Intercorp Financial Services Inc. Common Shares

Thank you for holding for IFS fourth quarter conference call. The conference will begin in a few minutes. We appreciate your patience. In the meantime, please refresh your screens in order to update the webcast presentation. Thank you. Thank you. Good morning, and welcome to Intercorp Financial Services' fourth quarter 2022 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 to the procedure to follow if you would like to ask a question. Also, you can submit online questions at any time today 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 Borja of Inspire Group. Sir, you may begin.

Thank you, and good morning, everyone. On today's call, Intercore Financial Services will discuss its four-quarter 2022 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercore Financial Services, Mrs. Miquela Casasa, Chief Financial Officer of Intercore Financial Services, Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro, Mr. Bruno Ferrecho, Chief Executive Officer of Inteligo, and Mr. Carlos Tori, Executive Vice President of Payments at Intercore Financial Services. They will be discussing the results that were distributed by the company on Monday, February 13th. 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.pe, 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 feature economic circumstances, industry conditions, the company's future performance, or financial results. As such, The 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 on Monday, February 13th. 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.

Okay, thank you very much. Good morning and welcome to our fourth quarter and full year 2022 earnings call. Thank you to you all for attending today's call. I wanted to start by making a brief summary of our strategy, the one that we are deploying at IFS. As we have shared with you before, our purpose at IFS is to empower all Peruvians to achieve their financial well-being. We're committed to do so through our four operating business segments. Our aspiration includes to increase our customer base by leveraging data and analytics with sound rich management skills. To provide the best digital experience based on operational excellence. This while building a leading digital financial platform to provide profitable solutions in our key businesses that have a clear strategic focus on payments, consumer financing, wealth management, and life insurance. To achieve all these goals, we continue to work on four main pillars. We are developing a simple, resilient, and scalable technology platform for current and future growth. We are becoming a data-driven organization with deep understanding of Peruvians and consumer preferences. We are focused on attracting and developing the best talent within our remote first framework that allows us to increase productivity and to reach the best talent regionally. And we want to become a leader in sustainability. We are adopting stronger and more widespread ESG practices to drive value creation for all of our stakeholders. This is our strategy, and we continue to execute it with a long-term vision. We know that we are operating in an environment of macro and political instability in our country. However, this should not distract us from reaching our objectives. We are being cautious with our operations, given the scenario we are facing, but we remain committed to helping Peru and Peruvians to overcome these challenging times. Regarding GDP growth in Peru, December's monthly figure is expected to be announced today. But looking at the past month's figures and considering that we have had disruption occurred at the end of last year, we would expect weakened full-year growth levels. Prospects for 2023 show most forecasts pointing to less than 2% growth this year. Nevertheless, We remain confident that Peru's fundamentals, as well as a low open international products and the accelerated trend of digital payments, provide plenty of opportunities for our businesses. As you will see during this call, IFS continues to show resilience in its core operations. Our banking franchise delivered solid results in 2022 with growth in net interest income and fees offsetting the requirement of higher provisions. while delivering clear improvements in efficiency. Our insurance segment continues to recover its investment performance, and the wealth management segment posted positive numbers this quarter after two quarters of losses related to market conditions. Finally, our payments ecosystem continues to expand and is in good shape to seek further growth. With this, let me pass it on to Miquela for a detailed update of our results. Once again, thanks very much for attending our call.

