Intercorp Financial Services Inc (IFS) 2021 Q2 法說會逐字稿

Good morning, and welcome to Intercorp Financial Services Second Quarter 2021 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its second quarter 2021 earnings. We're very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; and Mr. Bruno Ferreccio, Chief Executive Officer Inteligo. They will be discussing the results that were distributed by the company yesterday, August 11. There is also a webcast video presentation to accompany 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 InspIR 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 future economic circumstances, industry conditions, the company's future performance or financial results. As such, statements made are based on several assumptions and factors that could change, causing actual sales to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued yesterday.

It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services, for his opening remarks. Mr. Castellanos, please go ahead, sir.

(inaudible) quarter 2021 earnings call. Thanks, everyone, for making the time to attend our call. I hope you and your families remain safe and healthy. Let me start by giving you a brief overview of the health and macro situation in Peru. On the sanitary front, Peru was able to speed up its vaccination process, and as a result, currently around 27% of the population or 8.9 million individuals have had their first dose, while 19% have also received the second dose or a single-shot vaccine.

Focalized lockdown measures have softened across the country, and numbers indicate we are ending the second wave. We know that we must get ready for a third wave and the new government is planning accordingly. The improved sanitary conditions continue to have a positive impact on the economic recovery of the country. Despite volatility witnessed during the electoral cycle, economic activity in the country has continued to show a robust revamp.

Accumulated GDP growth levels as of the month of May point towards a 20% increase as a result of important base effects, strong public investment and tailwinds from higher commodity prices and improved trade balance. For the rest of the year, growth will probably trim down towards low double digits as the base effects dissipates over the next couple of quarters.

As we all know, on July 28, the new government took office. Political challenges remain high in the country as the government takes its first steps and the business community and the population, in general, assess the nominations in different positions, including the Cabinet, and the first measures are announced. The consumer and business confidence indicators continue at low levels, signaling that economic activity will likely slow down in the coming months. In the meantime, we have seen volatility in the exchange rate and the weakening of the local currency, which has had effects on inflation.

Under this scenario, IFS' franchise continues to prove its strength and resilience. We remain confident that our team has experience and skills to manage through trying times as we have done successful in the past. Again, our clear strategic focus has taken IFS to reach another solid quarter, with strong results in all operating segments. I'm pleased (inaudible) in our strategic businesses.

In each of our subsidiaries, we have top results within the Peruvian financial system. Our liquidity, capitalization and provisioning levels, together with our risk management skills, our strong focus on efficiency, our digital strategy and our presence in the mind of our customers, give us confidence that our platform is well positioned to continue helping Peruvians with their financial needs in the future. The opportunity continues to be there as financial services underpenetration in the country remains high. We have the platform to make our work good.

I will pass it on to Michela to update you on the strong results of this quarter with a detailed review of our operations. Thank you, and please remain safe.

Thank you, Luis Felipe, and good morning, everybody, and welcome again to Intercorp Financial Services second quarter earnings call. This time, we have divided the presentation in 4 parts, which include financial highlights, key messages, the results by segments and trends and takeaways at the end.

I will start with a brief summary of financial highlights on Slides 2 to 5. The bank highlights for the quarter are: For IFS, we've registered another strong quarter with return on adjusted equity at 20%. With this, the first half earnings of PEN 984 million reached a 21.7% ROE. We've registered a 17.2% year-over-year growth in revenues for the first half. Efficiency ratio stays low at 31.2% in the first half, improving almost 200 basis points year-over-year. We continue to have a solid capitalization, strong liquidity and manageable dollarization levels. Our digital indicators continue to support IFS' strategy.

For Interbank, earnings continue to build up with an 18.8% ROE in the first half. Good news is that we have seen accelerated growth in retail loans in the second quarter, which has allowed us to gain 20 basis points market share during this quarter; 14.5% market share in retail deposits, again, up 40 basis points in the quarter and 70 basis points year-over-year; the first quarter with an improving NIM since the pandemic started, up 20 basis points Q-on-Q; and the second consecutive quarter with cost of risk below pre-COVID levels. Moreover, we've seen a recovery in expenses, which is driven by the recovery in activity, but we continue with our focus on efficiency and branch rationalization.

For Interseguro, solid profits in the first half drove ROE up to 50% due to higher results from investments. It is another quarter with a strong return on the investment portfolio at 7.7%. And gross premiums plus collections have increased 7.4% during the quarter with regular annuities picking up. We've also seen a strong gain in the annuities market share to 31.2% in the second Q.

For Inteligo, 30% ROE for the second consecutive quarter with a significant year-over-year growth in the first half '21 revenues, mainly driven by other income but also by net interest income. Other income has been positively affected by mark-to-market on the investment portfolio and asset under management plus deposits grew 7.3% only in the quarter, which has driven the yearly growth to 20.7%.

One of the very positive news of this quarter again is that the top line has continued to be strong, driving the first half '21 growth in revenues to 17.2% when compared to the first semester last year. This is mainly thanks to a recovery in most revenue lines, which includes net interest income, fees and other income, indicating an improvement in the quality of top line. This recovery has taken place in all 3 operating companies.

Now I will focus on the key messages we would like you to take home from this call on Slide 7. There are 6 key messages, which we will cover in detail in the following slides. First, the economic recovery in Peru continues. Second, we have a strong balance sheet with capital liquidity and dollarization levels substantially better when compared to pre-COVID levels. Third, we have seen a strong recovery in our core indicators in all 3 operating companies. Four, the digital trends continue to support IFS strategy, which translates into growth of clients and business. Fifth, the cost of risk continues to be below pre-COVID levels. And the sixth one is that we continue with our focus on efficiency and branch rationalization.

