.Now let's move to some more details on the performance of our 4 key segments on Slides 21 to 30. Starting with Banking and in line with our focused strategy, we continued increasing market shares, reaching 15.2% in retail deposits as of September and 9.6% in commercial loans.However, in line with the increased riskiness of the portfolio, we have not increased further our market shares in consumer loans and retail loans. There are a couple of things that we have been working hard in the past months and that are bringing nice results, as shown in the market share increase to 14% in payroll inflows from 7% a few years ago and the 14.7% market share in sales financing, up from 10% just 12 months ago.On Slide 22, we have seen a deceleration in top line at the bank this quarter with 9% year-over-year growth in top line with net interest income still growing double-digit, 14%, coming mainly from increased volume and yield on loans, but decreasing fees and flat other income. There has been a moderation of yield on loans, but still 10 basis points positive in the quarter, reaching 11.6% and NIM stable at 5.6% at the bank.Risk-adjusted NIM decreased in the quarter, in line with increasing cost of risk of consumer loans. Good news this quarter is that cost of funds moderated its growth reaching 4.2%, up only 20 basis points on a quarterly basis versus 40 basis points the quarter before.Cost of funds has been rising at market level, mainly due to 2 reasons. A continuous migration of retail deposits to more expensive term deposits both in soles and dollars and the higher remuneration to commercial institutional deposits, mainly in dollars as rates have continued to increase. Correction in the overnight deposits rate in soles continues, though at a slow pace. Our loan-to-deposit ratio of 103% continues to be better than the industry's average and positive news is also that deposits continue to increase its share in total funding and that retail deposits market share has continued to increase.On Slide 25, moving on to our insurance business, recovery in premiums up 18% in the quarter and in market share of annuities up to 30.5%, both individual life and retail insurance business lines, which constitute high-profitability businesses continue to grow nicely on a yearly basis or 18% and 42%, respectively, increasing their contribution to total premiums.On Slide 26, the quarterly return on investment portfolio came at 6%, below the extraordinary high third quarter, 7.9%, but on standard levels. The insurance portfolio is composed of 85% fixed income, 10% real estate and 5% equity in mutual funds as of the end of September.On Slide 27, good news in Wealth Management is the 8% year-over-year growth in assets under management. This quarter, we saw a negative impact from investment results, but the core business continues growing.Moving on to payments, starting on Slide 28, we wanted to give you a summary of the developments in our payment ecosystem. Growth in merchants and volumes continues with some moderation, as Luis Felipe mentioned. Izipay merchants increased 38% year-over-year, reaching 1.3 million, while transactional volumes grew 8%. E-commerce transactions are growing at the same pace and represent 17% of our total transactional volumes as of the end of September. In the case of IzipayYa, our solution for micro merchants, growth in merchants was 42% and was very strong in transactional volumes or 2x, all of which are linked to an Interbank account.On Slide 29, Izipay represents a growing and profitable operation and is working on creating synergies with the bank. Revenues continued to grow 3% year-over-year, supported by the increase in transactional volumes and merchants with some pressures on margins coming from increased competition. We have seen a moderation in the transactional volumes this quarter, in line with the decrease in economic activity as market share continues to increase, reaching more than 56% in physical acquiring and almost 23% in virtual acquiring.EBITDA continues to increase on a yearly basis, but has seen a contraction in the quarterly figures due to the impact from deferred costs from past rapid growth in merchants. We have been working to accelerate the growth of our payment ecosystem by having all our assets work towards a common strategy. We are focusing on increasing transactional volumes, offering merchants additional services, continue to pilot low-risk loans to merchants and use Izipay as a distribution network for Interbank products as well as a source of increased float.We are starting to see results from this strategy as evidenced by the following 4 key figures. 22% yearly increase in Izipay flows coming from -- coming to Interbank accounts and 31% increase in average balance on the accounts on merchants; second, 2x yearly increase in transactional volumes from micro merchants, thanks to IzipayYa; and third, the more than 4,000 new Prestamos credit disbursed in our test of the new lending model to merchants.On Slide 30, PLIN has been accelerated by the new landscape of interoperable P2P system. PLIN reached 13 million users as of the end of September with interval participation at 46%. The volume of transactions has continued its strong growth, reaching twice the volume registered the same quarter 1 year ago. PLIN and Yape interoperabilities started in April, and QR code interoperability was added in September.This has been an important development for financial inclusion in the country, which the Central Bank has encouraged and which should help to bring more Peruvians into the financial system, reducing the use of cash, which continues to be high in the country. Number of transactions has increased more than 2x since interoperability started.On Slide 32, let me finalize the presentation with some key takeaways. First, Peru's economy is decelerating, moderation of banking activity and increased consumer risk at Interbank. Second, we are increasing market shares in Banking with moderation in consumer loans. Third, good performance in insurance business, while investment results at Wealth Management not yet recovered. Four, time management of costs is reflected in solid efficiency levels at the bank and IFS.Five, digital indicators continue its positive evolution in line with our strategy. And last, we see clear opportunities to monetize our payment ecosystem.Thank you very much. Now we welcome any questions you might have.

