Intercorp Financial Services Inc.
Q2 2021 Earnings Call Transcript

Published: 14 Aug 2021

[Operator:]

Good morning, and welcome to Intercorp Financial Services Second Quarter 2021 Conference Call. It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

[Rafael Borja:]

Thank you and good morning, everyone. On today’s call, Intercorp Financial Services will discuss its second quarter 2021 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; and Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo. They will be discussing the results that were distributed by the company yesterday, August 11. There is also a webcast PDF presentation to accompany 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 212-710-9686. I would like to remind you that today’s call is for investors and analysts only. Therefore, questions from the media will not be taken. Please be advised that forward-looking statements maybe 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, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation 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 Felipe Castellanos:]

quarter 2021 earnings call. Thanks everyone for making the time to attend our call. I hope you and your families remain safe and healthy. Let me start by giving you a brief overview of the health and macro situation in Peru. On the sanitary front, Peru was able to speed up its vaccination process, and as a result, currently around 27% of the population or 8.9 million individuals have had their first dose, while 19% have also received the second dose or a single shot vaccine. Focalized lockdown measures have softened across the country and numbers indicate we are ending the second wave. We know that we must get ready for a third wave and the new government is planning accordingly. The improvement in tariff conditions continue to have a positive impact on the economic recovery of the country. Despite our activity witnessed during the electoral cycle, economic activity in the country has continued to show a robust revamp. Accumulating GDP growth levels as of the month of May point towards a 20% increase as a result of important base effects, strong public investment and tailwinds from higher commodity prices and an improved trade balance. For the rest of the year, growth will probably trim down towards low double-digits as the base effects dissipate over the next couple of quarters. As we all know, on July 28, the new government took office. Political challenges remained high in the country as the government takes its first steps in the business community and the population in general assessed the nominations in different positions, including the cabinet and the first measures are announced. The consumer and business confidence indicators continue at low levels signaling that economic activity will likely slowdown in the coming months. In the meantime, we have seen volatility in the exchange rate and the weakening of the local currency which has had effects on inflation. Under this scenario, IFS’ franchise continues to prove strength and resilience. We remain confident that our team has experience and skills to manage through trying times as we have done successfully in the past. Again, our clear strategic focus has taken IFS to reach another solid quarter with the strong results in all operating segments, an increase in our strategic businesses. In each of our subsidiaries, we have top results within the Peruvian financial system. Our liquidity, capitalization and provisioning levels, together with our risk management skills, our strong focus on efficiency, our digital strategy and our presence in the mind of our customers give us confidence that our platform is well-positioned to continue helping Peruvians with their financial needs in the future. The opportunity continues to be there as financial services under penetration in the country remains high. We have the platform to make our work good. I will pass it on to Michela to update you on the strong results of this quarter with a detailed review of our operations. Thank you and please remain safe.

[Michela Casassa:]

Thank you, Luis Felipe and good morning everybody and welcome again to Intercorp Financial Services second quarter earnings call. This time, we have divided the presentation in four parts, which include financial highlights, key messages, the results by segments, and trends and takeaways at the end. I will start with a brief summary of financial highlights on Slides 2 to 5. The main highlights for the quarter are

[Operator:]

Yes. Thank you. And the first question on the phone today comes from Ernesto Gabilondo from Bank of America.

[Ernesto Gabilondo:]

Hi, good morning, Luis Felipe and Michela. Congratulations on your strong second quarter results and your ROE of above 20%. My first question is on the economic and political outlook. We have seen that economic growth remains as one of the highest in the region. However, political uncertainty has generated an important impact in the Peruvian stocks. I believe one of the key concerns were related to who will be appointed at the Central Bank according to some Peruvian local newspapers, President Castillo wants to keep Belardi as the Head of the Central Bank, something that could provide continuity and could reduce risks related to tougher cap rates in the sector. So can you give us an update on what are you expecting at the Central Bank and what are the reasons that you are finding to be more optimistic on the political front? Then my second question is on loan and net interest income growth. We have seen loan growth continues to show modest recovery. However, as you pointed out, retail is already picking up. The economy remains strong. So how should we think about loan growth NIMs in the second half and maybe some potential trends for the next year? Thank you.