Thank you, Luis Felipe. Good morning, everybody, and welcome again, everyone, to Intercourse Financial Services' fourth quarter and full year 2022 earnings call. This time, we will review our financial highlights and key messages, but also our guidance for 2023. All the results you will see today are very much aligned with the strategy that we are deploying, as Luis Felipe has just mentioned, with a clear priority on digital growth with focus on profitability. I will start with a brief summary of financial highlights on slides 3 to 11 of the presentation. On slides three and five, IFS had another strong quarter in banking and payments, good results in insurance, and the first positive quarter for wealth management, showing a recovery in our investment portfolio. With this final quarter, the full year shows very strong core results in banking, insurance, and payments, but still a negative year for wealth management. Reported earnings in the quarter came at 403 million soles, which represents a 3% increase in recurring earnings quarter-on-quarter and shows an important growth in IFS earnings of more than 50% on a yearly basis. ROE for the quarter came at 16.5%, still impacted by a low ROE in wealth management of around 8%, insurance with 13.8%, and as previously mentioned, a strong quarter for banking and payments with 20.2% and 22.3% ROE respective. When looking at the full year figures, reported earnings reached 1,671 million soles or 1,448 million when excluding the one-off register in the third quarter due to the accounting revaluation from book value to the price paid of the previously owned 50% of easy pay at interval. In the annual comparison, earnings showed a decrease of 7% in the reported figures or 20% in the normalized figures, which is mainly due to the very strong and above-average results on the investment portfolio in insurance and wealth management during 2021, which turned negative in the case of wealth management for 2022. This specific trend on the return on the investment portfolio is penalizing the overall yearly trends. Reported ROE for the full year of IFS was 17.7% and was 15.5% when excluding the one-off. The low normalized annual ROE was mainly due to the negative impact from investments as ROE for banking, insurance, and payments for the full year are all high at 19.8%, 26.6%, and 26.7% respectively. On banking, we had a positive quarter in core activity with some signs of moderation due to the macro scenario. The shift in loan mix and repricing continued to positively impact NIM this quarter up to 5.4%. As already anticipated in our previous conference calls and in line with the change in portfolio mix, cost of risk has reached 2.5%, ending the year at 1.9%. This was a very good quarter for the operating leverage of the bank, which drove efficiency ratio down to 38%. On insurance, earnings were shy due to a stronger discipline on pricing and rates paid for annuities, which slightly impacted market share. An ROE of 13.8% was below average levels, despite another strong quarter on investments with return on the investment portfolio at 7.4%. On wealth management, results recovered strongly than previous quarter, reaching a positive result with a 7.6% ROE, still in the path to recovery, however, well below sustainable profitability. Finally, on our payment business, on one side, EasyPay continues with the solid growth in business with acquiring fees up 8% on the quarter and 32% year-over-year, Strong growth in number of merchants and transactional volumes and gaining market share within our volumes in e-commerce this year. Additionally, Plin and Tunki continue with very strong growth of users and transactions, as we will see in more detail further on in the presentation, and which should help us to benefit from the near future interoperability and to advance with our payment ecosystem. Among the key performance indicators for the quarter and the year on slides six and seven, I would like to highlight the continuous improvement in the NIM of IFS. There has been a 20 basis points improvement in the quarterly NIM, driving it up to 5.4%, and the full year up to 5%. Another ratio to highlight is the quarterly efficiency ratio, which stood at 34.8%, going back to pre-pandemic levels. On slides eight and nine, total recurring revenues for IFS grew 6% in the quarter, thanks to the growth register in banking of 7%, payments of 15%, and the recovery in revenues from wealth management from 3 million to 56 million this quarter. On a full year basis, IFS revenues increased 7%, thanks mainly to the increasing revenues of 15% in banking and 22% in payments. On slide 10, the efficiency ratio of IFS was 34.8% in the quarter. The full year efficiency ratio was 36.1% and would be 37.4% when excluding the positive impact from the one-off in revenues. Also, it is important to note that there is an impact in the reported cost figures of IFS of 2022 due to the consolidation of EasyPay figures starting April, which reflects a higher increase in expenses as they are included this year and they are not considered in the base of 2021. Normalizing easy pay effect in 2021, expenses at IFS grew 8% on a quarterly basis and only 3% year over year. This is a very material point as it makes a strong difference with the reported figures and represents a key differentiating element of IFS profitability. We believe this will be the case as revenues continue to increase faster than cost, thus improving the operating leverage of the company further. In fact, 2022 has been a good year in terms of recovery of the efficiency ratio and the positive operating leverage at the banking business, which is the main contributor to the overall cost base of IFS. In the fourth quarter, the efficiency ratio of the bank stood at 37.9%, down from 42.2% in the fourth quarter of 2021. The operating leverage of the bank for the fourth quarter 22 was very strong, with revenues growing 20% year over year and costs growing only 2%. When looking at the yearly figures, the bank cost base has increased 8%, mainly due to three reasons. The higher increase, 21%, is the increase in technology costs and new ventures, which include the technology expenses for our digital transformation, as well as new investments in payments. A 6% increase in personal costs, which is mainly coming from the increase in mandatory employee profit sharing in line with the improvement of the local gap earnings. An 8% increase in variable costs related mainly to credit cards, which is below the percentage increase in credit and debit cards purchases, which generates fees and financing volumes. Other expenses have grown single digit, reflecting our continuous cost efficiency efforts. Moreover, we have continued with our branch optimization efforts, reaching a total reduction in number of branches of 43% or more than 120 branches from the peak in 2016. On slide 11, we have a solid capital position as evidenced by the ratios of Interbank, but also in Interseguro and Intellivote. Core equity tier one ratio at Interbank is at 12% as of December 2022, and the total capital ratio stands at 15.1%, well above the industry's average of 14.4%, despite the strong growth in loans registered this year. Starting January 2023, we will implement some changes to the calculation of capital ratios in line with new regulation published by the superintendency with limited impact for the banking segment and some changes in wealth management established by the Central Bank of Bahamas. Now, I will focus on the six key messages we would like you to take home from this call on slide number 13. First, the macro outlook continues to be challenging. and impacted by the political uncertainty. Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, we continue to work on our two-tier digital strategy showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fourth, mild quarterly recovery in wealth management and above average investment results in insurance. Fifth, we continue to see a positive evolution in our payments business. And finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62 points, improving nine points from last year and a figure that is 16 points above the world's industry average. On slide 14, we are showing the evolution of some of the key macro indicators. GDP growth continues to be low, with an estimate of 1.8% for the yearly growth of the fourth quarter. Interest rates have continued to increase, with the central bank's reference rate at 7.75% and the dollar rate at 4.25%. However, there has been a pause of the new increases in the solace rates during the last week's central bank meeting. The exchange rate has registered ups and downs in the past weeks and is now down to 3.81 soles per dollar at the end of December. Inflation continues high at 8.5% as of December, reverting the first signs of change in trend due to the disruption that registered by the protests in different parts of the country, mainly in the south, and the blockage of highways. On slide 16, moving to the good news of banking, we have continued to see a good performance in activity in the quarter, despite continued slowing down in financing growth, as discussed during the previous calls, as we have just adjusted our credit and the writing standards in specific sub-pockets of low-income clients, which start to see some impacts of the slowdown of the economy and sustained inflation, and now on top of the disruption of December and also January. Moreover, due to the disruption in payments from clients caused by the protests, especially in the south of the country, but to some extent also in other regions, we have given additional payment facilities to clients by rescheduling some payments in consumer finance and to a minor extent also in SMEs. Despite this, credit cards and debit cards purchases continue to increase 7% on a quarterly basis and 28% on a yearly basis. In the same way, balances have increased 8% in the quarter and 29% on a yearly basis in line with the industry. We continue to see important growth in purchases as both credit and debit cards continue in their path of increased penetration in the country, which is still low. This growth has allowed us to increase market share around 100 basis points in the past 12 months for the combined purchases, thanks mainly to our interbank benefit loyalty program. Our increased focus on e-commerce and high-growth product categories, and finally, also thanks to our upselling strategy. New disbursement of personal loans have seen a recovery when compared to the previous quarter, but registered lower year-over-year growth of 8%. On the SME front, disbursements continue to be strong in the fourth quarter and are 17% above third quarter and twice the level of last year, and are helping this portfolio to grow snilely during 2022, starting from a very low base of less than 3% market share in this segment. On slide 17, we continue to see solid double-digit growth in banking revenues, thanks to double-digit growth in net interest income and fee income. Net interest income grew 23%, with a strong contribution of net interest income coming from credit cards and personal loans, but also from the repricing of commercial banking loans. Fee income grew 12%, thanks to the strong growth of credit cards fee income. due to the evolution of credit and debit cards purchases, but also to the sustained strong growth in fee income coming from cash management services in commercial banking. Other income at the bank recovered and was up 9% year over year. All in all, total core revenues grew 20% in the fourth quarter when compared to the fourth quarter of 21, a very strong recovery in banking revenues, which continues with a positive operating leverage as previously mentioned. On slide 18, we continue to see a strong portfolio shift to higher yielding loans. Retail loans reached 54% of the total portfolio versus 49% one year ago. And moreover, credit cards and personal loans reached 22% of the total loan book versus 18% one year ago. Reactiva loans, as of December, represent only 5% of the total loan book, down from 9% one year ago. These effects, together with the increase in the SME loan book, still small, and the increase in rates, is pushing yield on loans upwards 70 basis points in this quarter and 220 basis points in the year, reaching 10.5%, and NIM 40 basis points in the quarter and 100 basis points in the year, reaching 5.4%. Risk-adjusted NIM has remained stable in the quarter due to the increase in the cost of risk. We have also seen rising cost of funds as we start to see both the effect of the rise in the rates of dollars, funds, and the continuous raises in solace rates, as shown on slide 19. Cost of funds reached 3.2% in the quarter, up 40 basis points in the quarter and 160 basis points in the year. We have the best loan to deposit ratio among peers at 101% as of December versus a system average of 107%. On slide 20, as anticipated, we see increasing levels of cost of risk in line with the shift in the loan mix, but also from the impacts of the sustained high inflation and the latest disruption in the economy due to the protests. Cost of risk in the quarter was up to 2.5%, already above pre-COVID levels of around 2%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 4.7%, again above pre-COVID level. During this quarter, we have made some adjustments to the calculation of the expected loss, which includes an update of the forward-looking variables, but also applied a more conservative view on the consumer portfolio, shifting expert criteria from commercial banking to retail banking, which resulted in an extraordinary negative impact in retail and a positive one in commercial. This is the main reason why the reported cost of risk figures show a 6.1% for retail and a reversion of 1.6% in commercial banking. For this reason, the NPL coverage ratio continues to be very high in retail banking at 244%, which is much higher than the 179% that we had pre-COVID. Now, let's move to the third key message on slide 23. Our digital indicators show nice trends when compared to the previous year. Still, there is a way to go in moving these indicators further. As of December, digital customers reached 71% of customers who interact with the bank during the last 30 days, up six points in the past year. Digital acquisition reached 57%, up 19 points from last year, and digital sales reached 64%, increasing 6 points in the last