Inter & Co, Inc. Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 12 speakers on the call.

Operator

Good afternoon and thank you for standing by. Welcome to Interinco's First Quarter Earnings Conference Call. Today's speakers are Joao Widtermennen, Inter's CEO Alexandre Riccio, Senior Vice President of Retail Banking and Santiago Stel, Senior Vice President of Finance and Risks. Please be advised that today's conference is being recorded and a replay will be available at the company's IR website. At this time, all participants are in listen only mode.

Operator

After the prepared remarks, there will be a question and answer session. For this session, we ask you to write down your question via the Q and A icon on your screen. If you do not want to open your microphone live, please write down no microphone at the end of your question. In this case, our operator will read your question for you. Please note that there is an interpretation button on your screen where you can choose the language you want to hear, English or Portuguese.

Operator

Throughout this conference call, we will be presenting non IFRS financial information. These are important financial measures for the company, but are not financial measures as defined by IFRS. Reconciliations of the company's non IFRS financial information to the IFRS financial information are available in Interimco earnings release and earnings presentation appendix. Today's discussion might include forward looking statements, which are not guarantees of future performance. Please refer to the forward looking statements disclosure in the company's earnings release and earnings presentation.

Operator

Now, I would like to yield the floor to Mr. Joao Viter Menon. Sir, the floor is yours.

Speaker 1

Thank you, operator. Hello, everyone. Thanks for joining us for our 1st Q earnings release. As we generally do, I will start with a quick overview of our strategy, to then pass it to Sanjay and Santi that will cover the rest of the presentation. I will then close with a final remark and open it for Q and A session.

Speaker 1

Jumping to page 5, I will start with a quick update on this quarter performance and how this connects to our North Star, which is the 6thirtythirty plan. I'm glad to say that we reached almost 32,000,000 clients this quarter. This increase in number of clients came together with an increase in our activation rate. We reached 55%, an improvement of 86 bps just this quarter. On efficiency ratio, we continue making great progress quarter by quarter.

Speaker 1

It stands today at 47.7%, which implies a strong improvement of 3.6 percentage points again just this quarter. And last but not least, our ROE is approaching the 2 digits mark, closing the Q1 at 9.7%. We think this number is even more remarkable considering the high level of excess capital we hold. As I mentioned in the last earnings call, we are proud to be ahead of our North Star plan. It is strategically important for us to continue to be ahead of the plan, while continue to grow and innovate.

Speaker 1

Now, moving to Page 6. Here, we see Inter from a growth perspective and how we are disrupting the Brazilian banking market. We can see this disruption from 3 angles. 1st, on clients. We have experienced a strong expansion in our client base, with a steady increase in the number of customers choosing to transact in our platform.

Speaker 1

2nd, on loans. Our portfolio has been growing steady as more individuals and business finance their needs through our lending options. 3rd, on revenues. We have achieved robust growth, driven by increased client monetization across fees, savings and credit products. These results show how Inter is delivering alpha by consistently over delivering growth across client, balance sheet and income statement metrics.

Speaker 1

Moving to Page 7. Here, I will cover our main business achievements this quarter. There are 3 particular things I'd like to highlight. First, Loop. We are disrupting an outdated industry by integrating our existing verticals into a comprehensive rewards program.

Speaker 1

This initiative aims to drive client engagement and spending in our entire ecosystem. 2nd, we're scaling up our new credit lines. These are mainly PIX Financing and Buy Now Pay Later in our Intrashop. Lastly, we are strategically building our Global Accounts. We are doing this by leveraging the robust app infrastructure we have established in Brazil and replicating it to the US.

Speaker 1

These 3 groups of business opportunities are strategically important to continue reinforcing the power of our financial super app. And to conclude on my side, before handing over to Sanjay, I would like to point the 3 priorities that we have for the remaining of 2024. First on the growth side, we expect to continue growing Clients, loans, deposits and top line revenue. We will do that by continuing to innovate and delight our clients. 2nd, on the business side, we remain focused on increasing client engagement and Principality.

Speaker 1

We're doing that by offering the broadest digital solutions on the market. Lastly, on the financial side, our priority is to continue to improve operational leverage and expand our NIM. Streamlining our operations, optimizing the efficiency and improving the portfolio mix, we aim to enhance profitability and financial growth. We believe that these factors will allow us to continue operating in a positive trajectory that balance growth with profitability. Now, Sanje will walk you through our business updates.

Speaker 1

Thank you very much.

Speaker 2

[SPEAKER JOSE MARCO TRONCHETTI PROVERA:]

Speaker 3

Thank you, Joao. Good afternoon, everyone, and thanks for joining us today. As Joao mentioned previously, from day 1, we have been disruptors in the banking industry, allowing us to gain market share in one of the largest banking markets in the world. Our focus on innovation has been instrumental to our success. The Q1 of this year was not different.