Moving to Slide #8. We can see that the economic activity in Peru has continued to recover from the low levels registered in the second quarter of last year. Since March '21 onwards, we are seeing double-digit monthly GDP growth rates as well as in the main economic sectors. As a result, Peru's GDP figure is now near pre-COVID levels, evidencing a robust rebound. In the period comprising January-May 2021, the GDP growth rate is 20% year-over-year and was favored by the reopening of the economy, the progress in the vaccination program, as mentioned by Luis Felipe, and the base effect from last year when most of the activities were suspended to contain the pandemic. The positive performance is widespread in sectors like construction, manufacturing, commerce, metals and electricity and water. However, GDP growth should soften over the coming quarters as base effects dissipate, expecting a growth rate of around 10% by year-end.

On Slides 9 to 11, the second message relates to capital liquidity and dollarization. On Slide 9, we continue to have a solid capital position in all 3 operating companies of IFS. Our total capital ratio as of the end of June was 16.5% at Interbank compared to 15.4% of the system as a whole and the minimum 8.6% required by the superintendency. This means we have increased to almost 800 basis points the buffer in our total capital ratio after the superintendency decided to lower temporarily the minimum requirement. Our core equity Tier 1 ratio improved 10 basis points in the quarter, up to 11.5%. At Interseguro, our solvency ratio stands at 160%, well above the 100% required, while at Inteligo, our capitalization ratio is 22%, again, well above the 8% required.

On Page 10, we continue to register high levels of liquidity. Up to March, there was 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 Perú loans. Starting April and after the first calls for the second round of the presidential elections, we started experiencing a tightening of liquidity in the financial system and at Interbank. During this second quarter, total deposit base at Interbank decreased 3.1%, reducing the yearly growth to 9%. There was an outflow of dollars from the system, which decreased the liquidity in that currency. As -- but as of the end of July, the total liquidity of the system in both currencies remains good, and the loan-to-deposits ratio for Interbank is at 94%, still better than pre-COVID levels, which were above 100%.

Moreover, the loan-to-deposits ratio in both currency is at healthy levels with the loan-to-deposit ratio in soles at 107%, well below the 123% of the system. Good news is that during July, our retail deposit base increased 6% in 1 month as July is typically a very liquid month. We continue to have ample liquid financial assets with PEN 26 billion at Interbank, out of which more than PEN 16 billion are cash and equivalents and have around PEN 900 million at IFS stand-alone level, out of which around PEN 250 million are cash and equivalents, which could cover IFS' current obligations.

On Slide 11, our loan book has a manageable level of dollarization with little exchange rate risk as the remaining commercial loans in dollars correspond to export companies with no currency risk. Only 23% of total loss is comprised of dollars and only 6% of retail loans.

Moving on to the third message on Slide 12. Monthly operating trends at IFS have continued to show positive developments in activity for this quarters as well as for July 2021. At Interbank, debit and credit cards turnover has continued to increase substantially, reaching 45% above pre-COVID levels, new disbursements of payroll deduction loans to the public sector employees are growing 28% versus pre-COVID levels while mortgages have registered a slowdown in growth in July. They're growing 3% versus pre-COVID levels after reaching a record in June. Total fees for Interbank are at 82% of pre-COVID levels, with commercial banking fees recovering faster than retail fees, mainly thanks to the new business coming from the aggressive Reactiva loans strategy. In the case of Interseguro and Inteligo, the recovery was much stronger with gross premiums in July this year at 136% versus pre-COVID levels and asset under management at plus 21% in July versus February last year.

On Slide 13, we are showing the quarterly evolution of total revenues for IFS. We have seen a second strong consecutive quarter in terms of total revenues, which drives a 17.2% increase in revenue during the first half of the year. This growth is mainly coming from, first, stabilization of Interbank revenues; second, a strong recovery in revenues coming from other income from investments but also other sources of revenue at Interseguro and Inteligo. 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 the net interest income and NIM coming from low-yield Reactiva loans, excess cash, portfolio mix and a slower contribution -- but smaller contribution, sorry, of credit cards in low rates environment.

Now moving to the fourth key message on Slide 14. Our digital KPIs have stabilized during last month as the strong growth in activity is reflecting a more stable mix in channel usage. Digital users as of July are 78% of our customer base, up 18 points in the past 2 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 correspondent agents only for cash-in and cash-out, have reached 56% in July, up 25 points from June 2019.

Digital sales have also performed well. At Interbank, retail digital sales reached 55% in July; and at Interseguro saw our digital sales reach 81%, both increasing sharply in the last 2 years. We have continued to see an important number of new digital accounts being opened for individuals. As of the end of July, 61% of new retail saving accounts were opened digitally. And new digital client acquisition of retail customers reached 45% compared to 14% in June 2 years ago. Our investments to build our digital capabilities during the last year have definitely played to an advantage for our customers and operations under the current circumstances.

On Slide 15, we have reached more than 4.2 million retail customers at the bank and 116 businesses. Our retail client base has increased 14% CAGR in the past 2 years, while our commercial client base has increased 37%. Our 100% retail digital customers has grown at a CAGR of almost 16% in the past year, reaching almost 1.5 million customers.

