Intercorp Financial Services Inc

NYSE:IFS

Earnings Call Transcript 2018-Q4

[Operator]

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

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

[Rafael Borja]

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its fourth quarter 2018 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, Deputy CEO of Inteligo Group.

They will be discussing the results that were distributed yesterday. A result slide presentations accompany these results. If you didn't receive a copy of the presentation or the earnings, 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 i-advize in New York at [phone].

I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken.

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

[Luis Castellanos López-Torres, executive]

Okay, great. Good morning, thanks to everyone for joining IFS' Fourth Quarter and Year-end 2018 Earnings Call. To start, I will comment briefly on the macro environment. 2018 was a good year for Peru in terms of GDP growth and macro indicators, especially when compared to our regional peers, all these despite certain political volatility. Market consensus remains optimistic on having achieved close to 4% GDP growth for the year. Inflation rates remained low and under control. Public debt as a percentage of GDP diminished. Fiscal deficit was further reduced, and the Peruvian sol remained relatively stable.

We expect 2019 GDP growth to be also approx 4%. We expect private investments will have a positive impact on the economy as approximately $20 billion of private investment projects are expected to be executed in the next 2 years, with the large part going to the mining industry.

Infrastructure sector should also play a key role in our positive outlook for this year. Although works related to the Pan-American Games are on its final stage, projects such as Lima's second metro line and Lima's airport expansion, together with the ongoing reconstruction of the areas affected by El Niño phenomenon from a couple of years ago, should also support growth in 2019. An eye should be kept in commodity prices as any natural events could impact us such as another El Niño phenomenon.

Moving on, let's talk about the financial system, which I believe had a good year. At the banking system, outstanding loans grew north of 10%, driven by increases of 11% in retail loans and approximately 10% in commercial loans. The banking system continues to be profitable, with earnings growing north of 10% and ROE for the system reaching 18.5% in the year. The system is also well capitalized, with a total capital ratio of 14.7% as of the year-end.

The insurance system saw an 8% growth in internal assets in 2018, with total net premiums growing 13.6% when compared to 2017. Net profits grew 25%, a significant recovery with respect to the 18% contraction in 2017.

[ Now that we strategically aligned ] IFS. We had a strong solid year. Interbank continued to increase its market share in total loans, both retail and commercial and retail deposits, with improving cost of risk versus the previous years, healthy levels of commissions and good asset quality indicators reaching a 16.5% growth in recurring earnings and 20.3% ROAE. Interbank is also well capitalized with total capital north of 15% and core equity Tier 1 of 10 6%.

Our digital transformation efforts continue to deliver good results. With more capabilities being deployed for the benefit of our customers and increased usage and engagement. We have more than tripled our IT CapEx in the last 3 years, with agile service and operations increasingly gaining traction in our organization.

Interseguro completed its integration with Seguros Sura, which had record earnings of PEN 361 million under Peruvian GAAP, approximately $200 million, excluding one-offs, resuming growth in annuities and reaching a market share of more than 30% in such product, consolidating its leadership position.

Inteligo continued to grow in assets under management and achieved good levels of profitability. As you may know, in the beginning of this year, we announced the consolidation of our wealth management activities at Inteligo by reorganizing Interbank's mutual funds subsidiary, Interfondos, into Inteligo Group. This reorganization's objective is to boost our wealth management activities to help us to continue to run high-quality financial services to our customers.

In all, we are confident that the IFS platform is well positioned to continue to take advantage of the opportunities ahead of us while positively contributing to the growth of Peru and the well-being of Peruvians.

Now let me pass it on to Michela for a detailed review of our results.

[Michela Ramat, executive]

Thank you, Luis Felipe, and good morning to everyone.

Let me start the discussion with an overview of the yearly results. And afterwards, we will review in detail IFS quarterly performance.

Please turn to page #2. At Interbank, record year in growth and earnings and the strong improvement in cost of risk. Earnings reached PEN 1,025 million, a 16.5% increase year-on-year with a 20.3% ROAE; 17.3% year-on-year loan growth supported by a 28.4% growth in credit cards. Market share of total loans increased 60 basis points during the year, up to 12%. Cost of risk was down 60 basis points in the year to 2.5%.