Speaker 3

We once again welcomed 1,000,000 new active clients, bringing our total increment to 3,900,000 in the last 12 months. This growth is on par with the previous 12 month period, however, with a 3 40 basis points higher activation rate. All of this while maintaining an extremely comfortable level of customer acquisition costs. This across the markets we participate. Moving to Page 11, we can see that the day to day banking remains the backbone of our financial super app.

Speaker 3

Total TPV increased 42% in a year over year basis. This reflects the strong growth and adoption of our platform. This quarter, volumes from credit cards surpassed debit for the very first time. This shift contributed to a stable interchange revenue even when compared to the seasonally strong Q4. When looking in a cohort basis, we observe an encouraging trend.

Speaker 3

Newer cohorts show a steady increase in spending, reflecting their growing engagement with our offerings. Simultaneously, older cohorts continue to demonstrate robust growth as they mature. Moving to Page 12, I'll talk about Intershop Insurance and Investments, all of which had great performance this quarter. Starting with InterShop, we were able to resume GMV growth while increasing net take rate. We delivered a 1,000,000,000 GMV in a quarter typically marked by seasonal contraction.

Speaker 3

On insurance, we also had another great quarter, reaching more than 404,000 sales and 1,900,000 active clients. These operating numbers supported a record breaking BRL52 1,000,000 in net revenue for insurance. On investments, our cutting edge product offering resulted in an impressive 61% year over year growth and an AUC reaching BRL 95,000,000,000. On the global front, we're successfully replicating one of our most important competitive advantages, but now in the U. S, our strong deposit franchise.

Speaker 3

Our assets under custody and deposits in U. S. Dollars have reached the impressive milestone of $460,000,000 reflecting a remarkable 223% year over year growth. We achieved almost 3,000,000 clients in a vertical that is strategically important given its typical customer profile. I'd also like to emphasize that this quarter, we introduced a new investment option for our clients, time deposits.

Speaker 3

Despite being a recent addition to our lineup, we're thrilled to see the rapid adoption and growing interest in the product. Jumping to our 7th vertical, loyalty, we achieved 6,600,000 active clients, bringing a net increase of 1,200,000. Loop, as we call it, is an evolution of our cash back program and has and had one more quarter of success. A few highlights are we have rolled out more than 40 missions to enhance client spending, engagement and activation. These missions influenced the behavior of nearly 1,000,000 clients.

Speaker 3

2nd, we have observed that loop clients have a spending lift of 66% as compared to non loop clients. 3rd, we are consolidating all sources of cash back into points and customer feedback has been extremely positive. And last, from a financial perspective, we are observing a variety of benefits that go from profits made when selling points to interest earned on float to making spreads when points are burned. We're excited with all possibilities Luke will keep bringing us, especially after the launch of our new experience a week ago. Finally, before giving the floor to Santi, I want to talk about the expansion of our new credit lines.

Speaker 3

First, we're observing consistent growth in PIKS financing. 2nd, our buy now pay later offering is fine tuned and gaining traction, supporting GMV expansion in InterShop. These two products, along with bill pay financing, cash financing and overdraft are growing and showing great potential. Delinquency readings are within our expectations. We're continuously fine tuning user experience and flexibilizing credit policies to make the offering more broad.

Speaker 3

There is a lot of room to grow within our base. The portfolio reached $170,000,000 in the quarter and is evolving at an encouraging pace. Now, I'll pass the word to Santi to present our financial performance.

Speaker 4

Thank you, Sande, and hello, everyone. Thank you for attending our call. Starting on page 17, we can see a strong performance on our credit book. After growing our loans several quarters at 5%, we are now at 4%, which is in line with Q1 seasonal trends, reflecting marginally lower credit demand as a result of holidays and Carnival. On a yearly basis, our portfolio grew 28%, surpassing BRL 32,000,000,000.

Speaker 4

Important to notice that we continue growing our loan multiple times more than the market, therefore, gaining significant market share across products and diluting our cost base. Moving to interest rates on the top of the page, we can see an increase of 1.0 percent in the all in loans rate during this quarter. This is a consequence of: 1, continued growth in the high margin portfolios 2, the repricing of the legacy payroll and real estate portfolios and 3, the higher than average inflation in the quarter. We'll go deeper into the full impacts of rates on the NIM page later. Going deeper on growth by loan type, we remain committed on deploying capital on the most profitable manner possible and therefore increasing the yields and ROEs on our loan portfolio.

Speaker 4

Our best credit products, FTTS and Home Equity had the highest growth levels in scale within our loan mix. In EBTTS, this quarter alone reached the highest underwriting volume on record, reaching approximately $500,000,000 in new loans at an average monthly rate of 1.8%. On credit cards, we continue with the approach of prioritizing credit limits to existing and strong performing clients, enabling us to increase by nearly 40% this portfolio while improving asset quality trends. Finally, on real estate and payroll loans, we balanced growth with repricing to ensure that profitability continues to improve in these portfolios. Now moving on to Page 19, on asset quality.