[Luis Felipe Castellanos:]

Hi, Ernesto, thank you for your question. Let me take on the first part, which is very simple. We are – we know basically the same as you regarding the Central Bank. There is no strong confirmation yet, but I have it that there is a view that the government could pursue confirming where we are. That’s where we’re all waiting for those news to come in. And regarding the political scenario, we obviously are cautious. There is early in the process. There are lots of moving pieces. So we are paying attention to the announcements by the government and the steps being taken in terms of announcements and measures. So again, we’re very focused on executing our strategy. We believe we have the platform to be successful in Peru in different circumstances. We’ve proven that not only in the last, let’s say, 10 years, since I’ve been at IFS but – Interbank and the companies which have been there for – like Interbank for over 100 years and Inteligo tell you since mid-90s, and we’ve seen lots going on Peru. And we’ve always had a team very focused on executing on the opportunities while being cautious in terms of the risk to arise depending on their situation. So I hope that addresses the first part of your question. And then on the second on more specifics regarding the trends, let me pass it on to Michela.

[Michela Casassa:]

Thank you, Luis Felipe. Good morning, Ernesto. And thank you for the questions. Let me first comment on what we are expecting for year-end. And as I was mentioning on the comment, on guidance, in terms of loan growth, we have seen roughly 4% year-to-date growth in retail, okay? And when we see the trend between the first quarter and the second quarter, the good news – and also looking at July, the good news is that consumer loans, especially credit cards are now starting to pick up. So we are expecting year-end figures for retail, especially to be in line more or less with the guidance that we gave, which was a single-digit growth. But given that we are at 4% already in the first half, no, we are expected to be between 8% and 9% for year end. Now in terms of the commercial portfolio, though, the guidance continues to be a slight reduction as the Reactiva loans start to be repaid, and we are replacing those loans with regular loans, but not at the same pace also not given the expectations and the uncertainty. In terms of NIM as you have seen for IFS, we have registered a 3.8% NIM first quarter; 4% in the second quarter. And what we are seeing for the rest of the year is NIM close to 4%. So we are not still guiding for a year-end figure, which is the low end of the range, close to 4%. As far as 2022 is concerned, to be sincere at this point, I’m not going to be able to give you any figures yet as we are just now in the process of starting – no strategic planning and budget for next year. And still, there are a number of variables that we need to see how they behave in order to be able to estimate obviously.

[Ernesto Gabilondo:]

Okay. Perfect. Thank you very much, Luis Felipe and Michela. Just let me elaborate last question in operating expenses. I believe this is the only line that is growing much higher than the U.S. of the lines in the P&L. So just wondering how do you see OpEx grow in the next quarters?

[Luis Felipe Castellanos:]

Go ahead, Michela.

[Michela Casassa:]

Yes, yes. Let me take. There are a number of things that are driving the increase in expenses for the first half. And basically, who is driving the growth in expenses is the banking sector. In the slides, I’m showing you that for the first half, those expenses are growing 9.5%. And what is driving growth is technology, and that has been the case if you want offer many years now. But more strongly, the variable costs related to marketing and credit card expenses. So we have seen an increase in the turnover of payment and credit cards, you have think of more than 40%. So that is something that strongly drives the expenses. So we are expecting for the second half of the year, not to continue to have these increases in expenses. And again, the two things that will drive expenses is technology and variable costs. And that is why despite the fact that we have an efficiency ratio of 31% for this semester, sorry, we are still guiding for the low end of the range at around 35%. There are also a number of additional costs that we are incurring related to our partnership with Rapino that have already materialized in the first half and will continue to be the case for the months to come. So with that, we will see especially the efficiency ratio of Interbank this year will deteriorate as expenses are recovering faster than revenues because of the pressure in NIM, but we expect that not to change in the coming years when the operating leverage for Interbank will continue to be as it was before, with revenues growing faster than expenses. I don’t know if this covers, Ernesto?