At Interseguro, fully merging Interseguro plus Seguros Sura, consolidated as market leader in annuities. The full year recurring ROAE increased 240 basis points to 9.4%. The yearly growth in premiums reached 45.6% boosted by the merger with Seguros Sura and very good fourth quarter results. Interseguro also remained as the leader in annuities with 30.2% market share, up from 23.6% in 2017.

At Inteligo, solid year in revenues, efficiency and profitability despite adverse market conditions on investments at year-end. Solid growth of 9.1% in assets under management plus deposits for the year. And as already mentioned, Interfondos will complement the wealth management product offering to existing and new customer base.

At IFS. 19.6% year-on-year growth in recurring profit at IFS with a normalized ROAE at 18.6%. The double-digit yearly growth in total revenues at IFS helped a 230 basis points improvement in the efficiency ratio, down to 34.8%.

On Page 3 of the presentation, we show you the yearly trends in earnings and ROAE. IFS reached record earnings in 2018 with a recurring profit of PEN 1.2 billion. Interbank also reached record earnings, as previously mentioned. This result was mainly due to a faster growth in loan than the market of 17.3% year-on-year as well as a more dynamic economic recovery, especially when looking at domestic demand figures. This growth, coupled with a strong improvement in cost of risk, has helped ROAE to reach 20.3%, 80 basis points higher than recurring ROAE in 2017. As we will see in a few minutes, our strong focus on digital transformation continues to show result, with growing figures in all our main digital indicators.

Interseguro's 2018 earnings were PEN 83 million, when excluding the negative impact of the new mortality tables of PEN 145 million reported in the second quarter of 2018. Gross premiums plus collections grew 45.6% when compared to 2017 figures.

Finally, Inteligo's profit decreased 2.4% year-on-year as an unexpected drop of security prices in global markets by the end of December affected the results from proprietary portfolio. Core business growth remained strong with 9.1% year-on-year growth in assets under management plus deposits. ROAE decreased when compared to 2017 but remained at healthy levels at 25.8%.

Now let's have a look at some additional IFS key performance indicators on a yearly basis on Page 4. As shown before, the earnings of PEN 1,091 million at IFS or PEN 1,236 million when you're normalizing the impact of the adoption of the new mortality tables at Interseguro. Recurring ROAE reached 18.6%.

NIM at Interbank remained stable, but recurring risk-adjusted NIM improved 40 basis points up to 4%. Recurring cost of risk improved 60 basis points to 2.5%, mainly due to lower requirements from credit cards. Total capital ratio for Interbank stands at 15.8%, with core equity Tier 1 ratio reaching 10.6% as of December 2018.

At Interseguro, return on investments remained relatively flat at 5.8%. At Inteligo, fee income increased 5.7% on a yearly basis, mainly due to the acquisition of incremental accounts and assets under management.

Now let's have a look at the quarterly performance on Pages 5 and 6 of the presentation. IFS net profit was PEN 280 million in the fourth quarter, a reduction of 11% on a quarterly basis and 2.4% on a yearly basis. The quarterly reduction was explained by lower contribution from IFS subsidiaries, mainly from Inteligo due to the previously mentioned impact from investments as well as by a lower gain on securities at the holding due to seasonality of dividend payments, which positively impacted the third quarter. ROAE of 15.9% at IFS had a 50 basis point negative impact from unrealized gains in IFS equity of around PEN 120 million.

At Interbank, lower earnings are mainly due to a higher level of commissions which, as I will explain later on during the call, were mainly related to a high growth in our credit cards portfolio of 7.8% during the quarter, which is almost twice the growth of the previous quarter. And this is a product which has the highest provision requirement for performing of Stage 1 loans under IFRS 9. NIM improved 20 basis points on a quarterly basis and 30 basis points when compared to the fourth quarter of the previous year. ROAE for the period was 18%.

At Interseguro, gross premiums increased 1.5% on a quarterly basis, with market-share in annuities increasing to 32.2% in the quarter. Earnings decreased 10% on a quarterly basis but grew 6.7% on a yearly basis. The quarterly reduction was mainly due to lower other income. The annual increase was mainly explained by higher net interest and similar income and lower other expenses.