Speaker 4

NPLs increased by 20 basis points, which is normal in 1st quarters as a result of less liquidity in the consumers as opposed to the prior quarters. On the other hand, we did see continuous improvement in the credit card NPL by cohort together with the NPL and Stage 3 formation. This performance is a result of continuous enhancements in the underwriting models, better risk management and collection strategies. On Page 20, we can see a stable performance in the cost of risk metric, which remained flat at 5.2%. Our coverage ratio also remained stable at 131%, which means we continue provisioning in line with NPL formation trend.

Speaker 4

Regarding loan mix, which could impact these 2 ratios, we have 2 opposing forces that offset each other. On the one hand, we are originating more FZTS and home equity loans, which should lead to lower ratios. And on the other hand, we are accelerating credit cards and fixed financing. Therefore, the overall numbers remain stable and in balance. We continue to focus on improving our underwriting models together with the collection practices, which are the ultimate drivers of our asset quality trends.

Speaker 4

Moving to Page 21, we once again see our strong funding franchise, which reached R43.8 billion dollars and is a result of BRL 15,700,000 clients trusting us with our deposits. As mentioned many times before, we have a very attractive funding mix with transactional deposits representing 32% of our total funding. We believe that this funding mix is one of the best mixes across Brazilian banks. In terms of growth, our funding base grew 1% this quarter, which was a good performance for our Q1 in the year. For instance, in the Q1 of 2023, we experienced a 1% decrease.

Speaker 4

Moving on to page 22, our cost of funding remains a key competitive advantage We can see this consistently over a long period of time and through the cycle of rates increasing, staying stable and then beginning to decrease. This quarter, our cost of funding was 61.9 percent of CDI, once again around 60% of the market that we aspire to operate in. As rates decrease further, we should continue to benefit from this dynamic given the structure of our balance sheet that makes Inter B liability sensitive. Moving on to Page 23. Once again, we had a great quarter in terms of revenue, reaching record breaking numbers.

Speaker 4

We achieved BRL 2,300,000,000 and BRL 1,400,000,000 in gross and net revenue, respectively, this quarter. These levels imply a growth of 37% on a year over year basis and a 7% on a quarter on quarter basis. The main driver of growth was NII, which experienced strong performance to focus on improving asset allocation into profitable loan segments. Fees decreased marginally this quarter as a result of the strong performance it typically has at the end of the year. On a year on year basis, growth in net fees was very strong, resulting in a 38% growth.

Speaker 4

Moving on to the unit economics metrics on Page 24. Here we can see that our ARPAK remains stable as we continue adding 1,000,000 active clients each quarter, as Alexandre mentioned. This result in a stable ARPAK of approximately BRL30 per month. On the cost side, we continue to improve significantly our cost to serve metric, which reached a record low level of BRL11.8. Our margin per active client reached a record of BRL18.5, which is 23% higher than a year ago.

Speaker 4

Moving on to Page 25, we present here the evolution in terms of our net interest margins. Despite being a quarter when the percentage of demand deposit within our deposit mix is typically lower than in other quarters, all of our NIMs had strong performance. Starting on the top of the page, both our NIM 1.02.0 with and without the non interest accruals of credit cards known as Avisca in Portuguese increased 20 basis points this quarter. When we look at the risk adjusted NIM, which is the DAX cost of risk, performance was even stronger, reaching records in both the 1.02.0 metric. This strong performance is the consequence of the following factors playing out consistently for the past several quarters: 1, improvement in the repricing of legacy real estate and payroll loans 2, change in the loan mix towards the most profitable credit products and 3, the lowering of the cost of funding.

Speaker 4

Let's move now on to Page 26, where we show our improvements on the operational leverage trends. On the left chart, we can see that we are able to further increase the gap between the growth of net revenue and expenses. These expenses remained flat, while net revenues grew 7% this quarter. With this dynamic, we continue to expand the gap between the two curves on the left graph, which is our goal in terms of operational leverage. As a result, our efficiency ratio improved 370 basis points to 47.7 percent as Joao mentioned at the beginning.

Speaker 4

We celebrate this milestone penetrating the 50% mark and highlight that this is one of the 3 key ratios we target for our sixty-thirty-thirty North Star in which we are way ahead of our goal at this point in time. And to close on my side, here we show our performance in terms of profitability. We delivered a record ROE of 9.7 percent by printing our best ever net income of BRL195 95,000,000. On a pretax basis, we reached BRL 274 1,000,000. This continued growth in profitability on a quarter by quarter basis strengthens our confidence on being in the right path to deliver a healthy combination of growth and profitability while building a franchise for the long run.

Speaker 4

Now I'll pass it to Joao for his closing remarks. Thank you.

Speaker 1

Thank you, Sachi and Sanje. As we saw in this presentation, we are disrupting the market by staying true to our mindset of builders and innovators. We truly believe that we are creating a unique, special and build to last financial platform. In the 1st 3 months of this year, our robust financial and operational performance showcased that the model is maturing and showing the true merits of its design. These achievements also highlight the resilience and effectiveness of our business, as profitability is effectively combined with disruptive growth.