PLIN, the P2P payment feature among multiple banks operating with cellphone numbers, is already active in more than 4.2 million users as of the end of July, 41% out of which use Interbank as their key account. And Tunki, 100% digital solution for payments relaunched on February last year, has reached 1.3 million users as of the end of July. Moreover, both payment initiatives have aggressively started to increase their number of merchants, reaching a combined number of 650,000 as of the end of July, 5x higher than 1 year ago.

The first key message refers to the low level of provisions registered for the second consecutive quarter at 1.7% below pre-COVID levels. The 3 positive trends that we have been experiencing in the past quarter 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 June, outstanding rescheduled loans were PEN 7.8 billion or 19% of the total loan book. This number represents a 39% decrease versus the peak of June last year. This is true for both retail and commercial 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 a very good payment behavior among Interbank's clients. As of July 2021, 99% of our total retail portfolio has already had a payment due. 71% of the retail portfolio has not been rescheduled and is registering a very good payment behavior. 99.1% of clients are paying their installments, 0% has requested any additional relief and only 0.9% has not paid. Of the 29% of the retail portfolio which has been rescheduled as of July, 97.4% of clients are paying their installments, only 0.1% has requested an additional relief and only 2.5% has not paid. Again, summing up, new relief requested and not paid, this represents a low number of 2.6% as of July, which compares to 3% as of April.

A similar payment behavior has been observed for credit cards as of July, with percentage of payments at almost 99% for the 63% of the portfolio that has not been rescheduled, while almost 99% for reactive reschedulings, 97% for unilateral reschedulings and around 96% for structural reschedulings. As far as SMEs is concerned, the outstanding rescheduled portfolio is small, around PEN 750 million, out of which 96% of clients have been paying their installments out of the 98% that have had payments already due as of the end of July.

On Slide 18, the third positive trend is the low level of provisions. Cost of risk for the quarter was extraordinarily low at 1.7%, below the 1.8% of the previous quarter and below pre-COVID levels of 2.2% for 2019, mainly due to the low cost of risk in retail, which today has a lower contribution coming from credit cards, which is the problem 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 3.2%, down from 3.4% in the first quarter and below the 4% for the full year 2019 pre-COVID levels. Commercial banking continues to have low levels of cost of risk, thanks to our small participation in the SME segment and was 0.4% for the quarter and below the 0.5% for the first quarter. NPL coverage for the bank as of June is at almost 170% and for retail loans, it's at almost 200%. Our stock of provisions as of the end of June represents around 7% of our total loans, excluding Reactiva guarantee portion of loans.

Finally, the last key message on Slide 19 refers to the discipline and proactive management of cost IFS has pursued before and after COVID started. During the first half '21, we have registered a very low efficiency ratio of 31% at IFS, below the 33% registered last year and well below our guidance of 35% to 37%, mainly thanks to the positive impacts on revenues previously described, which have contributed to our operating leverage as deposit leverage as the 17% increase in semiannual revenues more than surpasses the 11.9% increase in cost. This quarter, though, we have seen a recovery in expenses driven by banking activity with -- when compared to the previous year. It is important to remember that during 2020, IFS was one of the few financial services institution in the region which was able to execute an aggressive cost-reduction program, which ended up reducing the total cost base for IFS 5% for the full year.

At Interbank, efficiency ratio is at 40.8% for the semester, above the 37.2% registered last year as expenses have increased 9.5% as we start to see increases in variable cost in line with the recovery of the activity as well as continuous expenses in technology as anticipated during our 2 previous conference call and reflected in our guidance.

Moreover, we have continued with our branch optimization program started in 2016 and have closed additional 62 branches since the pandemia started, reaching a total reduction in number of branches of 33% or almost 100 branches from the peak in 2016. Expenses will continue to increase during the next quarters when compared to the previous year driven by variable costs, investments in technology and some additional expenses related to our commercial alliance with Rappi. Guidance remains at 35%, 37% cost income ratio for the full year for IFS, most likely we will be in the lower end of that range.

Now let's have a closer look at some additional indicator by segments in Slides 20 to 27. On Slide 21, we are showing a recovery in most of our key banking indicators, including for the first time since the pandemia started, NIM, which was up 20 basis points in the quarter. The recovery of NIM in the quarter is mainly due to a recovery in yields. Total fee and other income decreased 14.5% in the quarter, mainly driven by the strong investment results of the first quarter with fee income, though, recovering and growing 1.7% in the quarter and 44% when compared to the same quarter last year. Other expenses increased 3.9% in the quarter and 24% when compared to 1 year ago, as the second quarter last year was the strongest in terms of lockdown, which strongly impacted the level of activity. Efficiency ratio for the quarter is at 42.5%.

On Slide 22, the positive news come from the accelerated growth in the retail loans, which reached 4.1% in the quarter, resulting in a gain of market share of 20 basis points in the quarter and also a recovery in the size of the portfolio back almost to pre-COVID level. We have registered a strong growth in all retail products with consumer loans growing 3.7% in the quarter, mortgages growing a record 5.7% and payroll deductible loans to the public sector growing 2% this quarter. Moreover, July has seen a further acceleration, especially in credit cards. We've registered a 1.7% growth in 1 month, the highest seen in the year so far. Commercial banking grew 7.2% in the year, mainly due to Reactiva but was down 1% in the quarter.