At Inteligo, net profit was PEN 42 million in the fourth quarter, a 25% contraction on a quarterly basis and 2.2% growth year-on-year. As mentioned before, earnings in the period were affected by an unexpected drop of security prices in global market by the end of December. Assets under management plus deposits grew 9.1% on a yearly basis while fee from financial services recovered when compared to the third quarter of 2018.

On Slide #7, we show you the evolution of the relevant net income, which is the base for dividend payments of IFS, and which reached PEN 1,585 million in 2018, an increase of more of -- of more than 30% when compared to the previous year, mainly explained by Interseguro's results as well as a higher contribution from Interbank. As you can see from the figures, Interseguro has increased its level of recurring earnings from around PEN 85 million in the previous year to PEN 200 million after the merger with Seguros Sura. And the reported figures actually reached PEN 361 million, which also includes some extraordinary days.

Now let's have a look at each subsidiary's performance in detail, starting with Interbank on Slide 9. You can see improvements in most of the key quarterly indicators at the bank. NIM increased and reached almost 6%, with risk-adjusted NIM close to 4%. Other income grew 11.5% in the quarter, with fees growing PEN 26 million in the quarter. Other expenses grew 6% in the quarter, with the efficiency ratio improving 130 basis points in the quarter. Cost of risk increased in the quarter to 2.6% or 2.9% when excluding the positive impact of the release of provisions from the construction sector. This increase is mainly explained, as we will see in more detail later on, by the strong growth registered during the quarter in credit card loans, the product with the highest cost of risk in the portfolio but also with the highest level of profitability. The fourth quarter 2018 2.9% cost of risk is in line with our risk appetite and well below the quarterly levels registered during 2017, which reached 3.4% at the first quarter of that year. Even these figures are not completely comparable as 2017 cost of risk was calculated under IAS 39 accounting standard. This gives us a comparison point.

On Slide #10, we are showing the further evolution of our digital transformation. As explained during the last call, the first phase of our digital transformation was mainly focused on building the capabilities that would allow clients to perform their day-to-day transactions digitally and, afterwards, to be able to acquire products and services digitally. Now we are in the second phase in which we are increasing our efforts for educating clients to foster usage of our existing transactional capabilities but also to buy products and services online while completing the full set of digital capabilities. Digital customers, which include clients that interact with the bank through our digital platform, have reached 52% in the fourth quarter from 39% in the fourth quarter of the previous year, representing a 44% increase year-on-year in the number of digital customers. Moreover, the number 100% digital clients, which are clients that do not use branches any longer, have reached 20% as of year-end.

The percentage of transactions performed outside branches has continued to increase, reaching 95% in the quarter from 94% as of the same quarter 1 year ago. The percentage of functionalities that are available on our digital channels, which include transaction, sales of new products and self-service features, has continued to increase, reaching 95% in 2018. Digital sales and self-service interactions have also continued to increase, very importantly, with the penetration reaching 28% as of the end of 2018 from 16% as of December 2017. This represents a growth of 64% in the number of digital sales and self-service transactions performed on our digital channel.

On Slide 11, let's have a look at the loan growth. We can see that we have increased our market share in total loans by further 10 basis points on the quarterly basis and by a total of 60 basis points on a yearly basis, reaching 12% market share of total loans. Performing loans growth was 4.4% when compared to the third quarter as retail loans increased 4.4%; and commercial loans, 4.3%.

Credit cards growth reached 7.8% in the quarter, a pickup in growth when compared to the 4.3% registered in the third quarter of 2018. On a yearly basis, performing loans further reaccelerated growth to 17.3% due to increases of 18% in commercial loans and 16.7% in retail loans. It is worth mentioning that the year-on-year growth in credit cards has been increasing in every quarter of the year, reaching 28.4% as of year-end and gaining 230 basis points market share during the full year 2018.

On Slide 12, total deposits grew 7.6% on the quarter as a result of increases of 8.5% in commercial deposits and 6.6% in retail deposits. Retail deposits continued to grow, reaching 12.7% on a yearly basis, allowing us to gain 40 basis points in market share during the year. During the quarter, the high growth in commercial deposits allowed us to gain 30 basis points of market share, reaching 12.3% by the end of the year in commercial deposits and 12.6% in total deposits. Average cost of funds remains stable year-on-year at 2.9% but increased 10 basis points in the quarter.