Speaker 1

Finally, the performance of the Q1 of the year, 2 of the 6thirty-thirty plan, set us on a good pace. And therefore, we are full steam ahead for the coming quarters and years. I would like to thank to our amazing team of employees for their hard work and to our shareholders for supporting us since the beginning. Before moving to the Q and A section, I would like to extend an invitation to all of you to attend our Tech Day on May 13, 3 pm Eastern Time. This will be live in NASDAQ, New York office, with virtual streaming for people to also attend remotely.

Speaker 1

During this event, we will deep dive into Inter's key competitive advantage, which is our technology platform. You can find all the details for the event on our Investor Relations website. Thank you for your attention and for joining us for this earnings presentation. Operator, we can now open it for questions. Thank you.

Operator

We will now begin the question and answer session. Once again, for this Q and A session, we ask you to write down your question via the Q and A icon at the bottom of your screen. Your name will then be announced and you will be able to ask your question live. At this point, a request to activate your microphone will appear on your screen. If you prefer not to open your microphone live, please write down no microphone at the end of your question and our operator will read your question aloud.

Operator

Our first question comes from Mr. Tito Labarda from Goldman Sachs. Mr. Labarda, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Speaker 5

Hi, good afternoon. Thank you for the call and taking my question. I have two questions if I can. One, just good loan growth, some seasonality. Just thinking from here, I mean, how much of the pickup in NPLs do you think was related to seasonality?

Speaker 5

And in terms of continuing to grow the loan book close to this 30% level, how comfortable are you in being able to continuing to do that? And then my second question, really just to clarify a little bit, the decline in the capital ratio in the quarter, I see here that you paid a dividend, I guess, from the bank to the holding. But it looks like the reference equity fell even more than what the dividend was. Looks like the dividend is $125,000,000 if I have it correctly. But just if you can clarify a little bit that decline in the reference equity in the quarter and how much of it was related just to the dividend payment?

Speaker 5

Thank you.

Speaker 4

Hi, Tito. Thank you for your question. Santel here. So on asset quality, we think it was mainly due to seasonality. We are operating at the delinquency levels, both in terms of NPL formation and cost of and cost of risk that we think that we will be operating throughout the year.

Speaker 4

We have some upside to potentially be operating below this level, but it will be around this zip code. Keep in mind that we are increasing underwriting on certain unsecured lines that will put some pressure on those ratios. On the other hand, we are growing FDAs and home equity will which tend to compensate. We are solving for risk adjusted NIM. We have said this in prior calls.

Speaker 4

That's what we care the most about, which is what we get to take home now in terms of paying the bills both in the interest expense and cost of risk. And then in terms of capital, what we had was several factors playing in. On the one hand, we had AOCI or the mark to market of the of the securities portfolio, which is positive in some quarters, negatives in others. In this quarter, it was negative by 50,000,000. It goes directly to equity and impacts the regulatory capital or the reference capital as the regulator calls it.

Speaker 4

We had dividends from the bank into the holding level, which will I will dive in a bit deeper now for approximately R160 1,000,000. And we also had, a capital contribution from the bank to the broker dealer in Brazil, the the the TVM for 140,000,000. That will be reversed once the Central Bank recognized the consolidated capital of that. So that's 140 was temporary. And we also see the AOCI also as temporary because it has these oscillations of back and forth.

Speaker 4

And those 3 together explained the change in the reference capital. But the most important thing on capital that I would like highlight is that we are solving for financial performance. And in that sense, we created an organizational structure, a corporate structure, which now has the interim co holding with the follow on that we did at the beginning of the year. Together with the profits that we're increasingly creating, we do expect to have a bigger percentage of our excess capital up in the holding level. This is more efficient for the performance of the company.

Speaker 4

We will keep, obviously, a cushion of operating with a comfortable level of CET1 of the Brazil bank level, but the excess capital will be increasingly more based in the holding company.

Speaker 5

Okay. No, that's pretty clear. Thanks, Santiago. Just a follow-up on the first question. So the 30 ish percent loan growth, you feel pretty comfortable that you'll continue to be able to grow at that pace?

Speaker 4

Yes. We think it's going to be in the 30s. Obviously, the second half of the year is the most active one so that we will determine the out the final outcome. We saw that in the last year when we had an acceleration towards the end. The Q1 wasn't bad 4%.

Speaker 4

It was higher than prior 1st quarters, but we will see as the year goes by.

Operator

The next question comes from Mr. Thiago Batista from UBS. Mr. Batista, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Speaker 1

Hello? Are you hear me?

Operator

Loud and clear, sir. Okay. Perfect.

Speaker 6

First of all, congrats, Jean, and Alexandre Santiago for the results. Very strong numbers. I have two questions also. The first one about the fixed financing. How much transformational can be the fixed financing for Inter?