[Ernesto Gabilondo:]

Perfect. Thank you very much, Michela.

[Luis Felipe Castellanos:]

Ernesto and Michela, let me add something regarding that note, that we have to pay attention to also specifically on efficiency ratio because everything that Michela has mentioned is right. But I will also call the attention to the change in the risk profile of our credit card portfolio. And that is bringing lower revenues from that portfolio that hopefully, the risk appetite that we have still higher and probably that will continue to increase revenues in the future. But right now, what we’re seeing is customers that are coming in with lower rates, but significant lower risk costs as well. And you can see that in – both in our local book and our IFRS book where provisions are at a very low level. So when looking at efficiency ratio, specifically for what revenues coming from credit cards relate to, you have to take a look also at the after-tax return. I’m sorry, after risk return for that portfolio, which at the end is bringing in a very positive equation in terms of results, and that’s also a positive impact on net income and ROE. Thank you.

[Ernesto Gabilondo:]

Understood. Thank you very much, Felipe.

[Operator:]

Thank you. And the next question comes from Jason Mollin from Scotiabank.

[Jason Mollin:]

Hi, thanks for the opportunity, Luis Felipe and Michela. I have two questions. The first one, maybe just an update on the joint venture with Rappi and how that’s going? And if there is any metrics that you think we should be tracking closely on that front? And my second question is more of a general question that encompasses a bit of what you’ve been discussing about politics and some uncertainty. My question would be on that front. If you can talk about – we’ve been focused for some time on interest rate caps, changes in the pension system and potential implications for annuities, higher taxes you have a very conservative ROE outlook for this year, 14% – greater than 14%, excuse me. I think the greater that it is an important part of that statement given the almost 22% ROE you generated in the first half. How should we think about the scenarios going forward with potential policies and how IFS can protect itself or protect returns for shareholders in this environment? You said you’ve mentioned that the track record of doing this in the past. But how should we think about the future? And is this government and potential policy is different – could be different than what we’ve seen in the past? Thank you.

[Luis Felipe Castellanos:]

