Q3 2023 Intercorp Financial Services Inc Earnings Call
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And good morning, and welcome to the Intercorp financial services third quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. Please be advised that today's call is being recorded after.
After the presentation, we will open the floor for questions at that time instructions will be given at the person as the procedure to follow if you would like to ask a question.
Also you can submit a question online at any time using the window on the webcast and they will be answered after the presentation. During the question and answer session.
Simply type your question in a box and click submit questions. It is now my pleasure to turn the call over to Mr. Valentino Porto I've inspire group Ma'am you may begin.
Thank you and good morning, everyone on today's call Intercorp financial services will discuss its third quarter 2023 earnings. We are very pleased to have with US Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp financial services.
Michela Casassa, Chief Financial Officer, Intercorp financial services.
Ms Claudia Delgado Chief Financial Officer.
And Mr. Bruno <unk>, Chief Executive officer of illegal.
They will be discussing the results that were distributed by the company yesterday.
There's also a webcast video presentation to accompany the discussion during this call.
If you didn't receive a copy of the presentation or the earnings report you are now available on the company's website.
<unk> dot com dot P to download a copy.
Otherwise for any reason if you need any assistance today. Please call inspire group in New York at 6469408843.
I would like to remind you that today's call is for investors and analysts only.
Therefore questions from the media will not be taken.
Please be advised that forward looking statements may be made during this conference call. These do not account for future economic circumstances industry conditions, the company's future performance or financial results.
Such statements made are based on several assumptions and factors that could change, causing actual results to materially differ from the current expectations.
For a complete note on forward looking statements. Please refer to the earnings presentation and report issued yesterday.
It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp financial services for his opening remarks. Mr. Castellanos. Please go ahead Sir.
Thank you.
Good morning, and thank you for attending our third quarter 2023 earnings call.
Let's start with assessing the macro situation in Peru.
As we will as we move on through the year. Unfortunately macro conditions have continued to deteriorate.
Market expectation for a quick economic recovery has faded out.
Businesses and consumers are adapting to the new growth outlook.
But conditions have certainly taken a toll and credit conditions in the country.
According to the latest survey of economic expectations from the Central Bank GDP growth is expected to be close to zero this year and soft in 2024.
Nino will assess our risk for a pickup in growth next year, but these will only depend on the magnitude of such climate phenomenon.
We have taken certain actions in order to mitigate the possible negative impact as we will comment during the presentation.
It is worth to note that we remain optimistic on the Countrys mid term prospects as many of the factors affecting growth during the last months, we believe are temporary.
The political turmoil the social unrest, we faced earlier this year the yucca range the restrictive monetary policies after covet and even the potential El Nino.
On the positive side inflation has decreased consistently in the last months to such extent that the central bank has been comfortable to cut interest rates twice already and possibly for a third time later today.
Inflation expectations for the next 12 months now light very close to the upper limit of the policy target.
The government appears to be reacting to the negative business environment and housing started to make announcements of measures to boost the economy, but it is still early to call for a few recoup of confidence have private investment and a better macro outlook overall.
Moving to our business, even while facing these negative credit cycle period.
<unk> continues to deliver growth in terms of number of customers on our revenues and also we see progress in our digitalization efforts.
At interbank market shares across key business lines remained strong despite moderation in consumer loans.
Year payment behavior has deteriorated over into the adverse Mark <unk> mentioned.
We are digesting increased levels of cost of risk mainly in consumer loans, we remain well provisioned and well capitalized we are committed to helping peruvians to overcome these challenging times.
Separately.
Market global market conditions continue to impact negatively investment results in our wealth management business, our tight management of expenses over the years and particularly during the last quarters position iff's to face the current environment.
Our efficiency ratio at 34% is one of our strengths.
Adding to say, where do we see growth in premiums accelerated in individual life and retail insurance, while consolidated market leadership in annuities investment results continues to be solid in.
In this company.
Finally on payments despite growth in merchants volumes have moderated this quarter.
<unk> is working on creating new Jersey with interbank, while clean continues to accelerate within a fully interoperable b two pieces too.
Summing up we remain confident about <unk> outlook going forward and we believe that once we overcome this negative credit cycle current macro conditions.