Speaker 6

Do you believe that this can really change the profitability or change the business of the bank or how big this can be? The second question about Inter's hedge strategy. So we are seeing interest rates increasing a lot in the last couple of months in Brazil. So how Inter is doing its hedge strategy?

Speaker 1

Thiago, Jean Victor speaking. Thank you for the question. I'm going to cover the fixed financing part of the question, then Santi will cover the hedge. So we are very excited with the fixed financing product. We have been saying for a while that we see the 2.0 consumer finance in Brazil starting to play out.

Speaker 1

What do you mean by that? We see with the PIX Finance different from the HOT ACHIVO Y PASELAAD on the credit cards as a more active product, more interest product for us to deploy our capital. We can manage better the interest. We can manage better the moment where we do the underwriting. We have less intermediaries on the process, such as the card companies, the acquired companies and so on.

Speaker 1

And we started about 1 year or so, even less with fixed financing. And so far, the delinquency is better than the credit cards and the economics are better than the credit cards. And we're still improving. We're still rolling out that offering for our clients, as we always like to say at India when it comes to credit underwriting. We like to move forward, but with cautions.

Speaker 1

But we see as a big addressable market for Peaks Finance. So very excited with what we have seen so far. And again, just to remind the market, we have 80% of penetration on peaks. So we will be able to play a very good role on that product going forward.

Speaker 4

Hi, Thiago. Santiago here on the hedging side. What we started to do at the beginning of last year was to hedge the originations, not the stock, the originations of the loans that had more than 1 year of duration. This was payroll, FGTS, home equity and traditional mortgages. And we have been doing that since.

Speaker 4

Now that the interest rates went up a lot, we post. We'll resume once we see the rates going down. So we are smoothly increasing the level of the ratio of the hedge ratio in the long duration portfolio. We expect to do this or we seek to do this to have less volatility in the results. We think this is a strategy we're doing, but we don't want to rush in over hedging too fast when we still see some potential for rates to go slower.

Speaker 4

But overall, that's the strategy so far.

Operator

The next question comes from mister Pedro Leduc from Itau BBA. Mr. Leduc, we are now opening the audio, so you can ask your question live. Please go ahead, sir.

Speaker 2

Thank you, guys, and congrats on the quarter. I'd like to pick your brains a little bit on loan book. It's growing very well and noted credit card in special. So first on that, what led you to have more comfort on this? What are you doing different?

Speaker 2

Is it what kind of clients are you going after over user profile on these cards? And then on the overall loan book pace 30% yearly growth if that's the level we should see also for the remaining of the year. Thank you.

Speaker 3

Hi, Leduc. This is Alexandre speaking. Thank you for the question. So as you know, credit card is an important product for our transactional banking vertical and a key driver of Principality. So growth there is aligned with our short and long term objectives.

Speaker 3

With that, when we think about specifically the Q1, we had a few factors contributing to growth. First was Loop. So our loyalty program is gaining a lot of traction. We've deployed several missions and these have been drivers of a lot more use on our cards with a lot of focus or a good contribution from higher income clients also that use the upper scale products. This has been good.

Speaker 3

A second part is an early contribution in the total portfolio coming from Peaks Financing and also bill pay and cash financing. It's growing, so it starts to contribute for the growth of the portfolio. And also last but not least, the continuity of our usual growth and that includes new clients from onboarding that we continue underwriting credit limits and we're having good engagement. New clients for the credit card products coming from the behavior models were also very active on underwriting those limits and a big focus on gains of share of wallet on existing customers. So clients that are already using credit cards, we've been doing all the typical increases of limits.

Speaker 3

And again, with Loop, it's easier to sell this engagement. So we'll keep working on this in this direction throughout the year and that's good here for the business. When moving forward the growth, it's going to be in the ballpark that Santiago just mentioned. So we're going to be in the 30s and with the credit profile evolving in parallel with good growth on FGTS. So products with low delinquency balancing with products that might have a little bit more delinquency.

Speaker 3

And so we see growth in NPLs at good levels as we saw in the Q1.

Operator

Our next question comes from Ms. Neha Agarola from HSBC. Ms. Agarola, we're now opening the audio

Speaker 7

Hi, thank you for taking my question. Just a quick follow-up on the previous question regarding the unsecured credit lines that you're now expanding into. We've seen a lot of players offering PIX financing now. Even the incumbent banks are increasingly improving their offering in PIX financing. How do you think Inter can differentiate or you don't require differentiation given that you have 8% market share of fixed transactions?

Speaker 7

You could continue to grow aggressively on fixed financing. And this 170,000,000 number that you've shown this quarter, where could this be by the end of this year roughly? Where do you see these new lines growing into at least by the end of this year? That'd be very helpful for us to kind of anticipate what kind of growth we should imagine. Thank you so much.