Hi, Jason. How are you? Let me take on both, and maybe Michela can complement a bit. On the first one, the joint venture with Rappi is going well. Obviously, we launched that at the beginning of the pandemic. So it has had some delays because like getting something to start in operationally and that has not been that simple, but it’s been accelerated recently. Well, we have the solution operating and working very well. So far, we have reached around 180,000 customers for the venture, of which recently launched credit 100% to credit card is at around 25,000 customers. So it’s going well. It’s building up. We’re learning. We’re – how to work together with Rappi, like a very traditional institution like Interbank even though we have a DNA of innovation, working with a 100% digital native company as Rappi obviously presents some challenges and opportunity, but we are getting traction. I guess, in the future we will be the same as we are highlighting in our reports the growth of PLIN, which has reached over 4 million customers; and the growth of Tunki that has reached over 1.3 million customers, and we could include the Rappi evolution that again, it’s at around 180,000 customers so far, and we expect that to continue accelerating. Regarding the second part of your question in terms of the political environment and what we can expect. What we know is what has been announced. Obviously, there is in the presidential speech, there was a reference to looking for a new role in the Banco and Asian, which is the state-owned bank. Probably that has to go through a process of changing laws or whatever through Congress. So that’s something we’re monitoring, but that has been announced. And the other thing that has been announced has been the intention to continue with reforms on the private pension system, which is a business that we are – as you know, we do not operate. We’re obviously looking at that closely as well because it has an impact in the overall health of the financial system in Peru. It could create some opportunities for us, but we’re monitoring that. And there is not much yet specific in terms of measures towards the financial system, what has – what is already in place is the rate cap, which the Central Bank is already enacted, and we’re operating under that environment. We have seen some effects, not that much on the rates that we have for our customers because we are basically below that cap. But in delinquency commissions, we could charge that has changed. We have lost flows those revenues account for approximately PEN60 billion to PEN70 million per year, but that’s already reflected at least in this quarter fully. So those are the new levels of revenues we have from those. And then we remain with expectations of what’s going to come. Again, we manage that closely. I think what we need to do our mandate is be as efficient as possible in case different reasons, they continue to put pressure on our revenues or our spreads. So that’s something that we have been doing forever, and we will continue to do that because that’s the way we have been operated and we operate at Intercorp Financial Services For many years. And then very focused in terms of building competitive advantages, not to be everything to everyone, but in what we are good. And what we are good is not like wealth management, the life insurance business and the annuity business that and certain commercial banking services and specifically in consumer financing. That’s our strength. We are a – for our digital transformation, we have seen the results. We have no way back on that front. We continue to rationalize our operations, including our branches, and we continue to increase the number of customers. We have increased more than 25% of our customer base in the last year. So that has us very happy, and that’s the way to pursue. And then what could happen, as mentioned in the introductory statement and also while Michela was talking is that the growth of the overall system could decelerate because of different measures, because of macro conditions. And then we will have as management to see what we do. We are generating excess capital. So an alternative could be for our – in the benefit of our shareholders, maybe we boost up dividends in case growth does not materialize and we continue to be overcapitalized or maybe we evaluate what usually management does in these situations, maybe a share buyback could be a program, not something that we have done in the past. So it’s early still to tell, but we have been through these processes before, and we acted differently. Again, the priority is to look for opportunities to continue fostering growth and serving and helping Peruvians with their financial needs. But obviously, we also are looking for the best interest of our shareholders. So nothing is off the table in terms of making sure that we enhance shareholder value given the cash we have on hand. And regarding the ROE, I think Michela mentioned, obviously, above 14% was guidance under an uncertain scenario. We’re doing much better than that and we do expect to have a significant beat over those numbers. Let’s see how the second half materializes. But based on what we are seeing, we do feel confident that it’s going to be a material beat over those levels.

[Jason Mollin:]

Thank you very much. Appreciate hearing your views.

[Luis Felipe Castellanos:]

Thank you.

[Operator:]

Thank you. And the next question comes from Andres Soto with Santander.

[Andres Soto:]

Good morning to all. Thank you, Luis Felipe for the opportunity to ask questions. My question is regarding your ROE guidance, which sounds quite conservative given the performance in the first half of the year. So I would like to understand. When you look in the second half, this – the implied guidance will be an ROE in the range of 8% to 10%. How do you break that down between your different business units? Is this a result of having much lower trading gains expect for the insurance and wealth management business or is something related to your banking unit?

[Luis Felipe Castellanos:]

Let me pass it on to Michela. I think she has more detail on that.

[Michela Casassa:]