On Page 13 and 14, cost of risk was down 50 basis points during the year, reaching 2.5% or 2.2% when including the positive impact of the release of provisions for the construction sector companies. Cost of risk was 3.1% for 2018. And even if the figures are not fully comparable as 2017 corresponds to IAS 39 accounting standards and 2018 figures to the newly implemented IFRS 9, we can see a positive trend in all products, especially in credit cards, which improved from 14% in 2017 down to 9.5% full year 2018, and which has helped the overall ratio for retail to go down from 5.3% in 2017 to 3.8% in 2018.

When looking at the quarterly figures, cost of risk was 2.9%. A 70 point -- 70 basis points increase on a quarterly basis and 20 basis points increase when compared to the fourth quarter of 2017. The quarterly increase was mainly due to higher provision expenses related to the 7.8% growth in the credit card portfolio as we have almost doubled the loan growth during the fourth quarter when compared to the previous one. This higher volume growth implies higher level of provisions since credit cards have the highest requirement of provisions for Stage 1 among all products, close to 4% of all newly disbursed loans.

This level of cost of risk is within our risk appetite and well below the quarterly levels registered during 2017, which had a peak due to El Niño phenomenon, up to 3.4%. In particular, in credit cards, cost of risk of 11.2% in the quarter is well below the average of 14% of 2017 and of every single quarter registered during that year, which stood at 15.4%, 14.9%, 13.1% and 12.6%, respectively. And again, we've seen our risk profile in line with our targets for risk-adjusted profitability.

The nonperforming exposure under IFRS criteria remained relatively stable. When looking at Stage 2 and 3 of our total exposure, the ratio improved 20 basis points this quarter down to 11.6% of the total exposure. And the same happened when looking specifically to credit cards, which improved 40 basis points, down to 14.1% and which compares to a peak of 20.1% in the first quarter of 2017.

When looking at Stage 3 and refinanced loans, the way in which we measure NPL ratio, this ratio was 2.9%, an increase of 10 basis points in the quarter but a decrease of 30 basis points when compared to the previous year. This ratio, though, continued to improve in credit cards, 20 basis points this quarter, down to 4.6%, and which compares to a peak of 6.9% in the second quarter of the previous year. Moreover, total NPL coverage ratio, which measures the coverage of Stage 3 and refinanced loans under IFRS methodology, remained strong at 131% and well above the previous year level of 118.4%. And that Number has reached 200% for credit cards specifically.

On Page 15, when looking at SBS figures comparable to the system related to cost of risk, Interbank's PDL ratio remained stable in the quarter at 2.6% but improved 30 basis points when compared to the previous year. The system PDL was 3%, 40 basis points above Interbank's PDL. When looking at the PDL breakdown, we can see within retail that consumer and mortgages PDL ratio increased 20 basis points in the quarter to 2.3% and 3.9%, respectively. Credit cards PDL ratio, on the other hand, decreased 10 basis points to 4.1%. With respect to the commercial banking, the corporate PDL ratio remained stable quarter-over-quarter, while medium and small and micro PDL improved to 3.2% and 7.5%, respectively. Our 2.4% cost of risk in local GAAP for the quarter remains above the system average of 1.8%, mainly due to the higher incidence of retail and credit card loans in our portfolio mix, especially when compared to the system and to the other 3 main banks. Normalizing this portfolio effect, our ratio would be 1.8%, aligned with the system average.

On Page 17, as of 2018, Interbank's capital ratio of 15.8% is 410 basis points above its risk-adjusted minimum requirement established at 11.7% and above the system average of 14.7%. Core equity Tier 1 ratio improved 50 basis points during the year, reaching 10.6%.

Please turn to the following pages to discuss Interseguro's results. On Page 19, gross premiums plus collections in the fourth quarter increased 1.5% on a quarterly basis and 43.5% on a yearly basis. Annuities gross premiums increased 33.8% year-on-year with market share of 32.2% for the quarter. Retail insurance increased 3% in the quarter and 10.6% year-on-year, while individual life together with disability and survivorship showed strong year-on-year increases, mainly due to the incorporation of Seguros Sura. It is worth mentioning that during the last tender process, Interseguro was not awarded with any position of the disability and survivorship contract related to the private pension system. Although this will impair reduction in gross premiums sold starting the first quarter this year, most of the premiums sold under similar contracts in the past where we insured had a marginal impact on Interseguro's levels of net premiums, margins and profitability.