Midterm, we will return to our path of target profitability and growth now.
Now, let me pass it on to Michela two.
For a more detailed update of the results of the quarter.
Thanks, <unk> good morning, everybody and welcome to Intercorp financial services third quarter 2023 earnings call.
Today, We will review four sections of our earnings presentation, starting with the macro outlook shortly.
On slide three complementing what Philippe just mentioned decrease in GDP and inflation three quarters in a row has triggered the first scotts in solid rates in September and October dragging it down from $7, 75% to 725% infill.
Inflation has decreased from a yearly eight 8% as of June 22 to four 3% of October this year and exchange rate has been relatively stable with a slight peak during October which has resulted in the past days.
GDP remains the main concern is shown on slide four this third quarter has changed the view from a recovery in the second half of the year to a more negative one driving full year 'twenty, three GDP estimates down to less than 1% and internal demand and private investments to negative territory.
On slide five during the last weeks the probability of a strong Nino has surplus for the first time. The moderate view, we are already taking some actions to mitigate future impacts which include reviewing our infrastructure for the safety of our employees and clients.
Further tightened our credit underwriting standards in the north and south of the country reviewing potential impacts on our Agra fishing and transportation sector commercial clients and.
Further focus on cost efficiencies.
Additionally.
We have already including some impacts of a moderate Nino in our forward looking considerations for 2024, which has already impacted cost of risk this quarter, roughly 100 basis points.
On slide six in line with the previously mentioned macro scenario, we have further moderated banking activity by tightening credit standards, which had an impact in credit and debit card purchases as well as in retail and SME loan disbursements.
The reduced activity in banking and increased cost of risk in the consumer portfolio has impacted the banking earnings and ROE.
While investment returns impacted wealth management results.
These <unk> are at 195 million soles in a row at eight 2% driving cumulated earnings as of September two 793 million <unk> and ROE to 11, 3% as shown in slide seven.
Insurance continued to post good results in the quarter ending the year with payments continued to grow nicely, but has seen a decrease in margins due to the competitive landscape.
This does still growing on a yearly basis, both insurance and payments continue to gain market shares.
On slide eight we are giving an update of the main operating trends in check in changing guidance for cost of risk scenario.
First we continue to register some levels of capital with cost.
Core equity tier one ratio at 11, 2% and total capital ratio at 15%.
There has been a moderation in yearly total loan growth to 10% as of September and 16, 6% in consumer loans and a stabilization of NIM at four <unk>.
Five 5% at IHS levels.
We continue to see good efficiency levels, both at <unk> and at the bank level as we are strictly monitoring and managing costs, especially at the bank, which has reached a cost income ratio below 37% as of September a strong improvement versus last year, mainly due to the good operating leverage.
<unk>.
There has been a further increase in cost of risk coming from consumer lending this quarter pushing the bank accumulated nine months cost of risk to 4%, which already includes our first forward looking impact from a moderate Nino as previously mentioned we.
We are changing the guidance for cost of risk to reflect these new trends.
The new impact to four two to four 8% as we expect further increase in cost of risk in the fourth quarter.
IHS thoroughly as of September of 11, 8% has been impacted by cost of risk at interbank and soft investment results at the table.
We are changing the guidance Ferrari to reflect these trends to 8% to 10% per year.
Now, let's move to the second section of the presentation, which focuses on profitable growth.
On page 10, we see a continuous growth of customer base of ISS or 13% on a yearly basis in banking, 11% in insurance, 9% in wealth management and 38% in payment mentioned.
On slide 11, good news in topline as total revenues continued to grow 7% year over year. Thanks to the growth registered in banking of 9%.
Wealth management recovering from negative territory, one year ago.
<unk> growing 3%.
Similar trends in top line when looking at accumulated results for the first nine months of the year.
On slide 12, we have seen a deceleration in banking fees, mainly related to credit cuts and some commercial activity with a recovery in wealth management fees and flat fees in payments.
On slides 13, and 14, we wanted to give you more detail on the riskiness of the portfolio.
45% of intervention portfolio is focused on commercial banking, which continues to behave nicely mainly due to our conservative approach, which has always focused on low risk clients and have Scott a small participation in small and micro companies.