Yes, okay. Good morning, Andres, thanks for the question. I mean – what we have seen in the first half, you see the numbers in ROE are extremely high for insurance and also in Inteligo. So basically, let me just one second go to the slide, the first slide of the presentation. Okay. So we have – for the first half, we have a 21.7% ROE for IFS, which is composed of 18.8% for the bank; 50% for insurance and 30.9% for Inteligo. And also I remind that in the past, and let’s say that now we have had a terrible 2020, and now, we are having a very good 2021. But in the past, the guidance has always been for IFS to be in ROEs around 18% to 20%, the value was more or less the same. Insurance was, if you remember, at levels of 15% ROE and Wealth Management was always around 20% to 25% ROE. So basically, what has happened this first half is that bank is already if you want our sustainable ROE, but for a number of reasons that will change in time. So, during the first half, the bank has had first an extremely low cost of risk, 1.8% 1.7% is below the pre-COVID levels. And second, that during the first quarter, the Banking segment has also had some extraordinary gains in the portfolio. I don’t know if you remember, we have had a bit big sale of government bonds. And what is happening in this quarter with banking is that we are having high trading income because of the FX volatility. So, some of those things in the Banking segment will not repeat during the second half. But on the other side, banking is recovering in terms of the core, so net interest fee income and fees. So, it is difficult to think that we are going to improve that ROE that we have registered in banking. In the case of Interseguro, the 50% ROE in the first half is for sure, extraordinary. Remember, it was 15% pre-COVID and we have had in the first and second quarter extraordinary gains coming from the portfolio. The return on the investment portfolio has been above 10% in the first half. It has been 7.7% – this sorry, above 10% in the first quarter, 7.7% in the second quarter and the regular levels were 6%, 6.5% pre-COVID. So again, we have had some tertiary gains there that will not repeat during the second half. And in the case of Inteligo, it is really maybe a little bit more positive. Now we have had extraordinary gains during the first two quarters of the year. But in that case, we might have some additional ones depending on how market behaves. So, if you sum up everything together, the 21.7% ROE of IFS, it’s difficult to repeat in the second half of the year as we are expecting lower ROE especially, I would say, in the insurance business, but to some extent, it could also be in the banking business. Also guidance was 14% when we started the year. Of course, we were not expecting such a strong quarter. That’s why we are looking at our year-end figures. If you want the core ones without extraordinary things, we are pretty confident that we will beat this 14%, I said at the beginning, at least 200 basis points. Now it could be more depending also on the difficult to predict part related to the portfolio of Inteligo, especially, but to aome extent also on Interseguro. So, I know it’s not like a straightforward answer, Andres that’s more or less what we are seeing for the second half and why now we are not expecting such a high ROE as the first half.

[Andres Soto:]

Thank you, Bruno Ferreccio. And my second question is probably a follow-up on the comment that Luis Felipe just made about increased return to shareholders given the diminished growth outlook. In the past, when IFS stock was undervalued, so buyback while the preferred alternative for you guys, I would like to see what are your thoughts about that vis-à-vis the possibility of an extra dividend given the current liquidity and if they do a leasing structure that you currently have?

[Luis Felipe Castellanos:]

Yes. Hi Andres, it’s – again, there are different mechanisms to do that. We have used both actually at some point, we bumped up our dividends and at different moments, we did establish a buyback program that we managed for a couple of years. Again, we have many alternatives. We have not taken a decision. Obviously, we will have to take this to our board and then go through the necessary approvals. It’s just what I wanted to highlight the elements that we have on our heads in terms of thinking how we will face the upcoming months depending on what we see in terms of growth. Obviously, this is something that still needs to be discussed. So, there is no specific preference or any specific conclusion around that.

[Andres Soto:]

That’s very clear. Thank you, Luis Felipe. And if I may follow-up on that, all our business units are well above the minimum levels required by the regulator. How we can – or what your sensitivity or what is your target in terms of how much above the regulatory limits you want to be when you think about these decisions to return capital to shareholders?

[Luis Felipe Castellanos:]

Yes, usually, it has been like between 200 and 300 basis points above the minimum inventory levels. And that basically continues on the overall. However, now we are also looking at core equity Tier 1. And that probably creates a barometer. So I don’t know, Michela, if you want to complement, but I think that’s all and we need to look both numbers, no and we need to buffer that we want – overall capital ratio but also we are looking at the core equity levels and we want to be at sound numbers.

[Michela Casassa:]

Yes. And just going back to the guidance that we have for capital, we – at least for year-end, we have a total capital ratio more than 15% and core equity Tier 1 ratio more than 11%. So basically, where we have a big buffer is in the total capital ratio. Moreover, given that tendency decrease the requirement a little bit than it was before more than 10% and now we have 8% something. So, we have a very big concern there, but the – in core equity Tier 1 is much smaller not because we are there at 11.5%. But what we have to bear in mind though is that these numbers are built with the local accounting earnings. In the local accounting earnings, we do still have let’s say, an important number there of provisions that we did last year because of COVID, that we need to see how are they going to be treated even the low growth that we have experienced this year. And so there could be an opportunity there. And for sure we have to have in mind is that core equity Tier 1 cannot decrease a lot versus the levels that we have today.