Speaker 1

So, Nia, Jean Victor speaking here. Thank you for the question. As I told you before, it's a mantra at InterDebt. We like to move forward but with cautions, mostly on unsecured credit portfolio. But the good news is we are putting these new products up and running.

Speaker 1

The clients are adopting very fast. And lastly, the way that people, they buy this product with us, it's a 100% digital through our app in a very seamless way. This help us to grow fast. And also to mention, by having the best cost of funding in the market, we can have a very good profitability on that. We have been tracking the delinquency of the product, fixed financing, Buy Now Pay Later for our Inter Shop, the boleto payment option and the withdraw option with PIX.

Speaker 1

So far, as I mentioned before in the previous question, the numbers are better than the credit card and therefore the economics are much better without the intermediaries that I also mentioned on the previous question. So our appetite for this consumer finance 2.0 is big. I believe that as you said, having a big market share on the market, a good cost of funding and a very seamless way to hire the products, we believe that we gather again with cautions a big market share of the market going forward.

Speaker 7

Understood, Joao. Thank you. If I can just follow-up on the cost side, I mean, we continue to see very good cost control, and that has definitely helped in boosting up the ROE. How my what kind of levels do you have for this year in terms of cost control? Should we see continued kind of cost performance?

Speaker 7

Or can we see big moves this year? I think the biggest move happened last year, but what kind of expectation can we have for this year in terms of cost growth and cost control measures? Thank you so much and congratulations once again.

Speaker 3

Thanks, Neha. This is Alishandir speaking. So on cost control, one reality is we keep surprising ourselves. We expected it to grow marginally. It's not that we expected it to grow aligned with revenues.

Speaker 3

We want to gain efficiency, right? So we need operating leverage and we need this to happen. But with technology, with gains from implementation of new technologies and all the projects that we've been doing to keep costs under control, we've been surprising ourselves quarter after quarter. As we look forward, we still see a little bit of what we said in the last quarter call, which was having the costs growing at about half the pace that we see revenue growth. So that's kind of how we are aiming and how we are running the company.

Speaker 3

[SPEAKER MARTIN PEREZ DE

Speaker 1

SOLAY:] And Neha, here's Joao speaking. Just to complement Alexandre, it's important to mention that it's not by accident that our expenses are growing way less than the revenues. We need to think that by design, it was structured without the big IT like a systems, without the brands, 100% cloud based, with a very developed database. So we are working with that. With now the technology that we have on our kitchen under the hood to work and to improve the number of clients that you can serve per active employee, the number of products that you can offer in our super app.

Speaker 1

So, all of these combined have been helping us to achieve this operational leverage. And we believe that we're just scratching the surface. So, we see how we have been able to reduce from almost 90% cost to income to 47% cost to income in just maybe 3 or 4 quarters. It's really a very good achievement. And I believe that this metric is going to be maybe the one that we're going to get first in our sixthirty-thirty plan.

Speaker 1

Very excited with the cost control with the operational leverage that we're putting in the balance sheet.

Speaker 7

Super. Thank you so much.

Operator

The next question comes from Mr. Flavio Yoshida from Bank of America. Mr. Yoshida, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Speaker 8

Hi, guys. Congrats on the strong print. So I have two questions here on my side. The first one is on engagement and Principality. So in fact, we see many banks talking about seeking clients' Principality.

Speaker 8

And I was wondering how what do you think is key to get the clients' Principality? So I have a view that credit limit is very important, but I'm not 100% sure about it. So if you could elaborate on this, on how to increase engagement levels, it will be great. And then my second question is on the coverage ratio. So you're seeking growth on unsecured credit lines, right, including credit cards.

Speaker 8

You are running with a stable coverage ratio around 130%. But when we see other banks, other listed banks historical data, we see an average around 200%. So how comfortable are you guys with this level? Do you think it will be necessary to drive this coverage level up considering that the loan mix is getting riskier? Thank you.

Speaker 3

Hi, Yoshida. This is Alexandre. Thank you for the question. So, I'll start with the engagement and principality part and then Santi will talk about the portfolio and risk part. And what we see is, 1st, strategically, how do we position ourselves to gain principality, to have high engagement.

Speaker 3

It's about several things, so not only credit card, but a lot about the product. So we've been differentiating ourselves since the early days back like IPO ed in 2018 and invested a lot in bringing many different products to our super app. So a lot of transactional banking features. So we have today the best peaks in the market based by the like the central bank rating system, and that's an important one. But then we have a lot of different verticals including insurance, a very complete investment platform, all InterShop adding a lot of value to customers, more recently our global account offering that drives tremendous engagement from a lot of upper scale clients.

Speaker 3

So having the super app offering with all the products within the same app at a seamless user experience is for us the biggest driver of Principality. People don't need to leave InterZap to take care of their entire financial lives. And we'll keep moving there and to get more Principality. And when we get more to the tactics, to the tactical action items, then we'll do a lot of things to make sure that we bring everything that I talked before as soon as possible to Inter. So for example, when we think peaks, an important part of the process is to get one of the clients' main PIKs keys as they are called in Brazil.