On Page 20, total premiums earned less claims and benefits resulting -- resulted in minus PEN 68 million in the fourth quarter, an improvement of PEN 7 million quarter-on-quarter but a decrease of PEN 15 million year-on-year. The quarterly increase was mainly explained by a PEN 10 million reduction in the adjustment of technical reserves, partially offset by a decrease in net premiums as well as in net claims and benefits incurred.

On Page 21, Interseguro's investment portfolio reached PEN 11.3 billion, relatively stable on a quarterly and yearly basis. Results from investments in the fourth quarter were PEN 170.4 million, again, relatively flat to the previous quarter as lower net valuation gain on real estate investments were offset by the reversal of provisions for impairment loss on available for sale investments registered as other expenses. Return on Interseguro's investment portfolio was 6%, relatively stable to the third quarter.

Please turn to the following pages to discuss Interseguro's (sic) [ Inteligo's ] results. On Slide 23 -- Inteligo's results. On Slide 23, net interest and similar income was PEN 29 million in the fourth quarter, a 10.5% increase on a quarterly basis and 28% increase on a yearly basis. Net fee income from financial services was PEN 31 million, a 17% increase on a quarterly basis and 1.5% year-on-year. Both the quarterly and annual increases were explained by fees from funds management.

Inteligo's other income reached PEN 4.3 million in the fourth quarter, a decrease of PEN 18.8 million when compared to the third quarter and PEN 22.6 million when compared to the fourth quarter of the previous year, attributable mainly to bad market conditions that prompt lower mark-to-market valuations at the end of the year when compared to positive ones in the third quarter.

Inteligo's other expenses reached PEN 23 million in the fourth quarter, a 10% increase on the quarterly basis and 43% decrease on a yearly basis. The quarterly growth was mainly due to higher administrative expenses, while the annual reduction was mainly explained by the recognition of an impairment loss on available for sale investment in the fourth quarter of the previous year. Excluding impairment charges, total other expenses would have decreased PEN 5.4 million or 19% year-on-year.

On Page 24, asset under management plus deposits reached PEN 15.5 million in the fourth quarter, an increase of 1.6% on a quarterly basis and 9.1% on a yearly basis. The quarterly increase was mainly explained by a growth in deposits. The annual increase was mainly due to the opening of accounts of -- as a result of a strengthened prospection strategy of clients during 2018.

Inteligo's loan portfolio reached PEN 1.6 billion in the quarter, an increase of 21% on a quarterly basis and 18% on a yearly basis. Revenues generated by Inteligo were PEN 64.6 million, a decrease of 15% on a quarterly basis and 19.7% on a yearly basis, contractions that were entirely explained by the decrease in other income as previously explained. All other business lines show a healthy growth, while Inteligo Bank's fee income divided by assets under management was stable at 0.9%.

Inteligo's net profit in the quarter reached PEN 41.7 million with a 25% decrease quarter -- on a quarterly basis. However, when excluding the mark-to-market impact on investments previously mentioned, profit would have grown 17% on a quarterly basis and 9.5% on a yearly basis.

Now we welcome any questions you may have.

[Operator]

[Operator Instructions] And we can take our first question from Adriana De Lozada with Scotiabank.

[Adriana De Lozada, analyst]

My question relates to cost of goods. You explained that it was impacted by credit cards, an increase in credit cards in the quarter. But we also saw post-provision NIM decline in the quarter. So I just wanted to know, going forward, how do you see the evolution of post-provision NIM?

[Michela Ramat, executive]

I'm sorry, I couldn't hear you exactly. The question is related to the evolution of risk-adjusted NIM, was that it?

[Adriana De Lozada, analyst]

Yes. Correct, correct because cost of risk was higher in the quarter impacted by credit cards, you explained. And so I wanted to know how we can think about the post-provision NIM going forward.

