Intercorp Financial Services Inc. Common Shares

Good morning and welcome to the Intercorp Financial Services first quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded. After the presentation, we will open the floor for questions. At that time, instructions will be given as procedure to follow if you would like to ask a question. Also, you can submit an online question at any time using the window on the webcast, and they will be answered after the presentation during the Q&A session. Simply type your question in the box and click Submit Question. It is now my pleasure to turn the call over to Rafael Borda of Inspired Group. Sir, you may begin.

Thank you, and good morning, everyone. On today's call, Intercor 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 Intercor Financial Services. Mrs. Miquela Casasa, Chief Financial Officer of Intercall Financial Services, Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro, and Mr. Bruno Ferrecho, Chief Executive Officer of Intelligo. They will be discussing the results that were distributed by the company on Wednesday, May 12th. There is 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, they are now available on the company's website, ifs.com.be, to download a copy. Otherwise, for any reason, if you need any assistance today, please call Inspire Group in New York at 212-710-9686. I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. These do not account for economic circumstances, industry conditions, the company's future performance, or financial results. As such, statements 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 last Wednesday. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercall Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir.

Oh, thank you very much. Thank you. Good morning and welcome to our first quarter 2021 Earnings School. 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 localized 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 the ones implemented one year ago. In the recent days, health alert levels have 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 have started to go down, and the vaccination plan is on its early stages. Today, around 5% of the population has been vaccinated so far, or 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 continued to recover and will start to show 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 back of strong public investment, better terms of trade, and higher private consumption. We continue to foresee a low double-digit growth in GDP in 2021. Supporting this view, the central bank held its monthly monetary policy meeting last night and kept its policy rate at an unchanged rate of 0.25% in consideration of the limited underlying inflationary pressures. Since our last call, Congress finally approved the cap-to-interest rates for the financial system. We do not expect a major impact on our banking business from these measures, but do think it will have a negative effect in the financial inclusion and bancarization process of Peruvians. Legal proceedings are in place to declare the anti-constitutional nature of the law. We will follow this process closely. All eyes are focused on the run of presidential elections will take place next June 6th. The most important pollsters agree that the margin between the two candidates has narrowed significantly, which makes it impossible to predict who Peru's next president will be. There will be uncertainty in the days ahead, and the strength of Peru institutions might be tested in different ways depending on the outcome. Under this scenario, IFS's franchise continues to prove resilience. We remain confident that our team has experience and skills to manage through uncertain times, as we have done in the past. Our clear strategic focus and measures taken during last year's crisis has taken IFS to reach record earnings during the first quarter of this year, with solid results in all of our operating segments. Our liquidity, capitalization, and provisioning levels, together with our risk management skills, world-class efficiency level, digital strategy, and a strong presence in the mind of our clients, give us the confidence that our platform is well positioned to continue helping Peruvians with their financial needs in the future. We continue to be focused on helping our customers during these times and to deploy our resources in an efficient way to maintain the path of profitable growth. Now, let me pass it on to Miquela for a detailed review of our results. Thank you again, and please remain safe.