On Slide 23, during the second quarter, there has been a reduction in the total amount of deposits of the system. In the case of Interbank, deposits decreased 3.1% in the quarter but grew 9.1% year-over-year with retail deposits decreasing 0.7% in the quarter but growing 11.3% year-over-year, which has allowed us to gain 40 basis points market share in the quarter and 70 basis points year-over-year to a record 14.5% as of June. Cost of funds remained stable at 1.4%, representing a reduction of 80 basis points year-over-year. This positive development came from several factors like decreases in market rates, a better funding mix and higher funding from the Central Bank.

On Slide 24 to 25, let's have a look at Interseguro. Quarterly premiums continued to show a very strong growth of 7.4% Q-on-Q, driving the yearly growth to more than 100%. Most business lines grew, with mandatory annuities leading the growth in premiums. Interseguro registered also a strong gain in market share in annuities in the quarter, reaching 31.2% compared to a 28.7% market share in the previous quarter.

On Slide 25, Interseguro's investment portfolio decreased 1.3% on a quarterly basis, mainly due to sales in the portfolio but grew 3.8% on a yearly basis. Results from investment continued strong this quarter but below the extraordinary high first quarter with return on Interseguro's investment portfolio still high at 7.7% this quarter, well above the 6.3% registered 1 year ago.

Moving on to our wealth management segment on Slide 26. Inteligo posted strong revenues in the quarter, again, beating the extraordinary high level registered in the first quarter. Net interest income grew more than 5% in the quarter. Other income grew almost 10% with fee income flat after a particularly positive trend last quarter and more than 20% up versus last year.

On Slide 27, Inteligo's assets under management plus deposits had a strong growth during the quarter of 7.3%, driving the yearly growth to 20.7% and reached PEN 27.2 billion in June. Earnings of PEN 90 million for this quarter are above the strong first quarter of PEN 87 million and drives the semiannual earnings to PEN 177 million with a 30.9% ROE.

On Slide 29, we are providing a comparison of our semiannual results with the operating trends expected for 2021. As we mentioned in our previous conference call, 2021 will be a year of rebuilding the portfolio at Interbank to foster growth in the coming years. Interseguro and Inteligo should continue to grow despite an extraordinary good year for both companies in 2020 despite COVID. First, talking about capital. We expect Interbank capital to remain at sound levels, well above regulatory requirements. As of June, total capital ratio of 16.1% (sic) [16.5%] and core equity Tier 1 ratio of 11.5% are above the guidance.

In terms of profitability, the first half '21 IFS return on adjusted equity is at 21.7%, well above the guidance and should be above the 14% for the full year 2021. Given the strong results of the first half, we expect to beat our guidance by at least 200 basis points. The extent of this beat, of course, will largely depend on the speed of the recovery in activity. Talking about loan growth. Year-to-date loan growth as of June was 4.3% for retail and minus 1% for commercial, in line with our guidance. We expect retail loans to continue building up by year-end.

NIM was 3.9% in the semester but 4% in the quarter, growing 20 basis points, which brings us to the low end of the guidance provided, which is what we are expecting also for year-end. In terms of cost of risk, it came again below the guidance at 1.7% in the quarter and 1.8% in the semester, slightly below pre-COVID levels. So we are expecting cost of risk to start gradually increasing as the credit card portfolio builds up and we continue maintaining our guidance of around 2%.

In terms of efficiency ratio, the efficiency ratio for IFS was 31% in the semester better than our 35% to 37% guidance. We have continued with our cost-efficiency efforts and branch rationalization program, and we expect an increase in expenses in the coming quarters in line with the recovery of activity, which drives variable costs and further acceleration of our digital investments, including building our venture with Rappi. So we should end up the year in the low end of the guidance.

Moving to Slide 30. We wanted to give you a brief summary of the main actions we have undertaken towards a stronger corporate governance and ESG disclosures since the IPO in the New York Stock Exchange in July 2019. We have undertaken a series of actions, which include that right after the IPO, we improved our reporting standards in line with best practices in the financial services industry. Starting September 2019 and up to April this year, we have implemented SOX controls with KPMG, resulting in improved internal controls and procedures.

During the second quarter 2020, we appointed an independent audit committee at IFS and the internal SOX auditor. In the first quarter this year, we appointed a new Board, including a representative of minority shareholders for the private pension funds, and we included new disclosures related to ESG in our reports. On the second quarter this year, we have successfully concluded our first audit on SOX controls performed by Ernst & Young. And we are currently participating, for the first time, in the Standard & Poor's Global Corporate Sustainability Assessment.

Finally, on Slide 31, I want to close the presentation with a brief summary of the 6 key messages discussed before. First, the economic recovery in Peru continues. Second, IFS has a strong balance sheet with capital liquidity and dollarization levels substantially better when compared to pre-COVID levels. Third, we have seen a strong recovery in our core indicators in all 3 operating companies, which is reflected in revenues and profitability. Fourth, the digital trends continue to support IFS strategy, which translates into growth of clients and business. Five, cost of risk continues to beat pre-COVID levels for the second consecutive quarter. And six, we continue our focus on efficiency and branch rationalization.

Thank you very much. Now we welcome any questions you might have.

(Operator Instructions) And the first question on the phone today comes from Ernesto Gabilondo from Bank of America.

Congratulations on your strong second quarter results and your ROE of above 20%. My first question is on the economic and political outlook. We have seen that economic growth remains as one of the highest in the region. However, political uncertainty has generated an important impact in the Peruvian stocks. I believe one of the key concerns were related to who will be appointed at the Central Bank. According to some Peruvian local newspapers, President Castillo wants to keep Velarde as the Head of the Central Bank, something that could provide continuity and could reduce risks related to tougher cap rates in the sector. So can you give us an update on what are you expecting at the Central Bank and what are the reasons that you are finding to be more optimistic on the political front?