[Andres Soto:]

Thank you, both.

[Luis Felipe Castellanos:]

Thank you.

[Operator:]

Thank you. The next question comes from Carlos Gomez with HSBC.

[Carlos Gomez:]

Hello, good morning. First, congratulations for the results and the good presentation as always. Two quick questions, one on the Rectiva program, how is it evolving, how is the payback. And do you expect this program to be extended and at some point, perhaps for the banks to have to make the contribution for it. Is that a possibility that you are contemplating. And second, we noted a good capital being implemented at Central Bank at rate which was just probably higher for your business, at what level do the rate caps have to be lower start affecting your credit card business? Thank you.

[Luis Felipe Castellanos:]

Okay. Let me take a drag at this, Carlos, thanks for your question. The Reactiva program is evolving very well. As you know, we were active participants. We have had a big number of customers. And also we took the opportunity to enhance our commercial banking platform specifically in the medium sized enterprises and also in the small sized enterprises. So, that’s behaving well. The payback is according to what we expected. And so that’s good. The government launched the possibility to extend certain tenders, we are working actively with customers to take advantage of that. We do not have a clear indication of how the program will evolve, so it will be extended. I guess it all depends on the extend of the economy recovery. So far the economic recovery as well all mentioned looks to be on the right track. So, we will be – we are paying attention to that. But so far that the program has worked very well, it helped the economy very well and it helped Interbank particularly very well because we have been able to strengthen our platform and relationship with commercial banking. I don’t know really what you mean by contribution, maybe you can clarify a little bit later. And then in terms of the rate caps and again our portfolio, like the main effect of rate caps is towards smaller financial institutions, but particularly to those like Caja or small financiers that focus on exactly independent customers with a lack of track record. So, probably those are the ones that are being hit. You can see our average yields of our portfolio are below that. So every time you decrease that probably will hit a small portion of the portfolio, but we don’t – it has to be higher than what we have seen and expect to really have a material effect on our portfolio. However, as I mentioned, one of the byproducts of that was the late payment fee that was also touched upon that regulation which that really impacted us and whole financial system because that’s the way we do it that’s the way that we used to do it in countries, used to be in many countries. And the concern there is not really the PEN60 billion or PEN70 million that, that growth in revenues, but it is what will be the effect on payment behavior going forward of the Peruvian consumer, because that’s if you know that you are late by some days you will be – that where it’s consciousness on behaving well in terms of payments. So, that’s something that we are looking at because we have transmitted, we have reported to the Superintendency and regulators, that that’s our main concern. With this we have a long-term effect in changing the customer behavior in terms of being on date for payments or not. So, that’s probably the effect that we are looking at more closely rather than just the revenue that we have lost for that.

[Carlos Gomez:]

Okay, yes on the revenues…?

[Michela Casassa:]

Sorry, just if I can add some information related to the Reactiva loss, so that you have a sense of the size. I mean, we reached during the third quarter last year, we reached a loan book for Reactiva loans of PEN6.7 billion, okay. In this – in those PEN6.7 billion there was roughly speaking PEN2 billion for the small businesses, almost PEN4 billion for the mid-sized companies and PEN700 million for corporate. What has happened as of the end of June is that now, we have PEN6 billion. So, it has decreased around 12% of that portfolio. And what has decreased is actually the portion of the corporate Reactiva loans. That has decreased more than 40% because of prepayments. And also we have seen a decrease in the mid-sized companies of around 15%. The small businesses portfolio of Reactiva is the one that continues to be stable also because of the new, let’s say, the new deadlines given by the government in terms of giving more a free time let’s say for companies. And so far around 12% of Reactiva loans have already been paid as of the end of June.