Thank you, Luis Felipe. Good morning, and welcome again to Intercore Financial Services' first quarter 2021 earnings call. This time, we have divided the presentation in four 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 slides three to five. Main highlights are at Intercore Financial Services, as mentioned by Luis Felipe, record earnings of 528.7 million in the first quarter with our return on adjusted equity at 23.7%. Earnings grew in all subsidiaries supported by lower provisions, charges, and solid results from 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. Key banking indicators are recovering where retail loans resume growth. Strong deposit franchise with 40.1% market share in retail deposits. We have seen cost of funds down almost by half from last year at 1.4%. And NIM is still under pressure due to asset and loan mix and excess cash. Cost of risk came at 1.8% in the first quarter below pre-COVID level. And we continue our focus on efficiency and branch rationalization at the bank. At Interseguro, profit surged in the first quarter due to higher results from investments. Business activity is accelerating and is above pre-COVID levels with regular annuities leading the recovery. It was a solid quarter in gross premiums plus collections, up 14.3% on a quarterly basis and 25% on a yearly basis. Strong net gain on sale of financial investments with return on investment portfolio at 10.4%. And Interseguro continues to be the market leader in annuities with a 28.7% share. Intelligo had a sound first quarter result with return on adjusted equity at 30.7%. Profits normalized from negative results in the first quarter last year and an all-time high levels in the fourth quarter of 2020. There was a significant growth in fee income from funds management and commercialization of structured products. There were cost savings from reduced use of office spaces and lower administrative expenses, and asset under management had a strong growth of 6.5% in the quarter and 24.1% year over year. Now, this record quarter has been mainly driven by investment results at Interbank and Interseguro. But we are very happy to see a recovery in most of our core and recovery results, which include, first, the recovery in the quarterly growth of retail loans with an acceleration of mortgages and personal loans. Second, an inflection point in credit cards in April, where we have seen a first month of growth since the beginning of the pandemic. Third, there was an important growth in insurance premiums. And fourth, a recovery in fees coming from increased activity with clients at Interbank and in Peligro. Now, I will focus on the key messages we would like you to take home from this call on slide seven. There are six messages which we will cover in detail in the following slides. First, we continue to see a micro recovery. Second, we have a strong balance sheet with liquidity and capital levels substantially better when compared to pre-COVID levels. And moreover, we have manageable dollarization levels in the balance sheet. Third, activity has continued to recover, as mentioned before, in all three operating companies. The digital trends continue to be better each month and support IFS strategy, which translates into growth of clients and business. The fifth message relates to cost of risk, which is below pre-COVID level. And last, that we continue with our focus on efficiency and branch rationalization. So now let's move to slide number eight. The first key message is about the recovery in the macroactivities. In March, we have seen a strong recovery in most of the GDP indicators favored by the reopening of the economy and the base effect from last year, when activity was depressed by the first round of strict measures to contain the pandemic. As a result, the performance of leading indicators linked to domestic demand, such as cement sales, electricity consumption, and public investment, suggest that the economy performed strongly in March. particularly public investment, as you can see in the bottom left corner. Government strategy to reactivate the economy through the execution of public investment resulted in a new historical record of almost 7 billion soles executed in the first quarter this year and almost 4 billion soles only in March 2021. This was mainly explained by progress in works related to the Reconstruction with Changes program, the Line 2 of the Lima Metro, and the Arranca Peru program. Expectations on economic activity continue to recover up to March, but saw a deterioration in April mainly due to the uncertainty related to the outcome of the elections. In the same way, volatility in the exchange rate saw a dollar reaching 3.84 last week, but today it is back again to around 3.7 soles per dollar. On slides 9 to 11, the second message relates to liquidity, dollarization, and capitalization. On page 9, during the first quarter, we have continued to see an increase in our total deposit base at Interbank of 4.6%. driving the yearly growth to 33%, which has helped our loan-to-deposit ratio to stand at a low level of 89% this quarter and below the system's average. Moreover, the loan-to-deposit ratio in both currencies is at healthy levels, with the loan-to-deposit ratio in Solace at 105%, well below the 118% of the system. Up to March, there has been an improvement in liquidity in the financial system due to the funds coming from the private pension funds, as well as the unused portion of the funds coming from the Reactiva Peru program. We have been able to benefit from this situation and to have gained additional 40 basis points market share in total deposits in the quarter and 20 basis points market share in retail deposits. In April, and after the first polls for the second round of the presidential elections, we have seen a tightening of liquidity in the financial system and at Interbank. There was an outflow of dollars from the system, which decreased liquidity in that currency. As of the end of April, the total liquidity of the system in both currencies remains good, and the loan-to-deposit ratio for Interbank is at 91%, well better than pre-COVID levels, which were above 100%. We continue to have ample liquid assets with 28 billion soles at Interbank, out of which 18 billion soles are cash-in equivalents, and have around 1 billion soles at IFS standalone, out of which around 300 billion soles are cash-in equivalents, which would cover or could cover IFS current obligations for more than three years. On slide 10, our loan book has a manageable level of dollarization with no exchange risk as the remaining commercial loans in dollars correspond to export companies with no currency risk. Only 23% of total loans is comprised of dollars and only 6% of retail loans and 1% of small businesses. On slide 11, we continue to have a solid capital position at all three operating companies of IFS. Our total capital ratio as of the end of March was 17% at Interbank compared to 16.3% of the system as a whole and a minimum of 10.6% required by the SBS for Interbank. This means that we have over 600 basis points buffer in our total capital ratio. our core equity tier one ratio was stable at 11.5%. At Interseguro, our solvency ratio stands at 163%, well above the 100% required, while at Inteligo, our capitalization ratio is 30%, again, well above the 8% required. On slide 12. Monthly operating trends at IFS have continued to show positive developments in activity this quarter, as well as for April this year. At Interbank, debit and credit cards turnover has recovered to pre-COVID levels of 