[Michela Ramat, executive]

Okay. Basically, what we are envisioning is a stable risk-adjusted NIM, okay, which -- I mean also due to the little volatility that the IFRS methodology includes, I mean it can be a different proportion within the cost of risk and the total NIM but basically stable risk-adjusted NIM. This is what we are foreseeing for the near future.

[Operator]

And our next question comes from Andres Soto with Santander.

[Andres Soto, analyst]

Probably a follow-up to the previous question, and it's related to your profitability at Interbank, which has stood at 18%, partly due to this increase in cost of risk. I would like to understand if this is what you've considered a sustainable cost of risk for Interbank at this point of the cycle or you are seeing any upside to this number based on your expected growth in 2019. And to that point, if you could provide a bit guidance of what you are expecting in terms of loan growth, NIM and cost of risk for this year.

[Michela Ramat, executive]

Thanks for the question, Andres. Basically, what we have seen this quarter is a 2.9% cost of risk, okay? This has been very much impacted by what I explained in the higher incidence of credit cards, which is [ parallel ] with a higher provisioning level. And basically, for the next year, we expect to be in levels -- I mean close to 3%. But this should go together with our profitability or our level of ROAE that should be, on average, at year-end, around 20% with stable NIMs, as I previously mentioned. This would be the guidance that I would like to give to you by now.

[Andres Soto, analyst]

And related to loan growth, what do you expect -- what are you seeing for 2019?

[Michela Ramat, executive]

The system ended up growing this year 10% approximately, okay? We are seeing a system that next year will grow something similar to that, okay? So we should outpacing that growth of the system and remain at levels of double-digit growth, like low double-digit growth. When we are showing 17.6% year-on-year growth, when we are showing the year-end growth figures, which are also very positively impacted by the 28% growth in credit cards, that has kind of a rebound effect after not growing the previous year. So basically, I mean similar levels of growth, [ to not much level ] for double-digit growth, low double-digit growth and outpacing the market so that we can continue to gain market share.

[Operator]

And we will take our next question from Alonso Aramburú with BTG.

[Alonso Aramburú, analyst]

Also a follow-up on cost of risk. Michela, can you comment if there's more possible reversions of provisions related to construction maybe in the short term? And can you comment also on the behavior of new vintages in credit cards where you're comfortable with the asset quality in those -- in that segment? And I also wanted to ask you about expenses, because in second quarter where Interbank gross expense is double digits year-over-year. How should we think about growth of expenses in 2019?

[Michela Ramat, executive]

Alonso, thanks for the question. Okay, let's start with construction companies. We don't expect major releases of provisions in construction companies. There might be something left. We need to see the behavior of those clients. But nothing is quite as big as what we have this year when you sum up the second, third and fourth quarter, okay? Because keep in mind that when we adopted the IFRS 9 methodology, there was there an increase in the stock of provisions which then, during the year, has been partially released. Related to the vintages of credit cards, if you look at the quarterly performance that we have been showing you in the cost of risk this year, actually, we have reached very low levels. We started -- we ended up last year with 12.6% of cost of risk of credit cards. Then we went down to 9.4% in the first quarter, 9.2% in the second quarter. And at that time, we told you that -- I mean we weren't expecting to continue to lower that cost of risk and that, most likely, it was going to grow a little. As we were in the strategy of improving the risk profile of the total portfolio, okay, that number continued to increase. But at some point, when we ended up this, if you want, cleaning up of the portfolio, and we felt comfortable with the levels that we had in the portfolio, we started growing back again. And the strategy for this year would be to grow a little bit more in higher risk profiles. I mean this is not going to change dramatically the risk profile composition of the portfolio, but it is going to bring a little bit more cost of risk, specifically in that product. So basically, we have ended up with 11.2% for the quarter. And that number specifically could grow a little bit more in the coming quarters. But again, we've seen the risk profile that we have in mind well below the levels that we have last year, which, at some point, reached even 15.4%, okay?

And related to expenses, actually, there are a couple of things that are impacting expenses at Interbank. Let me just take my page -- the right page for you. Okay. There are 2 things that are showing a little higher, if you want, growth in other expenses in the quarterly evolution and which -- I mean I would explain being related to accounting principles, okay? One is related to the payment of the -- I don't know how say...

[Luis Castellanos López-Torres, executive]

Profit sharing.