Then my second question is on loan and net interest income growth. We have seen loan growth continues to show modest recovery. However, as you pointed out, retail is already picking up. The economy remains strong. So how should we think about loan growth and NIMs in the second half and maybe some potential trends for the next year?

Ernesto, thank you for your question. Let me take on the first part, which is very simple. We are -- we know basically the same as you regarding the Central Bank. There's no strong confirmation yet, but I have it that there's a view that the government could pursue confirming Velarde. That's -- we're all waiting for those news to come in.

And regarding the political scenario. We obviously are cautious. There's -- early in the process, there are lots of moving pieces. So we are paying attention to the announcements by the government and the steps being taken in terms of announcements and measures. So again, we're very focused on executing our strategy. We believe we have the platform to be successful in Peru in different circumstances. We've proven that not only in the last, let's say, 10 years, since I've been at IFS but -- Interbank and the companies, which have been here for -- like Interbank for over 100 years and Interseguro and Inteligo since mid-90s, and we've seen lots going on in Peru. And we've always had a team very focused on executing on the opportunities while being cautious in terms of the risk that arise depending on the situation. So I hope that addresses the first part of your question.

And then on the second on more specifics regarding the trends, let me pass it on to Michela.

Thank you, Luis Felipe. Ernesto, thank you for the questions. Let me first comment on what we are expecting for year-end. And as I was mentioning on the comment on guidance, in terms of loan growth -- so we have seen roughly 4% year-to-date growth in retail, okay? And when we see the trend between the first quarter and the second quarter, the good news -- and also looking at July, the good news is that consumer loans, especially credit cards, are now starting to pick up. So we are expecting the year-end figure for retail, especially, to be in line more or less with the guidance that we gave, which was a single-digit growth. But given that we are at 4% already in the first half, no, we are expected to be between 8% and 9% for year-end.

Now in terms of the commercial portfolio, though, the guidance continues to be a slight reduction as the Reactiva loans start to be repaid, and we are replacing those loans with regular loans but not at the same pace also not given the expectations in the uncertainty. In terms of NIM as you have seen, for IFS, we have registered a 3.8% NIM first quarter, 4% in the second quarter. And what we are seeing for the rest of the year is NIMs close to 4%. So we are now still guiding for a year-end figure, which is the low end of the range, close to 4%.

As far as 2022 is concerned, to be sincere at this point, I'm not going to be able to give you any figure yet as we are just now in the process of starting, no, strategic planning and budgets for next year. And still, there are a number of variables that we need to see how they behave in order to be able to estimate those figures.

Okay. Perfect. Just let me elaborate, last question in operating expenses. I believe this is the only line that is growing much higher than the rest of the lines in the P&L. So just wondering how do you see OpEx growth in the next quarters.

Go ahead, Michela.

Yes, yes. let me take it. There are a number of things that are driving the increase in expenses for the first half. And basically, who is driving the growth in expenses is the banking sector. In the slides, I'm showing you that for the first half, those expenses are growing 9.5%. And what is driving growth is technology, and that has been the case if you want, for many years now. But more strongly, the variable costs related to marketing and credit card expenses. We have seen an increase in the turnover of payment in credit cards, you have seen more than 40%. So that is something that strongly drives the expenses.

So we are expecting, for the second half of the year, no, to continue to have these increases in expenses. And again, the 2 things that will drive expenses is technology and variable costs. And that is why despite the fact that we have an efficiency ratio of 31% for this semester, sorry, we are still guiding for the low end of the range at around 35%. There are also a number of additional costs that we are incurring related to our partnership with Rappi that have already materialized in the first half and will continue to be the case for the months to come.

So with that, we will see especially the efficiency ratio of Interbank this year will deteriorate as expenses are recovering faster than revenues because of the pressure in NIM, but we expect that to change in the coming years when the operating leverage for Interbank will continue to be as it was before, with revenues growing faster than expenses. I don't know if this covers, Ernesto.

Yes, let me add something. Ernesto and Michela, let me add something regarding that, no, that we have to pay attention to also specifically on efficiency ratio because everything that Michela has mentioned is right. But I will also call the attention to the change in the risk profile of our credit card portfolio. And that is bringing lower revenues from that portfolio and hopefully, the risk appetite that we have still higher and probably that will continue to increase revenues in the future.

But right now, what we're seeing is customers that are coming in with lower rates but significant lower risk cost as well. And you can see that in -- both in our local book and our IFRS book where provisions are at a very low level. So when looking at efficiency ratio, specifically for what revenues coming from credit cards relate to, you have to take a look also at the after-tax return -- I'm sorry, after-risk return for that portfolio, which at the end is bringing in a very positive equation in terms of results, and that's also a positive impact on net income and ROE.

And the next question comes from Jason Mollin from Scotiabank.

I have 2 questions. The first one, maybe just an update on the joint venture with Rappi and how that's going and if there's any metrics that you think we should be tracking closely on that front.

And my second question is more of a general question that encompasses a bit of what you've been discussing about politics and some uncertainty. My question would be, on that front. If you can talk about -- we've been focused for some time on interest rate caps, changes in the pension system and potential implications for annuities, higher taxes. But you have a very conservative ROE outlook for this year, 14% -- greater than 14%, excuse me. I think the greater than is an important part of that statement given the almost 22% ROE you generated in the first half. How should we think about the scenarios going forward with potential policies and how IFS can protect itself or protect returns for shareholders in this environment? You said -- you've mentioned that -- the track record of doing this in the past. But how should we think about the future? And is this government and potential policies different -- could be different than what we've seen in the past?