106 after reaching a peak in December at 113%. New disbursements of payroll deduction loans to the public sector employees are growing 15% versus pre-COVID level, while mortgages have registered a new record month in April and are growing 43% versus pre-COVID levels. Total fees for Interbank are at 83% of pre-COVID levels, with commercial banking fees recovering faster than retail fees, mainly thanks to new business coming from the aggressive reactiva loans structure. In the case of Interseguro and Inteligo, the recovery was much faster, with gross premiums in April this year at 107% versus pre-COVID levels and asset under management at plus 19% in April versus February last year. On slide 13, we are showing the quarterly evolution of IFS total revenues. We have seen a strong recovery in revenues coming from other income from investments, mainly at Interseguro, but also at Interbank and Intelligo. Quarterly growth of 0.8% is driven by a 27% increase at Interseguro, which more than offsets decreases of 3.1% and 33% at Interbank and Intelligo. Yearly growth in revenues of 19.4% was mainly driven by interseguro and inteligo, which more than offsets a 4% decrease in interbank revenues. The diversification of IFS businesses has definitely played an important role in the yearly recovery of revenues. The banking business continues to recover in a more gradual way, mainly due to the pressure in net interest income and NIM coming from low-yield reactive loans, excess cash, portfolio mix, and a smaller contribution of credit cards in a low-rate environment. Moving on to slides 14 and 15 and the fourth key message. On slide 14, our KPIs in the digital transformation continue to show positive results supporting IFS strategy. Digital users as of April are 78% of our customer base, up 31 points in the past two years. 100% digital customers who are clients that do not use branches or contact center any longer and who use digital channels plus ATMs and corresponding agents only for cash in and cash out have reached 57% in April, up 30 points from March 2019. Digital sales have also continued to see a rapid increase. At Interbank, retail digital sales reached 53% in April, and at Interseguro, SOA digital sales reached 77%, both increasing sharply in the past two years. We have continued to see an important number of new digital accounts being opened for individuals. As of the end of April, 55% of new retail saving accounts were opened digitally, and new digital client acquisition of retail customers reached 42% compared to 12% in March 2019. Our investments to build our digital capabilities during the last years have played to an advantage for our customers and operations under the current circumstances. On slide 15, we have reached more than 4 million retail customers and more than 110,000 businesses. Our retail client base has increased almost 15% CAGR in the past two years, where our commercial client base has increased 39% each year for the past two years. Our 100% retail digital customers have grown at a CAGR of more than 60% in the past two years, reaching 1.3 billion. Bling, the P2P payment feature among multiple banks operating with cell phone numbers, is already active in more than 3.5 million users as of April in only one year, 40% of which use Interbank as key account. Tunki, our 100% digital solution for payments relaunched on February last year, has surpassed 1 million users as of the end of April. The fifth key message refers to the low level of provisions registered during this quarter with a cost of risk of 1.8% even below pre-COVID levels. The three positive trends described during the last conference call have continued to develop further during this quarter. On slide 16, the first positive trend is that outstanding rescheduled loans have continued to decrease. As of March, outstanding rescheduled loans were 9.2 billion soles or 22% of the total loan book. This number represents a 28% decrease versus the peak of June last year. This is true for both commercial and retail portfolios. Moreover, the number of total clients rescheduled has also decreased as the new inflow has been marginal during these last months. On slide 17, The second positive trend is that we have continued to see an improving payment behavior among Interbank's clients. As of April 2021, 99% of our total retail portfolio has already had a payment due. 67% of the retail portfolio has not been rescheduled and is registering a very good payment behavior. 98.9% of clients are paying their installments, only 0.1% has requested an additional relief, and only 1% has not paid. Summing up, new request of relief and not paid, this represents a 1.1% as of April, which compares to 1.5% as of January. Of the 33% of the retail portfolio, which has been rescheduled as of April, 97% of clients are paying their installments. Only 0.4% has requested an additional relief and only 2.6% has not paid. Again, summing up new relief requests and not paid, this represents a 3% as of April, which compares to a 3.8% as of January this year. A similar payment behavior has been observed for credit cards as of April, with percentage of payments at almost 98% for the 55% of the portfolio that has not been rescheduled, while almost 98% for reactive reschedulings, 96% for unilateral reschedulings, and around 95% for structural reschedulings. As for SMEs concerned, the outstanding rescheduled portfolio is small and below 750 million soles, out of which 96% of clients have been paid the installments out of the 92% that have had payments already due as of the end of April. On slide 18, the third positive trend is the quarterly reduction of provisions. Cost of risk for the quarter was extraordinarily low at 1.8%, which compares to the 3.1% of the fourth quarter last year and the 3.4% of the first quarter 2020. This level of cost of risk is below pre-COVID level of 2.2% for the full year 2019, mainly due to the low cost of risk in retail, which today has a lower contribution coming from credit cards, which is the product with the higher cost of risk in the portfolio. This is reflected in the low cost of risk for retail in the quarter, which was 3.4%, down from 6.2% in the fourth quarter and 5.5% in the first quarter last year, and also below the 4% full-year cost of risk 2019 pre-COVID. Commercial banking continues to have low levels of cost of risk thanks to our small participation in the small business segment and was 0.5% in the quarter. Finally, the last key message on slide 19 refers to the discipline and proactive management of costs we have been pursuing before and after COVID started. This quarter, costs are flat when compared to the previous year as activity has recovered and we start to see increases in the variable costs, especially at the back. We have registered a very low efficiency ratio of 30% at IFS, well below our guidance of 35% to 37%, mainly thanks to the positive impacts on revenues previously described. At Interbank, efficiency ratio is at 39%, where we have accelerated our branch optimization program started in 2016 and have closed additional 52 branches since the pandemic started, reaching a total reduction in number of branches of 30% from the peak in 2016. As mentioned during the last conference call, expenses will start to increase during the next quarters as the level of activity continues to recover, driving variable costs. And some additional expenses start to materialize related to our commercial alliance with RAPI and IT investments. Guidance remains at 35-37 cost-income ratio for full year for IFS. Now let's have a