[Carlos Gomez:]

Okay, that’s very clear. And to clarify my question and some of these program, number one, they can be extended and eventually they got extended for the long period of time and at some point they are extended at low rates and at some point the financial institutions have to take care and maybe a more of a cost kind of benefit. So I was asking if that is something that you contemplate or it doesn’t seem to be in the horizon?

[Luis Felipe Castellanos:]

No, we don’t expect that to be happening. We already put our contribution, as you name it in doing this program with rates significantly rates on this, who basically paid zero to what we have used to do with these types of customers. So, I think that was the contribution. And again, the program has worked well. We don’t see something happening in the future. We do not expect that. We hope it doesn’t change.

[Carlos Gomez:]

Got it. Thank you so much.

[Luis Felipe Castellanos:]

Thank you.

[Operator:]

Thank you. And the next question is from Daniel Mora with Credicorp Capital.

[Daniel Mora:]

Hi, good morning. Thank you for the presentation and congratulations for the results. I have a couple of questions. The first one is regarding loan growth considering the pace of growth of credit cards in the second quarter and also in July. When do you believe that Interbank will reach again the recovery level of the credit card portfolio? And my second question is regarding Interseguro, can we – what are your thoughts on the coming quarter regarding gross premiums and the adjustment of the recovery and the claims are considering that given the current situation that claims have and also the adjustment of the reserves have a different performance than normalized figures. Can you provide more color regarding these trends and being short? Thank you so much.

[Luis Felipe Castellanos:]

Okay. Thank you for your question. On the credit cards let me pass it onto Michela. We do expect not a gradual recovery and hopefully we are witnessing that, but Michela probably has more detail and then maybe Gonzalo can help us in the second part of it.

[Michela Casassa:]

Yes. Good morning Daniel. Related to credit cards, still, there is a long way to grow having to remind that the credit card portfolio alone decreased roughly speaking one-third like 30% during COVID. What we have seen during the second quarter was like a first session we have had like a one month of growth, two months stable and now we have seen July not July being a very positive month. So, we expect that together with the turnover that we are seeing for credit cards and debit cards, this will continue. But have in mind that the decrease was really, really sharp. And we are in an uncertainty scenario. So for sure, it’s not going to be this year. We have to run the numbers for the growth expectations next year to see whether or not that can take place during the...

[Luis Felipe Castellanos:]

Gonzalo, can you help us with the second part of the question, please.

[Gonzalo Basadre:]

Yes, sure. Well, we see for the second half of the year regarding premiums, first, we see strong growth continuing. We haven’t yet seen any deceleration in our lines of business. So, we have no concerns there. With regards to claim, it’s very uncertain. I mean the third wave is probably coming in the next few months, but we feel confident that we have been able to pass the first and second with no major incidents. So, we feel confident that the claims part will be okay. The part that we have more uncertainty in the performance of our portfolio, markets are very volatile right now. So, depending on how they behave, that will affect our results for the second half.

[Luis Felipe Castellanos:]

Thank you, Gonzalo

[Daniel Mora:]

Perfect. Thank you so much for the answers.

[Luis Felipe Castellanos:]

Thank you, Daniel.

[Operator:]

Thank you. And the next question comes from Alonso Aramburú of BTG.

[Alonso Aramburú:]

Hi, good morning. Thank you for the call. I wanted to ask about margins, and you had a nice increase in yields retail portfolio. I think its 40 basis points quarter-over-quarter. Can you comment on what’s driving that increase? Are you going into real estate segments or are you just re-pricing? And do you think this can continue to the second half of the year and also related to margins, Central Bank made into – to some expectations of rates would start to increase maybe in the second half. What’s – can you remind that’s what let’s say rates on your margins? Thank you.

[Luis Felipe Castellanos:]

Sure. I will answer. Okay, let me pass it on to Michela, so she can give us a little bit of detail on that.