[Michela Ramat, executive]

Profit sharing, okay, that is related, actually, to local GAAP accounting and not IFRS. So that has increased in the quarter. So that has seen a little bit expenses. And the second one, which actually is not related to operating expenses, but it's something that is related to extraordinary expenses for a loan that we have, that [Foreign Language]

[Luis Castellanos López-Torres, executive]

Awarded?

[Michela Ramat, executive]

That we have awarded, okay, that creates a negative impact and extraordinary expense but a positive one in provisions. So you see the negative impact in expenses. But actually, there is an offsetting line in provisions, okay? So when I exclude those 2 things that I'm telling you, actually, the quarterly increase in expenses, it's only 1%. And the yearly one that is shown here at 14 is only 8.7%, okay? In any case, when you look at the yearly increase in expenses which stands close to 7%, okay, that level has increased a little bit when you compare that with the previous year. And this, as we have discussed before, goes hand in hand with the increase in the level of investments, not that that's cheaper, from 2015 to 2018, related to the digital transformation, okay? This is something that you will see going forward. So again, around 7% increase in the expenses. But as long as we're able to continue to grow revenues more than that, the efficiency ratio should slightly continue to improve.

[Luis Castellanos López-Torres, executive]

Yes, Alonso, this is Felipe. We will continue to target a 40% efficiency ratio, that demand level. That's what drives our expenses and our revenue generation that we are looking from those investments.

[Alonso Aramburú, analyst]

Okay. And so just to confirm on the cost of risk, Michela, the guidance you provided was 3% for 2019?

[Michela Ramat, executive]

Yearly, okay? Again, depending on the quarter, we might have something a little more or less in the quarter. But yearly, it should be around that.

[Operator]

And we will take our next question from [ Jorge Vieto ] with Compass Group.

[Unknown Analyst]

I want to ask about the variation in Interseguro's equity. What is the nature of the unrealized gains reduction during the fourth quarter? And Interseguro's equity is going to stabilize? Or is it going to continue to be volatile?

[Luis Castellanos López-Torres, executive]

The second part of your question, what was it, sorry?

[Unknown Analyst]

Yes. I want to know if Interseguro's equity is going to stabilize because there was a considerable reduction in the fourth quarter. Or is it going to continue to be volatile, the Interseguro's equity? It's going -- I don't know. I want to know if it's going to increase again in the following quarter.

[Luis Castellanos López-Torres, executive]

Yes, it's -- I mean 2 factors explain the volatility at the equity level. First of all, is all markets are available for sale, the change in value will be reflected both on the asset side and on equity. It will flow to the income statement. And also, reserves are also recalculated using current market interest rates, and the change in value is also reflected in equity. So we will have still some volatility on the equity side, some of which should be compensated because an increase in interest rates will affect inversely on our loan portfolio and our reserves. But still, we will expect to see some volatility to continue.

[Michela Ramat, executive]

If I can just add something to that. Actually, when we implemented IFRS and when we did the change in Interseguro of moving the impact of the volatility from the P&L to equity, we reduced the volatility of the P&L. But this has caused an increased volatility on equity, thus, on ROAE, okay? So this is something that you will see in Interseguro. But it also impacts a little bit the bank in Inteligo because when we have unrealized gains, the equity side, that impacts ROAE and at IFRS level. Actually, at IFRS level, this quarter, we had a 50-basis-point impact on the ROAE because of unrealized gains. So this is something that we will try to show to you in the recent quarter, but it's something that, together with the IFRS 9 methodology, is going to accompany us in the next quarters.

[Operator]

And we can take our next question from David Oropeza with AFP HABITAT.

[David Oropeza Salazar, analyst]

So my first question is regarding incentives that started this year. If you just do a simple calculus, you can see that the tax rate for this year was 27.6%, different than the 24% in 2017 and different from the 26% in 2016. Would you explain more in detail why is this different?

[Michela Ramat, executive]

Yes. There are a number of factors that impact this tax rate. On one side, the contribution of Interseguro which is a tax base. So that is one, it's depending whether Interseguro contributes more or less, we think, in the total IFS tax rate, and that varies. The second thing is the bank. And actually, at the bank level, in 2018, the tax rates have increased versus 2017. And this goes hand in hand with the continuation of the tax-free investments that we make in the bank. So if 1 year, those investments are higher, you have a lower rate. If those investments are a little bit lower, as was the case in 2018, the tax rate is a little bit higher.