year. All indicators focus on retail. We see an important number of new digital accounts being opened, both for individuals and businesses. As of the end of December, 58% of new retail saving accounts were opened digitally, while 94% of new business accounts were opened digitally. MPS for digital customers continues its path to become a top MPS in the next years, reaching 49 points this quarter, improving three points versus the previous year. Insurance digital indicators show positive developments as well, with SOAD insurance already at 80% and Vida Cash Life Premiums, a digital product, reaching 39% of total life premiums. On slide 25, in line with our digital strategy, we continue to see an important growth in our customer base of 18% in retail, 29% in digital retail customers, and 20% in commercial banking customers, reaching more than 5 million customers as of the end of December. On slide 27 and 28, we're showing improvement in the wealth management portfolio and another strong quarter in the insurance portfolio. Wealth management on slide 27 had a positive yet small return on the investment portfolio, almost entirely reverting losses from other income and strongly improving revenues, up to 56 million in the quarter. This has helped improve bottom line results for the quarter, but remain in negative territory in the yearly figures. Good news for the insurance segment, with another quarter of strong returns on the investment portfolio, with ROIP at 7.4% in the quarter, still above average historical levels. Now, moving on to payments, on slide 30, we are showing strong growth in number of merchants and transactional volumes. Merchants increased 14% in the quarter and 73% year-over-year, reaching more than 1 million. Transactional volumes grew 10% in the quarter and 33% year-over-year. Moreover, e-commerce transactions are gaining share within our total transactional volumes, reaching 17% as of the end of December and in line with our strategy. Revenues continue to grow nicely, 15% in the quarter and 8% year-over-year, supported by the increase in transactional volumes and merchants. We are also including info related to EBITDA this quarter to show the improvement registered this quarter, which reached 26% and 24% year-over-year. We have been working to accelerate the growth of our payment ecosystem by having all our assets work towards a common strategy. We are focusing on increasing transactional volumes, offering merchants additional services, continue to pilot low-risk loans to merchants, and use EasyPay as a distribution network for interbank products as well as a source of float. On slide 31 and 32, Plin and Tunki continue with their accelerated growth. Pling reached almost 10 million users as of the end of December, with interbank participation as main bank account still above 40%, and Tungki users reached 2.5 million. Number of merchants continued to increase as well, or 91% year-over-year for Pling and 65% for Tungki. The number of transactions has seen a strong acceleration in the past three quarters. This quarter, the strong growth of the previous quarter has continued, reaching a 33% quarter-over-quarter for Plink and 45% quarter-over-quarter for Tunkey. We are currently working on getting ready for Plinyapi interoperability. This is an important development for financial inclusion in the country, which the central bank has encouraged, and which should help to bring more people into the financial system, reducing use of cash, which continues to be high in the country. Technical tests start next week, and we expect full deployment to be ready in April. On slide 34, moving on to our sustainability strategy, we have continued to build upon our focus areas. Our efforts in the last 12 months have allowed us to improve our corporate sustainability assessment score this year, reaching 62 points and improvement of nine points as we announced during our last conference call. But now we are also able to compare this result with the world's industry average for 2022, which was 46 points. Thus, we are 16 points above that average, which reflects improvements in the environmental, social, and governance and economic areas. Our latest developments in ESG include on the social front, being all four companies in the top 10 positions of Great Place to Work Peru 2023, Further contents and learnings through AprendeMath, our financial services education platform with almost 700,000 users. And in the governance front, we have received the number one position by Merco on top companies, both in the reputation category and in the ESG category as Interbank for Peru. Now, let me move to the new guidance for 2023 on page 37. And let me mention that insurance figures included in the guidance includes preliminary IFRS 17 figures, which are currently under review and which may lead to some adjustments. The guidance reflects a full alignment with our strategy, which has three clear priorities. One, grow client base and top line in a sustainable and profitable way. Two, provide a top experience to clients digitally. Three, focus on key businesses, including consumer finance, payments, efficient funding, insurance, and wealth management. 2023 guidance goes as follows. First, we are maintaining the same guidance for the capital ratio, which implies capital ratios to remain at sound levels with total capital ratio at around 15% and core equity tier one ratio at around 11%. Second, a continued path to recovery in core profitability with 2023 IFS ROE at around 18%. In terms of loan growth for 2023, we expect, again, high single-digit growth in total loans when excluding last repayments of reactiva, led by low double-digit growth in consumer loans. For 2023, we are focusing the NIM guidance on Interbank. We expect Interbank NIM to be between 5.5% and 6% after closing 2022 at an average 4.9%. Cost of risk for banking is expected to increase in 2023 and to be above pre-COVID levels and reach a number between 2.6% and 3%. Finally, we will focus on efficiency, especially on positive operating leverage. At this time, we are not ready to include the guidance for the efficiency ratio at IFS level, which we will include due during the next quarter once IFRS 17 is fully reflected in the figures. But we are also adding as guidance the efficiency ratio of the bank, as it is one of the main drivers of efficiency for IFS. We expect interbank efficiency ratio to be below 39% for 2023, as we expect revenues to continue growing double digit while expenses don't. On slide 38, let me recap the six key messages of this presentation. First, the macro outlook continues to be challenging and is impacted by the political uncertainty. Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, we continue to work on our two-tier digital strategy showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability. Fourth, there has been a mild recovery in wealth management in the quarter and above average investment results in insurance. Fifth, we continue to see a positive evolution in our payment business. And finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62, 16 points above the world's industry average. Thank you very much. Now we welcome any questions you might have.