Speaker 3

We've been doing a lot of that. On getting clients to engage with credit card limits, you need to have a loyalty program that has to be complete. We're doing a lot of missions to make sure we bring those clients. And as we go, we're being able to engage clients with the more value add products such as PIGS Financing. I'll pass the word to Joao, who is going to fill in for with a little bit with some ideas.

Speaker 3

[SPEAKER JEAN PIERRE ANDRE DE CHALENDAR:]

Speaker 1

No, Yoshida, just to add on top of Alejian's comments, I would say that 2 things are very, very important to have the best product on the street. By having the best product, you have client principality. And I would say it's the combination of innovation and technology. So as we told before, our technology is the best in class and we have this culture threat, right? We are a very innovative company.

Speaker 1

So when you combine these two things, we are always the 1st mover on the new trends that we see on the digital banking environment, digital banking market. With that in place, the clients are embracing more and more and more Inter as their first option in the digital banking industry. And now Santi will cover about the coverage ratio for our portfolio.

Speaker 4

Hi, Yoshida. So on the coverage ratio, we have 2 different realities. On the one hand, we have the unsecured part, which is around 30%. That has coverage ratios which are higher than 130. And then the secured part, which has a lower.

Speaker 4

The blended is what the market sees, which is the 130. But inside that, there are different realities. What we have is a big level also of fragmentation or diversification on individual clients within the portfolio. So what we will see is how the portfolio mix evolves through time. So far, the changes hadn't been too significant that 30% now stands 32% the unsecured part.

Speaker 4

So it wasn't something that merits a substantial change in the coverage ratio. But if we do happen to have a bigger growth or bigger share on the unsecured part, we will assess accordingly. But we do not see our portfolio in the future having a mix significantly skewed towards unsecured. We do imagine unsecured growing beyond the 30%, but nothing substantially higher than that.

Speaker 8

All right. Great. Thank you.

Operator

The next question comes from Mr. Yuri Fernandes from JPMorgan. Mr. Fernandez, we're now opening the audio, so you can ask your question live. Please go ahead, sir.

Speaker 9

Thank you, guys, and congrats on the quarter. I have a question regarding payroll loans. You provided the breakdown of personnel excluding FTTS. So assuming the ex FTTS is basically payroll. It has not been growing.

Speaker 9

So I would like to understand what has been your view on the product. Is there any challenge on originating this more digitally? Like whatever you can comment on your expectations for this, the more traditional payroll, let's put it this way. And also if you can comment a follow-up on this question on potential changes to the product. So today we see lower rates like rate caps from the government, but we also see the government going for some kind of marketplaces for payroll, kind of potentially make it easier for digital guys like yourselves to maybe offer some of those products.

Speaker 9

So whatever you can comment on those initiatives, if you believe they will happen, if you have any timing, I think it can also help. So basically, what is happening because we are not growing? And can you accelerate growth if we see changes for this product?

Speaker 3

Thank you. Hi, Yuri. This is Alexandre speaking. Thank you for your question. So starting with the traditional payroll loans, I'll cover a few different topics that we're seeing and how we're approaching the product.

Speaker 3

So first is like portfolio management. Our focus is on having a healthy and profitable portfolio. Having said that, we're happy that even on a stable portfolio in size, so we remained in the $5,000,000,000 ballpark, we grew our implied rates by 80 bps in 1 quarter. So this was very positive and there is a lot of room to keep this trend given our discipline in pricing and the rates of the overall portfolio that are considerably lower than the current levels. 2nd, in terms of origination channels, as we have communicated before, we've been evolving from an origination that used to be mostly omni channel, which is like digital with human support to a hybrid of omnichannel, so the same one as before and a digital only origination.

Speaker 3

We see early results already happening of the digital only origination with a lot of INSS through WhatsApp going on already. And we're confident that we should resume portfolio growth throughout 2024. So this, I believe, are the main points as we think about the traditional payroll. So we'll keep the discipline to grow on this portfolio. When we think about everything that we've heard in the market, so we've heard noise on the FGTS product.

Speaker 3

We believe this product is here to stay. It's the lowest cost loan or loan that a normal worker can get in Brazil. So this is a product that we do 100% digitally. We're confident it's here to stay. And on the other issues that we've heard through the last few months, private payroll can be a gigantic opportunity, although it might take longer to see it implemented.

Speaker 3

And last, we've heard a lot about INSS digital INSS, and that one is probably one that we're going to see in the short term. So this is going to be like a portal from Dataprev who manages the INSS payroll loans and we're going to be able to put our offering there along with other competitors. And given our differentiated cost of funding, we should be able to use that as a great opportunity to grow and attract clients as we can comfortably underwrite at the lower end of the market prices with very good ROEs.