closer look at some additional indicators by segments in slides 21 to 27. On slide 21, we are showing a recovery in most of our key banking indicator with the exception of NIM, which is still under pressure. NIM decreased 70 basis points in the quarter down to 3.7%, but NIM after risk improved 10 basis points in the same period. The low level of NIM in the quarter is due to a number of factors. First, the portfolio mix with a low contribution of credit cards. Second, reactive loans at low yields. Third, excess cash invested at low returns. And four, the low rates environment. NIM should start to recover in the next quarters as credit cards resume growth, as we have already seen in April. We have a reduction in the excess cash, which we also have seen to some extent in April, and reactiva loans start to mature in a greater extent. NIM would have reached 4.8% in the quarter when excluding reactiva and excess cash effects. Total fee and other income had a strong growth of 25% in the quarter, mainly driven by strong investment results. Other expenses decreased 2.5% in the quarter and 2.8% when compared to one year ago, with efficiency ratio for the bank at 39%. On slide 22, our year-over-year loan growth was 12.3%, mainly thanks to the reactiva loans disbursement. The quarterly growth was small this quarter, but there are some positive trends in mortgages, which continue to accelerate, growing 3.6% this quarter, and payroll deductible loans to the public sector employees growing 2.9% this quarter. Credit cards and other personal loans decreased 5.8% in the quarter, but have seen an inflection point in April where credit cards have registered a positive number for the first time since the beginning of the pandemic. And other personal loans have continued to accelerate growth. This positive trend of April should translate into positive figures for the following quarters. Commercial banking grew 36% in the year, but was flat in the quarter. On slide 23. Total deposits grew 2.5% in the quarter and 35% year-over-year, with retail deposits growing 1.5% in the quarter and 25% in the year, gaining 40 basis points market share year-over-year to a record 14.1% as of March. Due to banks. which include the central bank's funding for the Reactiva Peru program, has decreased 7.6% on a quarterly basis, but has increased 70% of a yearly basis in line with the funds we have lent to our clients. Cost of funds has continued to decrease, reaching 1.4% in the quarter, a reduction of 20 basis points in the quarter, and 130 basis points on a yearly basis. This positive development came from several factors like decreases in market rates, a better funding mix, and the higher funding coming from the central bank. Moving on to Interseguro on slide 24 and 25, quarterly premiums continue to show a strong growth of 14%, driving the yearly growth to 25%. All business lines grew with mandatory annuities leading the growth in premiums. Interseguro remains market leader in annuities with a 28.7% market share in the quarter. When looking at the April figures, the recovery was more evident as premiums have grown two times when compared to April 2020. On slide 25, Interseguro's investment portfolio decreased 4.6% on a quarterly basis, mainly due to sales in the fixed income portfolio, but grew 13% on a yearly basis. Results from investment had a particularly strong performance this quarter, coming both from a reduction of provision from impairment loss and other investment income. Thanks to these trends, the return on Interseguro's investment portfolio was extraordinary high at 10.4%, well above the previous quarter level. Moving on to our wealth management segment of slide 26, Intelligo posted strong revenues in the quarter, but below the extraordinary high level registered in the last quarter of 2020. Fee income had a particularly positive trend this quarter, growing 22%, driving the yearly growth to 14.7%. On slide 27, Intelligos' asset under management reached 22.3 billion soles in March, a strong 6.5% quarterly increase and 24% increase on a yearly basis. Lows have also seen a positive trend, growing 3.8% in the quarter and 7% year over year. Earnings of 87 million soles for this quarter are below the extraordinary high level of 155 million soles of the fourth quarter, but represent a solid quarter for IntelliVo with a 30% return on adjusted equity. Moving on to slide 28, we are providing a comparison of our results with the operating trends expected for 2021, which we have shared during our last conference call. As we mentioned that time, 2021 will be a year of rebuilding the portfolio at Interbank to foster growth in the coming years. Intersegur and Intelligo should continue to grow despite an extraordinary good year for both companies in 2020. First, talking about capital, We expect interbank capital to remain at some level well above regulatory requirements. As of March, total capital ratio of 17% and core equity tier one ratio of 11.5% are well above the guidance and the regulatory requirements. Second, profitability. IFS return adjusted equity came at 23.7% this quarter and should be above the 14% for full year 2021 as per guidance. Third, loan growth at the bank for this quarter was relatively flat, but trends point out a recovery for the coming quarters. Fourth, revenues grew 0.8% on a quarterly basis, mainly thanks to other income. NIM was 3.8% in the quarter, still below the yearly guidance of 4% to 4.3%. The pressure in net interest income and NIM is mainly coming from three factors as previously described. The full year effect of almost 7 billion soles reactive loans at very low rates. The impact of mixed on average yields due to the decrease in the credit portfolio and the increases in mortgages. Third, the excess cash invested at low returns. And fourth, the low rate environment. Related to cost of risk, it came below the guidance at 1.8% in the quarter, below pre-COVID levels, and we are keeping our around 2% guidance for the full year. Talking about the efficiency ratio at IFS, it was 30% in the quarter, better than our 35% to 37% guidance. We have continued with our cost efficiency efforts and branch rationalization program. This ratio was extraordinarily low during the quarter, mainly due to the strong other income and some expensive seasonality. We expect an increase in expenses in the coming quarters, mainly due to the recovery of activity, which drives variable costs and further acceleration of our digital investment, including building our venture. On slide 30, we wanted to share with you that we have published our sustainability report for Interbank for 2020, where we outlined the actions taken throughout the year in order to achieve our vision of sustainability. You can find it in our website. And to finalize the presentation on slide 31, I want to close this presentation with a brief summary of the six messages that have been developed throughout the presentation. First, we continue to see a macro recovery in Peru. Second, we have a strong balance sheet with liquidity and capital levels substantially better when compared to pre-COVID levels. And moreover, we have manageable dollarization levels in the balance sheet. Third, Activity has continued to recover in all three operation companies of IFS. Fourth, the digital trends continue to support IFS strategy, which translates into growth of clients and business. Five, cost of risk is below pre-COVID levels. And six, we continue our focus on efficiency and branch rationalization. Thank you very much. Now we welcome any questions you might have.