Okay, Jason. Let me take on both, and maybe Michela can complement a bit. On the first one, the joint venture with Rappi is going well. Obviously, we launched that at the beginning of the pandemic. So it has had some delays because, like getting something to start in -- operationally under that scenario has not been that simple, but it's been accelerated recently. Well, we have the solution operating and working very well. So far, we have reached around 180,000 customers for the venture, of which the recently launched credit -- 100% digital credit card is at around 25,000 customers. So it's going well. It's building up.

We're learning. We're -- how to work together with Rappi, like a very traditional institution like Interbank, even though we have a DNA of innovation, working with a 100% digital-native company as Rappi obviously presents some challenges and opportunity, but we are gaining traction. I guess in the future, we'll be -- the same as we are highlighting in our reports the growth of PLIN, which has reached over 4 million customers; and the growth of Tunki that has reached over 1.3 million customers, and we could include the Rappi evolution. But again, it's at around 180,000 customers so far, and we expect that to continue accelerating.

Regarding the second part of your question in terms of the political environment and what we can expect, what we know is what has been announced. Obviously, there is -- in the presidential speech, there was a reference to looking for a new role in the Banco de la Nación, which is the state-owned bank. Probably that has to go through a process of changing laws or whatever it is through Congress. So that's something we're monitoring, but that has been announced.

And the other thing that has been announced has been the intention to continue with reforms on the private pension system, which is a business that we are -- as you know, we do not operate. We're obviously looking at that closely as well because it has an impact in the overall health of the financial system in Peru. It could create some opportunities for us, but we're monitoring that.

And there's not much yet specific in terms of measures towards the financial system. What has -- what is already in place is the rates cap, which the Central Bank is already enacted, and we're operating under that environment. We have seen some effects, not that much on the rates that we have for our customers because we are basically below that cap. But in delinquency commissions, we could charge, that has changed. We have lost those revenues that account for approximately PEN 60 million to PEN 70 million per year, but that's already reflected at least in this quarter fully. So those are the new levels of revenues we have from those.

And then we remain with expectations of what's going to come. Again, we manage that closely. I think what we need to do, our mandate is be as efficient as possible in case different reasons, they continue to put pressure on our revenues or our spreads. So that's something that we have been doing forever, and we will continue to do that because that's the way we have been operated and we operate at Intercorp Financial Services For many years.

And then very focused in terms of building competitive advantages, not to be everything to everyone, but in what we are good. And what we're good is, no, like in wealth management, the life insurance business and the annuity business that Interseguro runs and certain commercial banking services and specifically in consumer financing. That's our strength. We are a -- for our digital transformation, we have seen the results. We have no way back on that front. We continue to rationalize our operations, including our branches, and we continue to increase the number of customers. We have increased more than 25% our customer base in the last year. So that has us very happy, and that's the way to pursue.

And then what could happen, as mentioned in the introductory statement and also while Michela was talking, is that the growth of the overall system could decelerate because of different measures, because of macro conditions. And then we will have, as management, to see what we do. We are generating excess capital. So an alternative could be for our -- in the benefit of our shareholders, maybe we boost up dividends in case growth does not materialize and we continue to be overcapitalized or maybe we evaluate what usually management does in these situations, maybe a share buyback, it could be a program, no, something that we've done in the past.

So it's early still to tell, but we have been through these processes before, and we acted differently. Again, the priority is to look for opportunities to continue fostering growth and serving and helping Peruvians with their financial needs. But obviously, we also are looking for the best interest of our shareholders. So nothing is off the table in terms of making sure that we enhance shareholder value given the cash we have on hand.

And regarding the ROE, I think Michela mentioned obviously 14% -- above 14% was guidance under an uncertain scenario. We're doing much better than that. and we do expect to have a significant beat over those numbers. Let's see how the second half materializes. But based on what we're seeing, we do feel confident that it's going to be a material beat over those levels.

And the next question comes from Andres Soto with Santander.

My question is regarding your ROE guidance, which sounds quite conservative given the performance in the first half of the year. So I would like to understand, when you look in the second half, this -- the implied guidance will be an ROE in the range of 8% to 10%. How do you break that down between your different business units? Is this a result of having much lower trading gains expected for the insurance and wealth management business? Or is something related to your banking unit?

Let me pass it on to Michela. She has more detail on that.

Okay. Andres, thanks for the question. I mean what we have seen in the first half, you see the numbers in ROE are extremely high for insurance and also Inteligo. So basically, let me just, one second, go to the slide, the first slide of the presentation. Okay. So we have -- for the first half, we have a 21.7% ROE for IFS, which is composed of an 18.8% for the bank, 50% for insurance and 30.9% for Inteligo.

So have in mind that in the past, and let's say that now we've had a terrible 2020, and now, we're having a very good 2021, but in the past, the guidance has always been for IFS to be in ROEs around 18%, 18% to 20%. The bank was more or less the same. Insurance was, if you remember, at levels of 15% ROE and wealth management was always around 20% to 25% ROE.