This conservative approach has allowed us to maintain a lower PDL versus our peers to balance our higher focus in the riskier consumer portfolio.
On the consumer portfolio, we have three different risks first.
First the unsecured consumer portfolio, which is the one being impacted by the macro scenario in which represents 23% of the total loan book.
Mortgages at 21% of the loan book.
So payroll deductible loans to the public sector employees are low risk segment, which represents 11% of the total loan book.
This quarter cost of risk of the bank reached 5%, which considers an impact of 100 basis points from a moderate Nino included in the forward looking update and an increase in the retail cost of risk to eight 1%.
Coverage ratio for the retail portfolio remains high at 221% and above pre COVID-19 levels.
Virtual banking cost of risk has seen a slight increase in cost of risk with stable coverage ratio.
We have granted an increased number of rescheduling in the consumer loan book to help customers better cope with their payments as we are seeing a deterioration at system level, which includes over indebtedness of families sustained high level of food inflation and more contraction of the economics.
Deep.
This rescheduling as seen on slide 14 represent 18% of the unsecured consumer loans as of September 23.
Payment behavior.
Following loans is different for customers with and without rescheduling.
The unpaid portion for regular clients is two 1% while it is 14, 5% for reschedule clients for installment matured during September.
I would like to start the digital performance part of the presentation by reinforcing and highlighting that we are building, 100% digital solutions for our customer journeys, which includes day to day banking savings financial planning financing loyalty programs a marketplace.
Insurance wealth management, and acquiring four mentioned merchants through easy pay and ECP, yet as shown on slide 17.
In the following two slides positive news in our digital indicators, which continue to chose to show nice strength when compared to the previous year as of September 2023, digital customers reached 75% of retail customers, who interact with the bank during the last 30 days up five points in there.
Last year.
Those sales, which 63% up 3% from last year.
Our digital self service indicator has improved sharply from 75% to 86%.
MTS has seen a deterioration from the first time in many quarters, mainly impacted by the actions related to risk profile.
Insurance and wealth management digital indicators showed positive developments as well with digital premiums still small, but reaching 10% digital self service, reaching 57% and digital transaction for fund management, reaching 43%.
Now, let's move to some more details on the performance of our four key segments on slides 21 to 30.
Starting with banking and in line with our focused strategy, we continued increasing market shares reaching 15, 2% in retail deposits as of September a nine 6% in commercial loans. However in line with increased riskiness of the portfolio. We have not increased further our market shares.
In consumer loans and retail loans. There are a couple of things that we have been working hard in the past months and they're bringing nice results as shown in the market share increased to 14% in payroll inflows from 7% a few years ago in the 14, 7% market share in sales financing.
Up from 10% just 12 months ago.
On slide 22, we have seen a deceleration in top line of the bank this quarter with 9% year over year growth in top line with net interest income still growing double digits, 14%.
Coming mainly from increased volume and yield on loans that decreasing fees and flat other income.
There has been a moderation of yield on loans, but still 10 basis points positive in the quarter, reaching 11, 6% and mean stable at five 6% of the bank risk adjusted NIM decreased in the quarter in line with increasing cost of risk of consumer loans.
Good news this quarter is the cost of funds moderates its growth, reaching four 2% up only 20 basis points on a quarterly basis vessels 40 basis points for the quarter before.
Cost of funds has been rising at market level, mainly due to two reasons.
Continuous migration of retail deposits to more expensive time deposits, both in solid and dollars and a higher remuneration to commercial institutional deposits mainly in dollars as rates have continued to increase.
The ratio in the overnight deposits rates and solid continues though at a slow on a slow pace.
Our loan to deposit ratio of 103% continues to be better than the industry average and positive news is also that deposits continue to increase its share in total funding and that retail deposit market share has continued to increase.
On slide 25, moving onto our insurance business recovery in premiums up 18% in the quarter and in market share of annuities up to 35%, both individual life and retail insurance business lines, which constitutes high profitability.
This is continued to grow nicely on a yearly basis, or 18% and 42% respectively, increasing their contribution to total premiums on.
On slide 26, the quarterly return on investment portfolio came at 6% below the extraordinary high third quarter seven 9%.
On standard levels.