Thank you. And at this time, we will open the floor for questions. First, we will take questions from the conference call and then the webcast question. If you would like to ask a question, please press star then 1 on your touchtone phone. Questions will be taken in the order that they are received. And then if at any time you would like to remove yourself from the queue, please press star then 2. Again, to ask a question, please press star then 1. And for the webcast viewers, simply type your question in the box and click Submit Question. We will pause momentarily to compile a list of questions. And our first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi, good morning, Luis Felipe, Miquela, Gonzalo, and Bruno, and good morning, everyone. Congratulations on your record high earnings for a quarter thanks to your diversified 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 APEX should be trending up. But on the other hand, you are having a very strong economic recovery, so that should help to improve. lending dynamics and your NII and improving loan mix and using the excess cash. Also, provisions seem to be already below pre-COVID levels, and you're saying that we should set a cost-to-risk of 2% for the full year. So would it be right to expect core revenues improving in the next quarters while market-related income and other income normalizing? And where do you see the upside risks on earnings? And then just a 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 the pre-pandemic levels? Thank you.

Okay, thank you, Ernesto. I think you – thanks for your question, but 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 have a big investment portfolio in our businesses. This is what we do. So we'll be paying attention to any opportunity. But the offset to the potential increase of expenses and maybe let's see how the macro factors affect risk will be that our retail portfolio 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 how everything is going to move around, but that's the assumption under what we are executing. Return to growth, especially in higher margin markets. products that we have already witnessed through the end of March and beginning of April, which will offset the other potential negative trends and being very active in paying attention to additional investment opportunities. Now, for more detail on the trends, let me pass it on to Miquela so she can work around the numbers and the trends that we're seeing.