So basically, what has happened this first half is that the bank is already, if you want, at our sustainable ROE, but for a number of reasons, that will change in time. So during the first half, the bank has had, first, an extremely low cost of risk, 1.8%, 1.7% is below the pre-COVID levels; and second, that during the first quarter, the banking segment has also had some extraordinary gains in the portfolio. I don't know if you remember we've had a big sale of government bonds. And what is happening this quarter with banking is that we are having high trading income because of the FX volatility. So some of those things in the banking segment will not repeat during the second half. But on the other side, banking is recovering in terms of the core, so net interest fee income and fee. So it is difficult to think that we are going to improve that ROE that we have registered in banking.

In the case of Interseguro, the 50% ROE of the first half is, for sure, extraordinary. Remember, it was 15% pre-COVID and we've had, in the first and second quarter, extraordinary gains coming from the portfolio. The return on the investment portfolio has been above 10% in the first half. It has been 7.7% this -- sorry, above 10% in the first quarter, 7.7% in the second quarter and the regular levels were 6%, 6.5% pre-COVID. So again, we've had some extraordinary gains there that will not repeat during the second half.

And in the case of Inteligo, it is really maybe a little bit more positive. We have had extraordinary gains during the first 2 quarters of the year. But in that case, we might have some additional ones depending on how market behaves. So if you sum up everything together, the 21.7% ROE of IFS, it's difficult to repeat in the second half of the year as we are expecting lower ROE especially, I would say, in the insurance business, but to some extent, it could also be in the banking business. So guidance was 14% when we started the year.

Of course, we were not expecting such a strong quarter. That's why we're looking at our year-end figures. If you want the core ones, without extraordinary things, we are pretty confident that we will beat this 14%, I said at the beginning, at least 200 basis points. Now it could be more depending also on the difficult-to-predict part related to the portfolio of Inteligo, especially, but to some extent also on Interseguro. So I know it's not like a straightforward answer, Andres, but that's more or less what we are seeing for the second half and why we are not expecting such a high ROE as the first half.

And my second question is probably a follow-up on the comment that Luis Felipe just made about increased return to shareholders given the diminished growth outlook. In the past, when IFS was far -- was undervalued, so buyback the preferred alternative for you guys. I would like to see what are your thoughts about that vis-à-vis the possibility of an extraordinary dividend given the current liquidity and the dualism in structure that you currently have.

Andres, it's -- again, there are different mechanisms to do that. We've used both actually at some points, we bumped up our dividends and at different moments, we did indeed establish a buyback program that we managed for a couple of years. Again, we have many alternatives. We have not taken a decision. Obviously, we will have to take this to our Board and then go through the necessary approvals. It's just what -- I wanted to highlight the elements that we have on our heads in terms of thinking how we will face the upcoming months depending on what we see in terms of growth. Obviously, this is something that still needs to be discussed. So there's not specific preference or any specific conclusion around that.

That's very clear. And if I may follow up on that, all of your business units are well above the minimum levels required by the regulator. How we can -- or what are your sensitivity or what is your target in terms of how much above the regulatory limits you want to be when you think about these decisions to return capital to shareholders?

Yes, usually, it has been like a buffer of between 200 and 300 basis points above the minimum regulatory levels and that basically continues on the overall. However, now we're also looking at core equity Tier 1, and that probably creates a barometer. So I don't know, Michela, if you want to complement...

Yes.

But I think that probably we need to look at both numbers, having not only the buffer that we want, the overall capital ratio but also we're looking at the core equity tier levels and we want to be at some numbers.

Yes. I'm now just going back to the guidance that we have for capital, we -- at least for year-end, we have a total capital ratio more than 15% and core equity Tier 1 ratio, more than 11%. So basically, where we have a big buffer is in the total capital ratio. Moreover given that the superintendency decreased their requirement, which was before more than 10%, and now it's at 8-point something percent. So we have a very big buffer there, but the buffer in core equity Tier 1 is much smaller because we are there at 11.5%.

But what we have to bear in mind, though, is that these numbers are built with the local accounting earnings. In the local accounting earnings, we do still have, let's say, an important number there of provisions that we did last year because of COVID, that we need to see how are they going to be treated given the low growth that we have experienced this year. So there could be an opportunity there, but for sure, we have to have in mind is that core equity Tier 1 cannot decrease a lot versus the levels that we have today.

And the next question comes from Carlos Gomez with HSBC.

First, congratulations with the results and the good presentation as always. Two specific questions. One on the Reactiva program. How is it evolving? How is the payback? And do you expect this program to be extended? And at some point, perhaps for the bank to have to make a contribution for it? Is that a possibility that you are contemplating?

And second, we know that the rate caps have been implemented by the Central Bank at a rate which is probably higher than where you do most of your business. At what level do the rate caps have to be lowered so that it will start affecting your credit card business?

Okay. Let me take a crack at this, Carlos. Thanks for your question. The Reactiva program is evolving very well. As you know, we were active participants. We have a big number of customers. And also we took the opportunity to enhance our commercial banking platform, specifically in the medium-sized enterprises and also in the small-sized enterprises. So that's behaving well. The payback is according to what we expected, so that's good. The government learned to extend certain tenors. We are working actively with customers to take advantage of that.

We do not have clear indication of how the program will evolve. If it will be extended, I guess, all depends on the extent of the economic recovery. So far, the economic recovery, as we have mentioned, looks to be on the right path. So far the program has worked very well. It helped the economy very well, and it helped Interbank particularly very well because we have been able to strengthen our platform and relationship with commercial banking. I don't know, really, what you mean by contribution, maybe you could clarify a little bit later.