<unk> portfolio is composed of 85% fixed income, 10% real estate and 5% equity mutual funds as of the end of September.
On slide 27, good news in wealth management is the 8% year over year growth in asset under management. This quarter, we saw a negative impact from investment results at the core business continues growing.
Moving onto payments starting on slide 28, we wanted to give you a summary of the developments in our payments ecosystem.
Growth in merchants and volumes continues with some moderation as Philippe mentioned EC pay merchants increased 38% year over year, reaching $1 $3 million, while transactional volumes grew 8%.
E Commerce transactions are growing at the same pace and represent 17% of our total transactional volumes as of the end of September.
In the case of ECP, yet our solution for micro merchant growth in merchant was 42% and was very strong in transactional volumes are two times all of which are linked to an inter bank account.
On slide 29, ECP represents a growing and profitable operation and is working on creating synergies with the bank revenues continued to grow 3% year over year supported by an increasingly in transactional volumes and merchants with some pressures on margins coming from increased competition.
We have seen a moderation in the transactional volumes this quarter in line with the decrease in economic activity.
As market share continues to increase reaching more than 56% in physical acquiring and almost 23% India toilet quiet.
EBITDA continues to increase on a yearly basis, but has seen a contraction in the quarterly figures year to date impact from deferred cost from past rapid growth in merchants.
We have been working to accelerate the growth of our payment ecosystem by having all our assets worth towards almost strategy. We are focusing on increasing transactional volumes offering merchants additional services continued to pilot low risk loans to merchants and youth dissipate after distributions.
It worked for interbank products as well as a source of increased flows.
We are starting to see results from this strategy as evidenced by the following four key figures.
22% yearly increase in EC pay flows coming from coming to interbank accounts and 71% increase in average balance.
On the accounting metrics.
Second two times yield increasing transactional volumes from micro merchant thanks to UCP yet.
And so the more than 4000, new Preston will yet graded disbursed in our test of the new lending model to merchants.
On slide 30 please.
Accelerated by the new landscape of interoperable P to P system.
Lynn reached 13 million users as of the end of September with interbank participation at 46%.
The volume of transactions has continued its strong growth reaching twice the volume Register the same quarter one year ago.
Clean and Yep interoperability started in April in Q. According to Operability was added in September.
This has been an important development for financial inclusion in the country.
The Central Bank has encouraged and which should help to bring more but we'll get into the financial system, reducing the use of cash which continues to be high in the country number of transactions has increased more than two times seems interoperability stuff.
On Slide 32, let me finalize the presentation with some key takeaways.
First they loose economy is decelerating.
<unk> of banking at TVT and increased consumer risk at interbank.
Second we are increasing market shares in banking with moderation in consumer loans.
So good performance in insurance business.
While investment results wealth management, not yet recovered.
Tight management of costs is reflected in solid efficiency levels at the bank and <unk>.
<unk> digital indicators continue its positive evolution in line with our strategy and last we see clear opportunities to monetize our payments ecosystem.
Thank you very much now we welcome any questions you might have.
Thank you at this time, we will open the floor for questions.
Firstly, we will take questions from the conference call and then from the webcast.
We would like to ask a question. Please press the star key followed by the number one on your Touchtone phone.
Questions will be taken in the order, which they are received if at any time you would like to remove yourself from the question queue. Just press the star key then to.
Again to ask a question. Please press Star then one.
A webcast viewers simply type your question in the box and click submit questions and we will pause momentarily to compel your questions.
And the first question will come from Ernesto <unk> with Bank of America. Please go ahead.
Okay.
Thank you hi, good morning Felipe.
Thanks for the opportunity.
My first question will be related to a renewal.
As you mentioned Youre, increasing your customer is expected losses with a moderate.
Yeah of around 100 basis points.
But I.
I don't know if you can.
Bob.
Explore how much of the loan portfolio.
You bet.
Who will be on the phones back.
From the labs and media experience in 2013.
You have to have an idea.
The regions that you really need this quarter.
No.
And also it will be interesting.
For example, this is the peak or it will continue to cost.
The level of provisions.
The first quarter of next year.
And then my second question is on your wealth management business.
We have seen a lot of volatility.
The evaluation and the results. So I wanted to know you have like a strategy to pretend.