Thank you, Luis Felipe. Good morning, Erlesto, and thank you for your question. I guess, as we have mentioned, this first quarter has seen a big incidence of other income revenues. So basically, the guidance that we have provided for the full year is a soft top-line recovery. So we're talking about really a marginal growth in the full year. We have seen a 0.8% this quarter, and as Felipe mentioned, It is possible that 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 inflation point in credit cards. So summing up those two trends together, second quarter, we should see a better recovery in the in the volumes of written laws, we should drive a little bit interest income, but also fee income. Then I guess your second question was related to 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 trends that we have described, so top-line recovery and a further increase in expenses. Most likely, no, we will see quarters with lower ROEs than the one that we have registered this quarter. No, and the aim is to try to be at more normalized levels of ROE for 2022, depending, of course, on the microenvironment. I don't know if this is okay, Ernesto. There was something else that you wanted to answer.

No, yes, perfect.

Thank you very much, Ms. Felipe and Michaela. Thank you. Okay.

And our next question will come from Sebastian Gallego with Credit Corp Capital. Please go ahead.

Yes. Hi. Good morning, everyone, and thanks for the presentation. As my colleague said, congratulations as well for the strong quarter. I have several questions. Maybe the first one, a follow-up. on the recovery of credit cards. Can you elaborate a little bit more on that topic, particularly considering 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 pace 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 one 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 it 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? Thank you.

