Intercorp Financial Services Inc.
Q1 2021 Earnings Call Transcript

Published: 14 May 2021

[Operator:]

Good morning and welcome to the Intercorp Financial Services First Quarter 2021 Conference Call. Please be advised that today's conference is being recorded. 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 first quarter 2021 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro and Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo. They will be discussing the results that were distributed by the company on Wednesday, May 12. The results of our webcast, video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website ifs.com.pe to download the copy. Otherwise, for any reason, if you need any assistance today, please call a group in New York at 212-710-9686.

[Luis Felipe Castellanos:]

Thank you very much. Thank you. Good morning and welcome to our first quarter 2021 earnings call. First, I want to thank everyone for making the time to attend our call. I hope you and your families remain healthy and safe during these times, that in many instances continue to prove to be very challenging. Let me give you a brief overview of the health and macro situation in Peru. On the sanitary front, we continue to face vocalized lockdown measures across the country. The second wave has hit Peru very hard with number of cases and deaths going above the first wave. However, the implemented measures were not as strict as it was implemented 1 year ago. In the recent days, health alert levels had softened, and it looks like the second wave is starting to decrease. So now most businesses in Lima and in several regions of the country are allowed to operate at increased capacity, although not yet at normal levels. COVID-19 cases has started to go down and the vaccination plan is on it's early stages. Today around 5% of the population has been vaccinated so far for around 1.5 million people, but we are seeing the speed of vaccination increase, which is very positive in our view. Economic activity in the country has continue to recover and will start to show improved important base effects from this moment onwards. GDP figures for the month of March will be out tomorrow and growth is estimated to have reached almost 20% on the banker strength public investment, better terms of trade and higher private consumption. We continue to see -- to foresee a low double-digit growth in GDP in 2021. Supporting this view, the Central Bank held it's monthly monetary policy meeting last night and kept its policy rate at an unchanged rate of 125%, in consideration of the limited underlying inflationary pressures.

[Michela Casassa:]

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

[Operator:]

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

[Ernesto Gabilondo:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

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

[Operator:]

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

[Sebastián Gallego:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

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

[Operator:]

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

[Jason Mollin:]

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

[Luis Felipe Castellanos:]

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

[Operator:]

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

[Geoffrey Elliott:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

The late payment fee.

[Luis Felipe Castellanos:]

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

[Geoffrey Elliott:]

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

[Luis Felipe Castellanos:]

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

[Operator:]

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

[Yuri Fernandes:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

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

[Operator:]

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

[Andres Soto:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

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

[Operator:]

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

[Rafael Borja:]

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

[Luis Felipe Castellanos:]

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

[Michela Casassa:]

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

[Luis Felipe Castellanos:]

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

[Rafael Borja:]

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

[Luis Felipe Castellanos:]

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

[Rafael Borja:]

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

[Operator:]

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

[Michela Casassa:]

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

[Operator:]

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