Speaker 1

Leduc, Jean sorry, Leduc, just one Juri, sorry. Juri, just one thing, just to complement on Alejani's comment. It's important to mention that with the cap at 1.68%, we see the average of the market with their portfolios at 1.75% ballpark. We have, as Santi mentioned in the past, our portfolio at 1.25 because it was underwritten, I'd say, 2 years ago. So we have huge room to improve the monetization of our current portfolio, but not only that, to get market share from the market.

Speaker 1

And just to highlight, having the best cost of funding. And also on this new product that Alexandre was mentioning, it seems to me like a deja vu. I remember when PIX started in Brazil and we had all the costs with the cheapest tariff as the inter banking fees that was pressing our margins. And when PIX started growing, it was very good for us. So imagine how the employees in Brazil doing the payroll loan through a portal, as Sanjay mentioned, connected through our API and our super app.

Speaker 1

This would be amazing. And we can see a proxy of that with the FGTS. The FTTS started. We're able to do that in a very, very seamless way in our app. And our underwriting is growing and growing and growing quarter over quarter.

Speaker 1

So we're very excited that if it come to happens, this new type of payroll loan is going to be very, very good for our balance sheet.

Operator

The next question comes from Mr. Andrew Garrity from Morgan Stanley. Mr. Garrity, we are opening the audio now so you can ask your question live. Please go ahead, sir.

Speaker 10

Thank you for the opportunity to ask a question. I just wanted to briefly ask about how we should think about the income from derivatives portion of your securities income, which ultimately gets included in the NII. There was a pretty significant swing in this line quarter over quarter. Can you just kind of provide some more details as to what happened? And do you expect this to continue to be a tailwind for NII for the rest of the year?

Speaker 10

Thank you.

Speaker 4

Hi, Andrew. Santiago taking this one. So what we do is we break down the result of that derivatives, which are interest rates of the longer duration portfolios that I mentioned earlier in our question. We break that down by product, and we add that to calculate the implied rates at the portfolio level. We disclosed that in the release.

Speaker 4

We disclosed that in the Excel file of the IR website called historical series. And with that, you can see how the interest rates of real estate loans, personal loans, etcetera, perform through time. So I guess the way that we think about is how will the interest rates, considering the hedges, will evolve through time. And as Alexandre said, the at the payroll, which is the main part of personal loans, there we are we're still with a portfolio that is running at around 1.25 percent per month, and we're originating about 1.6 percent. So those rates should continue to go up.

Speaker 4

And the same thing on real estate, which is a bit more complicated because we have inflation adjusted loans there, but they're also increasing the performance quarter by quarter. But to answer the question, we do break down that at the product level. There is part of the hedge that touches directly the interest income as well and part that goes to the derivative line. But to see all that together, we do the work and we show it in the breakdown to calculate the all in rates of the portfolios.

Speaker 10

Got it. Thank you.

Speaker 4

Thank you.

Operator

The next question comes from Mr. Ricardo Boquipigal from BTG. Mr. Boquipigal, We are now opening the audio, so you can ask your question live. Please go ahead, sir.

Speaker 11

Good afternoon, and thank you for the opportunity to make questions. I have 2 here on my side. 1st, can you please share some light on when do we expect to have the NPL formation declining? And if you could provide an update for this metric so far in Q2, as we have April and a little bit of may numbers, I want you to basically get an idea on when we could see cost of risk declining more as a reduction on this indicator is very important for that. And for my second question, we saw that personal expenses decreased by around 14% quarter over quarter, which we found out, if I'm not mistaken, lower bonus provisioning.

Speaker 11

So I want you to understand what was the rationale for that. And does it make sense to consider this level as a recurring base going forward? Thank you.

Speaker 4

Ricardo, Santiago here. So on NPL formation, we did have 2 consecutive quarters of NPL formation decreasing. This one was margin at 4 basis points, but it is a lower number in the Q4 despite the pressure that we have typically in the Q1. We don't see this number changing too much. As I mentioned before in another question, we think that the asset quality metrics will stay at around these levels, potentially a bit better, but not meaningfully different from what we have now.

Speaker 4

The cost of risk was 5.2%. We see it operating also at around the level, maybe even closer to 5.5 throughout the year. But ultimately, the second half drives more of the final outcome as there is more growth there. And we also have to see the level of penetration and success that we will have on the unsecured lines like Peaks Credit and By Now Pay Later, which are ramping up. In terms of the personal expenses, we do have the same situation at the beginning of last year.

Speaker 4

We do have higher expenses of bonuses of which a few of which are provisioned throughout the year as we decide to pay voluntarily in the Q4. Last year was a very good year. So we wanted to recognize the personnel and the talent, again, the huge effort that the team throughout Interput in a in a in a year that was very strong in terms of effort to to get the results done. And this year, we start at this level. That number will go up throughout the quarters, but we tend to provision as the net income grows quarter by quarter.

Speaker 11

Got it. Thank you.

Operator

This conference call is now concluded.

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Earnings Conference Call
Inter & Co, Inc. Q1 2024
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