[Operator]

[Operator Instructions] And the first question will come from Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question will be related to El Nino. As you mentioned, you're increasing your customer risk and expected losses to moderate in El Nino of around 100 basis points. But I don't know if you have explored how much of the loan portfolio of IFS could be on the zones impacted from the last El Nino experience in 2017. Just to have an idea if the provisions that you're building in this quarter will be enough and also will be interesting if, for example, this is a peak or it will continue to have a high level of provisions during the first quarter of next year?And then my second question is on your Wealth Management business. We have seen a lot of volatility in the valuation in the results. So I want to know if you have like a strategy to present more consistent results? That will be my 2 questions.

[Luis Castellanos López-Torres, executive]

Thank you, Ernesto. First, on El Nino and the share, let me pass it on to Michela first, and then she will pass it on to Bruno for the question about Wealth Management.

[Michela Ramat, executive]

Related to El Nino phenomenon, we have some ransom numbers to estimate the percentage of the portfolio that might be impacted. Related to the retail portfolio, we are talking about something between 10% and 12%. And in Commercial Banking, the potential impacted portfolio is less than 5%, okay?Also in the small business portfolio, we are expecting an impact which is closer to the percentages of retail that I just mentioned. But as that portfolio is small, it's like PEN 700 million, PEN 800 million, we do not expect a strong impact in that portfolio. So those would be the numbers there.As we have incorporated a moderated impact from El Nino in these forward-looking considerations, not depending on how that evolves in the following months, no, we might need to incorporate in the fourth quarter a strong impact from El Nino that still needs to see because we have seen probabilities of El Nino phenomenon moving in different directions in the past weeks.

[Bruno Ferreccio del Rio, executive]

Yes. On your second question regarding results for Wealth Management. There's 2 parts to our results. First is the Wealth Management business, that's been very stable. The second part is due to the performance of the portfolio, as we've been discussing for the last 6 or 7 quarters and that is somewhat market dependent. But specifically to your question regarding our strategy to eliminate some of this volatility, the answer is yes.We've been implementing since basically fourth quarter last year, we had 90% -- almost 90% of results going through the profit and loss statement. We've been making a conscious effort to move all our fixed income investments to OCI, because our strategy is to collect income from the fixed income portfolio. Unfortunately, that was being booked again through P&L, causing much of this volatility that you're seeing. And we have made a conscious effort to move that. We've already increased that percentage to almost 40% from 10% only at the beginning of the year.And so we are continuing to move in that direction. And hopefully, by the end of the year, that percentage is going to be even higher. And so long term, our strategy is, again, more fixed income and that fixed income portfolio reflecting the variation through the OCI part of the book and not through P&L.

[Ernesto María Gabilondo Márquez, analyst]

That's super helpful. Just a last question in terms of the ROE trends. So again, this quarter and the full year will be impacted because higher provisions, the impact in the Wealth Management business. But thinking about next year, how should we think about a trend for the ROE? Should it be feasible to be at the double digits?

[Luis Castellanos López-Torres, executive]

The short question is yes, but all will depend on the -- obviously, in the recovery of the economy. As you've seen, we do expect the economic growth to return to a more positive environment next year. However, that will be dependent on the extent of the impact of El Nino. And also, we also expect moderation in terms of volatility in the global market conditions. And as rates go down, probably, that will have an impact, a positive impact.So probably the first half of the year will be more complicated than the second half of the year, but we do expect to slowly and surely return to an uptick in profitability. Probably next year won't be the year where we will reach our medium target -- medium-term target. But depending on -- again, on the impact of El Nino, we will start increasing our ROE to more normal levels.

[Operator]

[Operator Instructions] And I would like to hand the call over to the InspIR Group for any webcast questions.

[Valentina Porto]

Thank you, operator. The first question comes from [ Catalina ] from [ BCI Asset Management ]. The question is, what would be the impact on the cost of risk if you adjust in your models the probability of El Nino from moderate to strong?

[Luis Castellanos López-Torres, executive]

Okay. Thanks for your question, Catalina. Let me pass it on to Michela.

[Michela Ramat, executive]

We have run some estimates already. But I mean, of course, it will depend also on the update of the other macroeconomic variables. But what we do expect is a smaller impact of what we have already registered for a moderate impact from El Nino. So it should be a little bit less than what we have already in this quarter.

[Valentina Porto]

At this time, there are no further questions. I would like to turn the call over to the operator.

[Operator]

[Operator Instructions] There appear to be no further questions at this time. I would like to turn the floor back over to Ms. Casassa for any closing remarks. Please go ahead.

[Michela Ramat, executive]

Thank you, everybody, for attending our call. If you have further questions, you can always contact our Investor Relations and we will see each other again in the next conference call. Bye, everybody.

[Operator]

This concludes today's conference call. You may now disconnect.