More consistent results.
My two questions. Thank you.
Thank you Ernesto.
Nino.
Sure Let me pass it on to Michela first and then we'll pass it onto.
To Bruno for the question of our wealth management.
Good morning, Ernesto how long you are related to a leaner phenomenal with a fun run some numbers too.
Estimated percentage of the portfolio that might be impacted.
Related to the retail portfolio, we are talking about something between 10 and 12%.
In commercial banking.
Potential impacted portfolio is less done.
5%, Okay also in the in the small business.
The portfolio, we are expecting an impact which is closer to percentages of reason that I just mentioned.
First on <unk>.
Polio is small is like 700 800 million solid we do not expect a strong impact in that portfolio. So those would be the numbers there.
As we have incorporated a moderated impact from El Nino in these forward looking considerations not depending on how that evolves in the following months no we might need to incorporate in the fourth quarter, a strong impact from <unk>, but that still needs to see because we have seen.
Probabilities of El Nino phenomenon, and moving in different directions and in the past weeks.
No.
Yes.
On your second question regarding results for wealth management.
There's two parts to our results versus the worlds furniture business, that's been very stable GMO.
You may be on our liquidity.
The second part.
This is due to the performance of the portfolio as we've been discussing for the last six or seven quarters and that is somewhat market dependent but.
Specifically to your question.
Regarding our strategy to eliminate some of this volatility the answer is yes, we have been implementing since.
Since basically fourth quarter last year.
We had 90 almost 90% of the results going through profit through the profit and loss statements.
We've been making.
Conscious effort to move all our fixed income investments to OCI.
Because our strategy is to collect income from the fixed income portfolio. Unfortunately that was being both again through P&L.
Much of this volatility that you're seeing.
And we have we have made a conscious effort to move that we've already increased our percentage to almost 40%, 40% from 10% only at the beginning of the year and so we are continuing to move in.
In that direction and hopefully.
By the end of the year that percentage is going to be even higher and so long term.
Our strategy is again.
More fixed income and that fixed income portfolio, reflecting the variation through.
The OCI part of the book and not through P&L.
Oh, Thank you very much that's super helpful. Just one last question in terms of the ROA trends.
So again this quarter and fiscal year will be back because <unk> the impact of the wealth management business. What are you thinking about next year, how should we think about the trend for the ROE issue.
It could be at the double digits.
Hi.
Store and.
Yes.
The short question is yes, but all will depend on the obviously a recovery of the economy as you've seen.
We do expect.
The economic growth to return to a more positive environment next year, however that will be dependent on the extent of the impact of El Nino and also we also.
We also expect moderation in terms of volatility in the global market conditions.
The shows.
And as rates go down.
We will have an impact a positive impact.
Probably the first half of the year will be more complicated than the second half of the year, but we do expect to.
Slowly and surely return.
Toward uptick in profitability and probably next year won't be the year, where we will be will be reach our.
<unk>.
Target medium term target, but.
Depending on the impact of El Nino, we will.
Start increasing our our ROE.
To more normal levels.
Perfect. Thank you very much from Citigroup.
Thank you.
Again, if you have a question. Please press Star then one.
And I would like to hand, the call over to inspire group for any webcast questions.
Thank you operator, the first question comes from the Catalina Yang from Dci.
Management.
The question is what would be impact on the cost of risk. If you adjust in your models that probability of El Nino moderate to strong.
Okay. Thanks for your question Catalina, Let me pass it onto <unk>.
Okay.
Good morning Catalina.
We have ran some estimates already but of course it will depend also on the update of the other macroeconomic variables and when we do expect is us.
A smaller impact of what we have already registered for a moderate.
Impact from Aneel, so it should be a little bit less than what we have already in this quarter.
At this time.
Any questions.
I'd like to turn the call over to the operator.
Thank you again, if you wanted to add audio question. Please press Star then one.
There appear to be no further questions at this time I would like to turn the floor back over to MS. Casassa for any closing remarks. Please go ahead.
Excuse me man. This is the operator you have yourself. Thank you everybody for attending our call. If you have further questions you can always contact our investor relations and we will see each other again in the next conference call.
Bye everybody.
This concludes today's conference call you may now disconnect.
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