Okay. Thank you, Sebastian. Let me go through the concept of your first question, and then we'll go to Miquela so she can, again, walk us through the numbers. But basically what we're seeing in credit cards is a recovery. It has to do a bit with the recovery of the macroactivity, but it also has to do a lot with our risk appetite. And as you know, since last year started, we immediately – change our underwriting standards in order to be much more conservative. That, 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, ended up with our portfolio in credit cards reducing by more than 30%, which is very important for us if 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 say, 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 of our credit card portfolio. We've done our homework. We've calibrated our models. We understood the current situation of the Peruvian population. So we feel more comfortable in going back to search for that growth. And this is, again, what we do and we've been doing during the last 20 years. Now, in terms of the Page of growth, probably that will be from – we will start opening gradually because, you know, we still want to see if what we've 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 the low Provision expenses are related to that, are related that we are seeing tremendous good behavior in terms of payments from this set of customers that we have. So the equation is paying very nicely, probably lower revenues coming from those customers, but significant lower provisions as well. So 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 Miquela so she can talk about margins expectations and what we're thinking about fees coming forward.

Okay. Hello, Sebastian. Thanks again for the question. 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, because of private patient funds, et cetera, we have also started to see an acceleration in the in the new client acquisition. So new credit cards. So basically that also builds up more credit turnover. So that is also going to help the growth. So it's 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. It's even lower than pre-COVID level. So there is ample room not to push for more growth now that we have everything set in place, as Felipe mentioned. In terms of margins and reactiva, have in mind that we reached almost 7 billion soles of reactiva loans at the peak last year. What we have seen since last year is, on one side, there are some repayments. And those prepayments are coming mainly in this 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 program. that was approved, that that will not impact the full portfolio. Actually, you know, there are a number of things that have to be met for a company to be able to access to this extension. So it most likely impact only a portion of the reactiva loans. So what we are expecting is a gradual decrease of these outstanding loans from reactiva and that, you know, as they disappear from the balance sheet, that would also help a little bit. And the last point related to I mean, we will start. We have seen a recovery of fees. And as you mentioned, it has been slower than other cooperating trends. And naturally, it's a mixed trend. It's a mixed number because there are some very positive news in fees and there are some others that are recovering slowly. So on one 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 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 also at Intel, legal 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 are retail fees and especially fees related to credit cards. Now, have in mind that the credit card portfolio decreased significantly. 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 decreasing. recovering in the month to come. So putting all together, I guess revenues are, as the guidance says, going to be kind of flattish with lower revenues coming from other income and recovery in fees and net interest income.

Very clear, Miquela and Luis. Thank you so much.

Thank you, Sebastián.

And our next question will come from Jason Mullen with Scotiabank. Please go ahead.

Hello. Thanks for the opportunity to ask questions. 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 markets 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? Thank you.

Hey, Jason, thanks for your question. Yeah, we've been here before 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 the other point of concern is the underwriting standards. We have tightened during the whole last year, and we've started to move on that front. But that's something that we are being very careful still. And lastly, we've always managed our businesses kind of currency neutral. So we're kind of – We've always had that view of being hedged in terms of our operations and our dollar sole exposure, and we continue to do that. I think those four are the main parts that we need to take care of, and that's what we're doing now again.

That's helpful. I appreciate the color and comments.

Great. Congrats on the good quarter. Thank you, Jason.

And our next question will come from Jeffrey Elliott with Autonomous. Please go ahead.

Hello. Good morning. Thanks for taking the question. 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.

Sure. And thank you. Thanks for your question. 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 cap that the central bank has put in. Where we really have been a hit is there's a restriction in order for customers to, for financial institutions to charge, I don't know how you call it, Miquela, how are we calling it in the indescribable late payment late payment fee yeah exactly there's 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 40 million soles in all for IFS, which is, I don't know, less than half percent of IFS's revenues. However, what worries us is that it will not, it is not a good, like 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 revenue's 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. However, as you know, the law has been presented before the Constitutional Court in order to declare the unconstitutionality of the law, and we are waiting to see what happens there. We have expectations that it could be reverted, both for the cap of the rates and also for this late payment fee situation.

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

As bank-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 what has been discussed, like reprogramming of loans due to the pandemic that has been taken care of and a type of interest rate that has already been taken care of.