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

Hi. Good morning, Luis Felipe and Michaela. Thank you for your presentation and for the opportunity to take questions. My first question is related to the monetization of the digital initiatives. We have seen in the region that the digital transformation has shifted to profitability versus client growth, and also we have detected that the monetization is really coming from having digital deposits and digital loans, while the other products like payments, digital insurance, digital wealth management, the electronic marketplace, are key to build the ecosystem and the relationship with the client, but are not necessarily the key elements that will monetize the client. On the other hand, we have seen that Peru is not really a country that is facing the competition from fintechs that we're seeing in Brazil, Mexico, or Colombia. So can you elaborate on how your digital initiatives would translate into better efficiencies and a higher ROE at a consolidated level, and what would be the timeline to achieve that? And then my second question is a follow-up on your 23 guidance. How should we think about the OPEX growth at a consolidated level? Would it be at the same pace of growth that we saw last year, that's much a double digit? Or do you think we'll be above inflation plus certain digital investments? Any color on that will be very helpful. Thank you.

Okay. Hi. Hi, Ernesto. Thanks for your question. It's really a very profound question that probably will require a many minutes or hours of conversation. But let me take a crack at it to see if at least I can go to start with some of your points. I completely agree with you in terms of a change in the way some companies or firms are looking at their digital efforts. Obviously, we've seen what happened in the market and now the search for growth is switching to profitability or to more specific income-generating activities. Luckily, I think that's the view that we've had since the beginning. As we've mentioned before, we had a two-tier digital strategy. And the first part of the digital strategy, what we call the first tier, is actually to digitize what we do. Okay, so basically there's no magic there. What we are doing is to be able to provide consumers the ability to do in a digital way. everything they do with the interbank or interseguro physically today, but digitally. That has been the premise around what we've been doing. So now like 90% plus of the things that a customer can do with the bank, for instance, can be done digitally. And the focus there has been laser sharp on making sure that that new proposition has lower customer acquisition costs or lower customer serving costs while providing what you can call traditional banking products, let's say, but in a digital way. And we have made lots of progress there. As you know, 71%, 70% plus of our customers do not touch a branch in their interaction with Interbank for the last 30 days, for instance. So, So that's moving ahead. And then we have the other part where we build the second part of our strategy, which is deploying different things to create the ecosystem, like payments, like what we did with Dunkey, like what we've been doing with open banking, connecting with other players that are not financial related so we can complement and provide our services. And that part has also kind of two ways to look at it. Some are completely new ventures that we are very ready to kill if we don't see that the traction kill or pivot, not pivot, if we don't see that attraction is having what we were expecting. We are not in the game of just thinking someday we will see how this gets monetized. We are very disciplined in targeting short-term and medium goals and analyzing exactly how we do. An example of that is what we did with Rappi, for instance. We launched Rappi Bank under certain assumptions and we've been pivoting that effort We have not scaled it because one alternative is to continue pouring money into the effort, but another is to maintain the scale small, trying to find its market, its destiny, its segment. So far, we have not been very successful there. That's why we keep it as a very small initiative. We don't even talk about that anymore because we still have not been able to shape that initiative. But we have that discipline. That's what we do. And then we have other types like payments where we are investing heavily in the ecosystem because, as you mentioned, it will be both an enabler of developing better and a more strong relationship with customers and merchants, creating new avenues and new sources for growth for us, but also it will allow us to improve tapping new segments that we have not been tapping before, like merchants, for instance. So that's the way we're looking at this. We are not based on the fintech or fintech thought of scale will bring everything and sometime in the future money will come in. So we do have short and medium term goals in order to see how these ventures are rendering the results. And you're right, the Peruvian market has not seen lots of disruption from new fintechs or digital players. I think it's the incumbents that are cannibalizing themselves in terms of the business, some with more positive results than others. But we are getting ready, as we've discussed before, to receive potential competition from local fintechs, international fintechs, or digital banks, they will come to this market. We're very conscious of that. It's just a matter of time. And what we're doing is as quickly as possible to receive them when they come to our program market. So I hope that this kind of addressed your question about monetization and what we do is very present while we are deploying our Tier 1 transformation or the new initiatives of Tier 2 transformations. On the number two, in terms of the OPEX, I'm going to pass it on to Miquela. We have obviously our numbers for 2023. She will be able to give you a little more detail. However, I anticipate, as she mentioned, that there might be some changes because of some reclassifications coming from IFRS 17, but she can provide you a snapshot of how we're approaching discipline in OPEX for next year.

Hi, Ernesto. Thank you for the question. I tried to be clear on this effect during the script. Maybe I was not able to, but we have not had a double-digit cost-based growth at IFS during 2022, okay? In the reported figures, there is an important effect that is that we are including the cost of the payment of EasyPay during 2022, but not in the base of 2021 because of the entrance in April. So the comparison that you see there of the reported figures we show double-digit is not comparable, okay? So what we have tried to do in the slide that we show in the presentation, the slide number 10, is normalize the basis. So what you see there at IFS level is that expenses are growing. The fourth quarter is growing only 3% year over year. And with this new base, the efficiency ratio of the fourth quarter is 34.8%. And we're also showing that the bank, which at the end is the main contributor, the full year cost of the bank have only grown Eight percent. No. And I'm providing the breakdown there. That eight percent is coming from a 20 percent growth in everything related to digital transformation, payments, et cetera. And all the other numbers are single digit growth. OK. And this is the reason why we expect the operating leverage for Interbank to continue to be positive growth. next year with revenues that will continue to grow double digit because of rates and everything that we are seeing and expenses growing on only single digit at InterVac. Now, having said so, the reason why we are not at this point ready to show you or to give you a guidance with the efficiency ratio of IFS as we have always done, last year the guidance was between 35 and 37%, is that As we are finalizing the implementation of IFRS 17, there are some, I mean, the definitions in where exactly revenues, negative revenues and costs go within the P&L. So once we will sort that out, we will be able to provide that figure. But I think the important message here is operating leverage will continue to be positive for the bank and for investors. And maybe if I can just add on the philosophical discussion about monetization on everything that we are doing. Sometimes, Ernesto, I mean, what we're trying to do here is also try to link it to the P&L lines, because at the end of the day, if this is going to have an impact on ROE, either it has an impact of revenues or risk-adjusted revenues or costs. So basically, I would say that a strong part of the impact of everything we're doing in digital and analytics is coming from an impact on the top line, which comes from not only more clients, but more cross-sell and more revenues per client, both on loans and deposits. And I can just give you one small example. We have been very active with the digital opening of SMEs accounts. Those accounts... have increased substantially in the last two, three years. And the balances that we used to have there, as I think we show you on the investor days, I mean, went from almost nothing to 1,500 million soles deposits. So that is flow. So that is, if you want a concrete impact of the opening of digital accounts for SMEs. But also, we are expecting improvement in the risk-adjusted figures because everything we're doing with digital and analytics should also have an impact in better understanding the risk profile of clients. And the last thing I would say is that on the efficiency front, the marginal costs of everything we are doing are for sure higher. And this is why we have been able to double the client base of the bank from two point something million three, four years ago to more than five million this year, with costs that have been growing single digit. So I think those three components are the ones that on everything we do with digital and analytics are pointing out to that, which at the end should lead to a positive operating leverage and an improvement in the numbers and sustainable ROE. Hope that helps.

This is super helpful, Luis Felipe and Michela. Thank you very much.

Okay, great, Ernesto. Thank you.

Your next question comes from the line of Yuri Fernandez with JP Morgan. Please go ahead.

Thank you, Luis Felipe. Thank you, Michela. I have a question regarding our cost of risk. It should increase, right, as per your guidance. So if you can share, like, your expectations, maybe you should use, I don't know, a lower GDP and this is basically expected loss model being a little bit more punitive. Or if you are seeing, like, a more concerning, as you mentioned, like, consumer segment having a slightly higher cost of risk. I just wanted to understand a little bit where this cost of risk will come from. And I totally understand your margin expansion, right? So even with this cost of risk moving up, I guess your risk adjustment should still be fine this year. So not super concerned, but just would like to understand why cost of risk is running above the historical level. And if I may, a second question somewhat related to the cost and revenue side. We are seeing a very strong margin expansion, right? Your guidance implying 50 to 100-bit margin expansion. So your NII this year, assuming your guidance for long growth, should easily increase 20-plus percent, right? And as you said, you're very cautious on your G&A. So why not, like, again, you are discussing the cost-to-income guidance. I totally understand this. But shouldn't we not expect a much lower efficiency for you this year on the holding level, given your NII should be so strong? Thank you.