[Luis Castellanos López-Torres, executive]

Yes, mainly those investments are related to sovereign loans.

[Michela Ramat, executive]

Sovereign loans, yes.

[David Oropeza Salazar, analyst]

Yes. And do you think this tax rate is going to continue next year?

[Michela Ramat, executive]

I mean that the rules should be a factor on there. We really couldn't tell you because it's going to be the result of the different things that I have just explained. And the number that we have in mind, more or less, that we are running, our number is around 27%. But that number again can vary a little bit depending on what I just previously explained.

[Luis Castellanos López-Torres, executive]

Current levels are a safe assumption.

[David Oropeza Salazar, analyst]

Okay. I understand. So my second question is regarding market share expansion. Interbank managed to grow 17.6%, 1.7 multiple more than the banking system. And it made the bank to expand its market share. But apart from that, it's the bank with most loan provisions in the system and has the lower PDL. So my question is this, do you think that the credit cards are going to decelerate the next year -- or this year, sorry?

[Luis Castellanos López-Torres, executive]

Yes. It's Luis Felipe. Yes, probably our 28%, 30% growth of the last year will not continue to be back for this year. We expect to continue outgrowing the market and probably at lower levels of that. And you're right, credit cards are the ones that contribute the most in terms of the provisioning, not only for us but for the system as a whole. So the more you grow, the higher the weight of credit cards in your portfolio, your provisioning levels are higher, then that should be also looked at the profitability that we'll probably achieved.

[David Oropeza Salazar, analyst]

Yes. But I think that makes a little bit harder to run this kind of business. Yes. But regarding that, what is your strategy for the coming months to expand market share, even in the case of credit cards going to decelerate, as you said?

[Luis Castellanos López-Torres, executive]

Yes. Well, again, we expect the market to grow, as Michela said, between 8% and 10%. We are targeting to outpace that growth. It's -- yes, you mentioned, it's hard, but we'll have to do it. And we build value propositions for our customers that we believe are attractive and that enables us to continue attracting new customers and growing share of wallet with existing ones. We have a very customer-centric approach in managing our portfolios. So we have, we believe, a good strategy to target that. And even though we are at a high level in terms of credit card market share, we have ample room for growth in all the product sectors. There's consumer loans and mortgages, our market share is only 14%. And we have also the facility to continue growing through deposits and then do cross-selling. So we have ample room to continue to grow faster than the market according to our view.

[Operator]

[Operator Instructions] We will next go to Tiago Binsfeld with Itaú BBA.

[Tiago Binsfeld, analyst]

I'd like to hear from you about the revenues from fees? What are you expecting in terms of growth for 2019? Is it feasible to expect double-digit growth for revenues from fees?

[Michela Ramat, executive]

Tiago, thank you for your question. Double-digit growth, I don't think is feasible. Actually, what we have seen in this year is a little bit of a deceleration in the growth of fees for 2 main reasons. On the retail side, as we go more digitally, there are certain fees that you are not any longer charging. But on the other side, one thing that has been offsetting, if you want, is that decrease in fees on the retail side is that with the strong growth that we've been registering not only in loans of credit cards but in the usage of credit cards, which has also been double digits and close to 20%, that has also helped us to increase the fees generated from merchants. So that is a positive development, if you want. And on the other side, on the commercial side, I mean there has been, of course, also not a very much strong market in terms of new projects, no new inter-financings in FinCorp. So that side, the commercial side of the fees might recover a little bit this year, so that could help. But, on the other side, as I was mentioning, digital, is reducing some of the things that we were able to charge before. So I would say that's a single-digit growth for sure this year.

[Operator]

And this does conclude the Q&A session. I'd like to turn the program back over to Mrs. Casassa for any closing remarks.

[Michela Ramat, executive]

Okay. Thank you very much. Thank you, everybody, for attending the call today. And we will speak to each other in the first quarter 2019 results in May.

[Luis Castellanos López-Torres, executive]

Thank you.

[Operator]

Thank you for your participation. This does conclude today's program. You may disconnect at any time.