So nothing really that comes to mind, but we're paying attention in any case.

Thanks very much. Thank you. And our next question will come from Yuri Fernandez with JP Morgan.

Please go ahead.

Good morning, everybody. So I have just a quick question regarding other income, right? This was very 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, we 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 were still high, or would it return to 2018 or 2019 level? I know it's hard because, you know, marketing is very volatile and hard to predict, but I guess it has been very, very strong and would be nice to have more color. If this is like U.S. equities, if this is fixed income, what is driving this and all those trading issues. Thank you.

Okay, thank you, Yuri. Yeah, it's a little bit hard to say. But the way I would look at it is, like, everything related to Interseguro, I would like to – I would look at the historical levels of Interseguro, no? Probably we'll converge two historical levels of Interseguro. And then the ones 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 works. 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 happen in the month 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. I don't know if, Michele, if you have something to add. Maybe a little bit more uncertain will be Intelio's result, but Intelio has been doing year in, year out the earnings potential of the way they manage their investments. So, again, looking at the past successful story of Intelio might be a good predictor of the future. I don't know, Michele, if you want to add something.

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

Perfect. Thank you and congratulations on the strong quarter.

Thank you, Yuri.

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

Please go ahead.

Good morning to all. Thank you for the presentation. My question is regarding digital transformation. You guys have presented an impressive slide with the numbers regarding digital sales, new customers, et cetera. But I would like to understand from a business perspective, how this translates into fees, funding, and other operating metrics, and how do you see the journey for monetizing these impressive growth in users?

Thank you. That's an excellent question. that 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 will put it is we've been able to manage Almost like, let's say, 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 managed, you know, 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 more than a million customers join the bank in the last, I guess, 12 to 18 months would have cost us significantly more than what we are having now. 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 retail franchise. So our acquisition strategy is bringing funds, which are very efficient in terms of cost as well. So that's important. Despite, as Miquela 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, on more reach, on better services for our customers, will be the actual value being brought in is something that we're starting to focus, to measure, and probably in the future, 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, the possibility in terms of commercial terms to bring in more customers on a digital-only approach. We're 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. Okay. I don't know, Michele, if you want to add something more specific on that front.

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 to increase our revenues much faster than cost. And that goes back to the first point 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 two different situations 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 boosting in fees. So I would say that that is like more clear. In other words, an inflow of clients from digital. And now we are 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 that thing that will do not have to do a lot with the growth or the number of clients, not provision from last year and beyond. the low level of the incidence 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 pre-COVID. And I guess there we will see the value of what we're doing materializing. Andres, I hope that answers the question.

Definitely, Mikela. Thank you for the answer, Mikela Luis-Filipe, and congratulations on the result.

Thank you. There are no more questions at this time. We'll turn the call over to the Inspire Group for any webcast questions. Thank you.

We have one question from Joana Castro from Itaú, BBA. Could you share with us the reduction of onboarding costs? What was the cost in 1Q20 and after 1 million new customers, what is that cost today?

Okay. Thank you, Joanna, for your question. I don't know. Michaela, can you help me with that? Or maybe we will have to go to Joanna later if we don't have that detail so far.

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

Yeah. So we'll come back to you, Joanna, on that specific question.

Thanks a lot. We have another question from Isaac Nonto from Prima FP. Okay. What is your perspective on the new repo operations with state-guaranteed loan portfolios? Should we expect a great contribution in the banking system?

Well, I don't know exactly what other banks will do. I will tell you what we're doing. We are already... already doing big reprogramming of our customers at lower rates, and we are not very actively going through the whole program enacted by Cofidi because we find it a little bit that it has too many steps, no? So we've done our own solution for customers, and it's, as Michela showed, every time we're seeing less and less customers looking for this relief. So I think that program we have internally built is being very well accepted by our customers that need help. So we don't expect particularly to be high users of the program. But then, no, if you ask about the whole system, I cannot answer for the other institutions.

Well, at this time, I'm showing no further questions.

I would like to turn the call over to the operator.

And I'm 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. Casasa for any closing remarks.

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