Okay. Yuri, thank you very much for your I'm actually going to pass it on to Michele, but yes, overall, I think she's going to go into details, but it's basically a mixed change that we're seeing. Also, we are seeing low growth impacting all last year and will continue during the next year. The GDP is expected to be around 2% or less for Peru this year, and inflation continues to be high. We are not seeing lots of investments coming from corporates or for companies. So we do think it's going to be a slow year and that will have a toll in the Peruvian consumer and in Peruvian companies overall. So it's going to be a matter of both mix and consumer continue growing, but also deteriorating macro variables that will have an impact in the payment capacity of Peruvians you're taking off. very, very low, lots of liquidity into the system in the last years because of what happened with the pension funds, the help from the government, post-COVID and all that, that is also being taken out of the equation. So that will have a toll in Peruvian consumers and obviously in the cost of risk. If you add to that the political turmoil that we've witnessed recently in the closures of certain regions, the impact in the south of Peru, where we have close to 12 to 14% of our portfolio, Then we have what is happening in the tourism industry, in the restaurants industry, in the transportation industry. It's a little bit tough to actually make right predictions, but everything obviously points to higher cost of risk, given everything what I've mentioned. So maybe now I'm going to stop and pass it on to Michaela to make a couple of predictions of this, if required. And then to talk about the margin expansion and the impact of operator leverage that you asked. Michela?

Hi, Yuri, how are you? Maybe just a couple of additions to what Luis Felipe mentioned in the comparison to 2019, okay? Specifically, why we're expecting a higher cost of risk in 2023 versus 2019. I mean, first, already the mix, when you compare it to 2019, putting together credit cards and personal loans, it's already a little bit, it's getting close, a little bit higher than what it was 2019. But the other important component is that the riskiness within those two portfolios is higher than it was in 2019. Why? Not because at the very beginning we wanted not to build it that way, but because of the sustained inflation. That is a big variable that we didn't have present in 2019. Actually, it was not even present in our expected loss models. We incorporated it, I think it was in the first quarter of 2022. So I would say this is a big impact because the sustained inflation has been there almost the full 2022. And this has started to have an impact. We anticipated it already. We saw something in the second quarter, in the third quarter. Now it's been bigger. And on top of that, we have the disruption of the protests. So we have been doing in December and in January some reschedulings trying to help clients to overcome this moment. And, of course, everything we are doing now, we have some estimates of how that should improve over time in the next month. But I think that the impact is going to be felt and strong, especially in the first quarter. And how it evolves in the next quarter of the year, of course, will depend on what happens with the protest and with the outcome. Now, everything that we are envisioning is ongoing. I mean, on the light that the situation kinds of normalized, normalized, meaning, let's say, controlled uncertainty. No, but this is what we have more or less in mind. Now, moving on to efficiency. I mean, just to make it clear, what I am showing in the guidance now is only at the bank level, okay? So the bank is the one that will have an efficiency ratio below 39. That efficiency ratio for the full year for the bank was a little bit above 40, okay? And that is the result of this positive operating leverage. But what we are not able to show you yet, Yuri, is what will happen with IFS. So basically, I mean, conceptually, I agree, if there is a recovery of the revenues of wealth management, the bank grows nicely, interseguro grows nicely, and payments continue to grow nicely, revenues and the costs do not grow that much, there should be a positive impact. We just need to make sure that with IFRS 17, things do not move, not so the level, and that the comparison, of course, is one that makes sense. So, I mean, conceptually, I agree with you. We will have to check the numbers with the full impact of IFRS 17.

Perfect, Mikel and Felipe. Thank you very much. Thank you, Yuri. Thank you.

Again, if you'd like to ask a question, please press star then 1. Our next question comes from Andre Soto with Santander. Please go ahead.

Thank you. Good morning to all, and thank you for the presentation. My question is regarding the guidance that you are providing in terms of ROE. If you could help us break that down in terms of your different banking units, what are you expecting for ROE? Sorry, I mean the general segment. What are you expecting for banking, insurance, for management and payments?

Okay, thank you, Andres. That I'm going to pass on to Miquela straight.

Okay, Andres. Here, I'm going to tell you, I mean, the medium term that we are expecting, that some of them have slightly changed versus the past. But what we are expecting is, I mean, the bank to be between 18%, 19%. We're expecting Interseguro to be around or a little bit above 20%. This, though, has a very big question mark because of IFRS 17, okay? Because IFRS 17 has a strong impact also on the network of the insurance business. So that ROE might be higher, especially for 2023, okay? So that one we will need to review during next conference call. Inteligo should be above 20%, the same as payments, okay? So 1819, the bank, wealth management and payments above 20%, and we need to fine-tune insurance, having in mind that then when you put all those numbers together, there is a minus, let's say, on the total number of IFS, which is the holding, no? That has their... some expenses, which include mainly the expenses, the taxes, sorry, for the dividends, and some minor, let's say, operating expenses, plus the coupon of the $300 million bond that we issued for the acquisition of Suda. So a combination of the four subsidiaries plus the holding is what leads you to the around 18%.

Perfect. That's very clear, Miquela. And I assume that the recovery in wealth management is driven by improved market performance. Can you please tell us a little bit about that portfolio, both for the insurance and wealth management? What is the duration and what are the risk factors for this assumption for improvement of wealth management not to happen?

And maybe I will pass it first to Bruno for wealth management and then to Gonzalo for insurance.