[Michela Casassa:]

Alonso, how are you? Thanks for the question. The first part related to what is driving the increase in NIM is mainly the return on the portfolio, okay. And what we have seen at least for the second quarter is mainly coming from rate caps. So actually, what has happened is that I mean we are starting to see a growth in rate caps at moreover within the different credit cards products. We have seen an improvement in the cash part of it, which has higher yields. So basically, the average yield of credit cards has improved in the second quarter as the previous one. And we expect that not to be the case for the coming quarters. So, talking specifically the risk profile, I mean this year the risk profile that we have to pay in credit cards is below our appetite. And that is because now with the one-third of the portfolio is disappearing and the low growth of the past month. Actually, what has happened is that the overall credit card portfolio is at a very low level of risk and that is reflected in provisions as entities in revenues. So, what we are trying to build up for the future is a better and let’s say formula where we will see cost of risk going up. But we are aiming a higher increase in yields and revenues in order to improve the overall profitability of the business, okay. And I will kindly ask you to repeat your second question because I am confused if I got exactly the point.

[Alonso Aramburú:]

Yes. I was asking about the possibility of the Central Bank hike in rates which we are seeing in other countries and how will that impact your margins?

[Michela Casassa:]

Well, as Luis Felipe mentioned before, we already have – the capital rates if studies what you are referring to, and that has not materially impacted no interval so far. Of course we will need to see how they cuts – I mean there is formula that has been established and that is monitored by the Central Bank that will update once every quarter. And we need to check whether or not that continues to decrease substantially. But so far, the impact has been marginal. What we have seen though is that impact that we mentioned before in the fees of paying cuts related to the late payment fee, that one already was a hit of PEN60 million to PEN70 million for this year, so that should repeat in the following months of the year.

[Luis Felipe Castellanos:]

Yes, Michael, I am sorry. I think that also refers to the actions that the Central Bank can take in raising the reference rates. And we are also going for…

[Michela Casassa:]

Okay, sorry, yes.

[Luis Felipe Castellanos:]

Alonso, we are waiting for that obviously again if the reference rate goes up, it would have an impact in terms of the commercial business, as you know we run it through spread so probably that won’t affect very much the pricing there it’s usually fast and simple. And then we will have to see what we will do in the Inteligo portfolio probably mortgages again the new mortgages go out. We will manage it based on spreads, that’s easier, and then we need to see the impact on the other the types of loans and consumer loans or credit cards. However, again, I think the offset into any potential increase is the increased risk appetite that we are having for the portfolio. So, we do expect to if things go as planned to continue brining in customers that will come in with higher rates. So, probably some offsetting will come from that front. But again we need to wait and see what really happens in the announcement today.

[Alonso Aramburú:]

Okay. Thank you all. Thank you, Michela.

[Michela Casassa:]

Thank you.

[Operator:]

Thank you. And there appear to be no further questions on the phone or on the webcast at this time. I would like to return the floor to Luis Felipe for any closing remarks.

[Luis Felipe Castellanos:]

Yes, before Michela closing, let me add something that we just learned a couple of weeks ago. We wanted to share also with you because it’s the basis of everything that we do which is how our employees and we have been – Interbank has been named best place to work for Latin America. So we are number one in Latin America the place to work. We are very happy to own that. We want to share with you not only we got, we are proud of our – the way our employees are facing these testing times in terms of any kind of work that put to serve Peruvians, but also because, as you know, it’s part of like a core strategy in order to provide excellent service to Peruvian. Well, we maintain this good level of working environment. We were confident that our strategy will continue to be deployed. So, that’s from my part. Thank you very much to everyone for attending the call. As you know, we have strong franchise at least performing well, it’s recovering nicely from tough times that we underwent during 2020 and we do remain confident that we will be up to the task for any challenge that comes. In the coming months, we have a very strong franchise that is proving that has a diversification and focus in order to continue to drive good results while diminishing risks now. So, with that, let me pass it on to Michela for closing.

[Michela Casassa:]

Yes, not much to add. Thank you again everybody for joining the call and we will see everybody again during our third quarter conference call. Thank you. Bye-bye.

[Operator:]

Thank you. This concludes today’s conference call. You may now disconnect.