Yes, so at Intelligo fixed income is about 65% of the portfolio, duration of our portfolio today is between four and a half and five. What to expect? We think we're getting towards the latter end of the, of the cycle with regards to rates. So that should be beneficial for the portfolio. We've already seen in late last year, December and beginning of this year, fixed income portfolios recovering nicely uh and then so that should be positive and and again we'll hopefully volatility will come down on on the equity side as well and so uh should be a much better year we hope for for the investment portfolio on the wealth management side okay so uh with regards to interseguro uh around 80 percent of our portfolio is fixed income

The rest is divided evenly between equity and real estate. And with regards to the fixed income portfolio, we are actually hedged both in terms of duration and currency with our liabilities. Remember, we sell long-term liabilities in the form of annuities, and they have a duration of around... 13, 14, which more or less matches the duration of our portfolio for fixed income.

Okay.

Thank you.

Thank you, Andres.

Your next question is a follow-up from Yuri Fernandez with J.P. Morgan. Please go ahead.

Thank you, guys, for the follow-up. Just regarding refinancing loans, I guess Michela mentioned being more active, and we heard this from other banks. How the provision works for refinancing loans? Do you move to migrate to Stage 2, Stage 3? If you had to move some loans to that, how should we think about provisions for refinancing loans? Thank you.

Okay, Michela.

Yes, let me take that, Yuri. I mean, actually, under IFRS, these clients, some of them already had a significant increase in the risk profile. So they were already on stage two. So the fact that we have rescheduled them on some sense is not impacting now provisions anymore. Of course, if they at the end pay. OK, so what we need to see is the behavior of the refinance clients, because the portion of them that they may not pay, of course, then we'll go to stage three and require more provisions. OK, but I would say that a big portion of them were already on stage two. And then we also have the impact of forward-looking and the expert criteria that we have in the consumer's portfolio specifically that is kind of a buffer to cover some of those clients who might not pay those reschedulings. Now, the volumes that we have rescheduled during December and January, of course, are bigger compared to what we were doing in the monthly figures of 2022, but our very far away from what we did in COVID. We're talking different dimensions now because this is kind of more, I mean, localized, south of the country and some other clients. So there is an impact, but it shouldn't be as big if things go back to normal, let's say.

No, super clear. Thank you, Michela.

Our next question comes from Juan Ricalde with Scotiabank. Please go ahead.

Hi, good morning, and thank you for taking my question. My question is related to the loans to SMEs. So we saw a very strong growth in terms of SME loans diversions growing more than 100% year-on-year. So the question there is related to, so what part of this growth is related to EasyPay? And the second question related to this would be looking forward, should we expect a deceleration? And what kind of growth should we expect for SME loans in 2023?

Thank you. Okay, thanks, Juan, for your question. Uh, yeah, we've, we've grown very nicely in, in SMEs during that last year. Um, remember that we are coming from a very, very small market share of around two and a half, 3%. So we have plenty of room there. As you recall, we participated actively, very actively in, in, in reactiva for this type of customer. So we were able to get connections and get to know them better. Um, enhance our models and the whole theory around participating in Reactiva for SMEs way beyond our natural market share. Those loans have been going through their course, guaranteed by the government, but we've been able to capture some customers, clients there. And that's the result of what you've seen last year. And we expect that to continue in the coming month as well. Although we have been a little bit shy in the last couple of months, given the current situation in Peru, none of them come from Mississippi. That's still a small project that we have there. We have a couple of pilots, but basically not significant yet. In terms of what we would expect for next year is something similar to what we did last year, you know, in terms of overall disbursements.

That's helpful. Thank you for the comments.

Thank you.

At this time, we will take the webcast questions. I will now turn the call over to Inspire Group.

Thank you, operator. We have some questions from the webcast. The first question is coming from Greg Mitchell from ADP Ventures. There are two questions here. Can you please discuss how the efficiencies of less retail branches has led to efficiencies in headcount? And the second question is, can you share how the structure of your organizational chart will evolve as you move towards the two-tiered digital strategy and incorporate new types of employees?

Okay, thanks very much. Hi, Greg. Thanks for your question. It's a great question, actually. Let's see. Roughly, let's go through numbers. In Interbank, we got to a point where we had close to 7,300 or 400 employees. Today, we're operating with around 6,000 employees. So that's the direct impact of efficiency. However, it's not that every branch that we've closed gets away people. We are hiring new people for our call centers. Again, the digital model brings in places where you need to grow to reinforce your relationship with customers, but that's all in all the numbers, around 1.2K less employees than what we had when we had the whole branch network. And the organizational chart, that's a fascinating question. We are currently operating under like, let's say two types of organizational charts. the normal, the one that everybody knows, the ones that we still need to see because we've been deploying an agile methodology of working throughout the organization. So we have that type of organization inside our organization. We are deploying more of this into other areas. We started by technology. We expanded from technology to digital, then to retail, and we continue to span that. We're connecting with risk management and others. Actually, we have a project called Agility at Scale that we are starting to deploy for this year. And then there we are operating based on Agile cells, Agile teams, tribes, and all that. If you take a look, hopefully we will resemble more Spotify in terms of the way they operate. That comes with giving the new talent more empowerment, more responsibilities, the ability to take away hierarchical structures and all that to become much more lean. or organization. Luckily, the culture that Interbank had was very flexible, not very bureaucratic. So this is helping us go through the transformation. It is a challenge because, again, but we're moving towards agility and skill if you want throughout our operations. So I hope this... This answered your question, but if you want, like, send me an e-mail. We can get a coffee and discuss this. And I know it's probably one of your passions as well.

We have another question from Isaac Nonto from Prima IFP. When will the interoperability plinjape take place? What kind of services are allowed to offer through the interoperability?

Great. Well, thanks very much. That's widely known in the news, but I'm going to pass it to Carlos so he can answer that.

The interoperability will be starting in April, and initially it will be just P2P transfers. There will be a second phase later in the year, and the April interoperability will be between Plin and Yaput. And then in June, July, every bank should be able to interoperate through a cell phone. But most, well, most clients are already either in JAPE or Plin. So it shouldn't be a big change. And then the next phase is QR codes. You will be able to read QR codes from each other. That should be coming starting July. So that's kind of that. That's the interoperability. There's no other services when I talk about interoperability.

The next question comes from Daniel Merida from Diviso Bolsa. Could you consider some extraordinary dividends or maybe a buyback program during 2023?

Hi, Daniel. I saw your question. It talks also about guidance and ROE for next year and where our stock is trading now. We're always looking at ways to enhance shareholder value. The first track is executing our strategy and making sure IFS growth based on core strategic pillars. That's what we're doing. Then in terms of, uh, extraordinary dividend or buyback, we're always analyzing that. Uh, we have, we're not, we have not taken any decision. It's obviously under analysis. We see where the stock trades and the opportunities that that brings. Obviously you have to, to, to go over, you know, all that by the book things, no, but, um, Not so far. That's not under discussion or review, although we usually take a look at different alternatives.

The next question is coming from Fabricio Lavalle from Profuturo ICP. Given the central bank recently stopped hiking rates, how much time do you expect need to still be increasing? And how much lag is there between rate hikes and NIM expansion?

Okay, let me take a crack and then maybe Miquela can compliment. Remember that one of the reasons NIM is expanding is because of the switch in the mix. Again, COVID hit us very hard in terms of the evolution of our consumer book and that's growing nicely and we expect that to continue. That will have a toll in our NIM composition. And then the other part will be the increasing rates. We really don't know if this pause that Miquela mentioned will take the central bank. It might really pause or it could regain in terms of traction for further rates. It all depends on how inflation abates or not. But let me pass it on to Miquela to see if she has a little bit more color in terms of the timing.

Fabricio, I mean, first of all, have in mind that what we're expecting for 2023 is that rates will continue to be high at least the first half of the year, and at some point they will start to decrease. depending on which estimates you see, it can be the third quarter or it can be in the fourth quarter. What we have seen in the past, and you can see it in the evolution of NIMH, NIMH has improved I mean, substantially during last year, but it is just a fraction of the increasing rates that we've seen. We've had during 2022 more than 500 basis points increasing in soles and also a very big number in dollars. And the increasing NIM is just a fraction of that. Why is that? It's because, of course, you can reprice a portion of the portfolio with the new disbursement, but not the stock. And the same happens with the liability side, where the repricing actually, it's a little bit faster. So For 2023, we are expecting still NIM to improve because the full year effect of what has taken place in the increasing rates in 2022 will become or will materialize in the numbers during 2023. And that is a very big number. And then if we have the decreases in rates in the second half of the year, we will start to see some impacts first in the cost of funds because of the portion of institutional deposits. And then just after that in the asset side, maybe a little bit faster on the commercial banking side, but it will take some more time for the rates on the retail banking to go down with the reference rates. I hope that helps.

The last question comes from Daniel Mora from Credit Corp Capital. What would be the strategy of loan growth in 2023 considering the uncertainty and economic deceleration? Do you expect to continue growing strongly in credit cards despite the risk of higher MPLs? What is the guidance of credit cards loan growth in 2023 and expectations of MPLs in this year? And the next question is, can you provide further details regarding the contraction in annuities during the quarter and what could be the outlook for the different insurance products in 2023?

Okay. Thank you, Daniel Mora, for your question. Let's see. Do we expect to continue growing credit cards? Yes, we do expect to continue growing both in our consumer book Obviously, at a more moderate pace that we've witnessed during the last year, because part of the growth of last year was a recomposition of our whole group of customers that, because of the situation during COVID, just decreased their outstanding balances, and we've been recouping that. Actually, as you are aware, we've been more disciplined in terms of cutting underwriting or improving underwriting standards, and that had a toll in growth, especially for the second half of the year, and we expect that to continue. So probably we'll continue growing as the guidance provided by Miquela, low double digits in terms of that, and the guidance on cost of risk is there. Now, we do expect, given the situation, cost of risk to improve a bit, and also NPLs, following that path as well. For the second part of your question, let me pass it on to Gonzalo, so he can talk about annuities.

Sure, thanks. Okay, regarding annuities. First of all, let's remember that right now, since in the last five years, most of annuities are related to the disability and survivor benefits kind of annuities. Retirement annuities are practically non-existent after the 95.5 law, which allowed people to withdraw their funds from the AFP when they reach retirement age. So right now it's mostly disability and survivor benefits. What happened in 2020 and 2021 was that that market increased significantly because of the increase in death rates in the country due to COVID. So what we're seeing this year is that the annuities market is going down back to normal to what we had in 2019. So we expect a a level similar to what we had in that year. Now, right now it's being discussed the further retirements from the AFPs. We are not sure yet how this might impact or if it's going to impact the disability and survivor benefits insurance. But again, because we already have no annuity sold for retirement, that part of the business is not impacted. Now, with our other products, life insurance, bank assurance, and digital products, we expect to continue very high growth as we have seen last year. We're talking about double-digit growth, and we expect that to continue. We haven't found any deceleration in any of those products.

Great. Thank you, Gonzalo.

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

There appears to be no further questions at this time. I would like to turn the floor back over to Mrs. Casasa for any closing remarks.

Okay, just to thank you again, everybody, for participating to this call, and we will see each other again on our first quarter 2023 conference call. Bye. Stay well.

This concludes today's conference call. You may now disconnect.