And then in terms of the rate caps, again, our portfolio, like the main effect of rate caps is towards smaller financial institutions but particularly to those like cajas or small financieras that focus on like independent customers with a lack of track record. So probably, those are the ones that are being hit. You can see our average yields of our portfolios are below that. So every time you decrease that, probably it will hit a small portion of the portfolio, but we don't -- it has to be higher than what we've seen and expect to really have a material effect on our portfolio.

However, as I mentioned, one of the byproducts of that was the late payment fee that was also touched upon that regulation, which -- that really impacted us and the whole financial system because that's the way we do it, that's the way we used to do it, that's the way that is used to be done in many countries. And the concern there is not really the PEN 60 million or PEN 70 million that, that growth in revenues, but is what will be the effect on payment behavior going forward of the Peruvian consumer because that's -- if you know that you are late by some days, you will face this fee that creates consciousness on the scaling well in terms of payment.

So that's something that we're looking at because we have transmitted -- we have reported to the superintendency and regulators that, that's our main concern, will this have a long-term effect in changing the customer behavior in terms of being on date for payments or not. So that's probably the effect that we are looking at more closely rather than just the revenues that we have lost for that fee.

Okay. So the revenues...

Sorry, just if I can add some information related to the Reactiva loans so that you have a sense of the size. I mean we reached -- during the third quarter last year, we reached a loan book for Reactiva loans of PEN 6.7 billion, okay? In this -- in those PEN 6.7 billion, there was, roughly speaking, PEN 2 billion for the small businesses, almost PEN 4 billion for the mid-sized companies and PEN 700 million for corporate. What has happened as of the end of June is that now we have PEN 6 billion. So it has decreased around 12%, that portfolio.

And what has decreased is actually the portion of the corporate Reactiva loans that has decreased more than 40% because of prepayments. And also, we have seen a decrease in the mid-sized companies of around 15%. The small businesses portfolio of Reactiva is the one that continues to be stable, also because of the new -- let's say, the new deadlines given by the government in terms of giving more free time, let's say, for companies. So far, around 12% of Reactiva loans have already been paid as of the end of June.

Okay. That's very clear. And to clarify my question. I mean some of these programs, number one, they can be extended and eventually they get extended for a long period of time. And at some point, they are expanding at low rates. And at some point, the financial institutions have to take care of them, and it becomes more of a cost than a benefit. So I was asking if that is something that you contemplate, or it doesn't seem to be in the horizon yet?

No, we do not expect that to be happening. We already put our contribution, as you name it, in doing this program with rates significantly -- rates and spreads, basically, spread 0 to what we are used to doing with these types of customers. So I think that was the contribution. And again, the program has worked well. We don't see something happening in the future. We do not expect that. We hope it doesn't change.

And the next question comes from Daniel Mora with CrediCorp Capital.

Congratulations for the results. I have a couple of questions. The first one is regarding loan growth. Considering the pace of growth of credit cards in the second quarter and also in July, when do you believe that Interbank can reach again the pre-COVID level of the credit card portfolio?

And my second question is regarding Interseguro. Can we -- what are your thoughts on -- in the coming quarter regarding gross premiums and the adjustment of technical reserves and the claims are considering that given the COVID situation, the claims have -- go on and also the adjustment of technical reserves have a different performance than normalized figures. Can you provide more color regarding these trends in the insurance business?

Okay. Thank you for your question. On the credit cards, let me pass it on to Michela. We do expect gradual recovery and hopefully, we're witnessing that. But Michela probably has more detail and then maybe Gonzalo can help us in the second part of the question.

Daniel, related to credit cards, still, no, there is a long way to growth. Have in mind that the credit card portfolio alone decreased, roughly speaking, 1/3, that's 30% during COVID. What we have seen during the second quarter was like a first stabilization. We had like a 1 month of growth, 2 months stable. And now, we have seen July being a very positive month. So we expect that, together with the turnover that we are seeing for credit cards and debit cards, this will continue. But have in mind that the decrease was really, really sharp. And we are in an uncertainty scenario. So for sure, it's not going to be this year. We have to run the numbers for the growth expected next year to see whether or not that can take place during 2022.

And Gonzalo, can you help out with the second part of the question, please? We can't hear you, Gonzalo.

Yes, sure. Well, we see for the second half of the year regarding premiums first, we see strong growth continuing. We haven't yet seen any deceleration in our -- in all our lines of business. So we have no concerns there. With regards to claim, it's very uncertain. I mean the third wave is probably coming in the next few months. And -- but we feel confident that we've been able to pass the first and second with no major incidents. So we feel confident that the claims part will be okay. The part that we have more uncertainty is the performance of our portfolio. Markets are very volatile right now. So depending on how they behave, that will affect our results for the second half.

Thank you, Gonzalo.

And the next question comes from Alonso Aramburú with BTG.

I wanted to ask about margins, and you had a nice increase in yields, in retail portfolio, I think it's 40 basis points quarter-over-quarter. Can you comment on what's driving that increase? Are you going into riskier segments? Or are you just repricing? And how do you think this can continue to the second half of the year?

And also related to margins, there's a Central Bank meeting today, there's some expectation that the rates will start to increase, say, maybe the second half, maybe not today. What -- can you remind us what's the impact of higher rates on your margins?

Sure, Alonso. Okay. Let me pass it on to Michela, so she can give you a bit detail on that.

Alonso, thanks for the question. The first part related to what is driving the increase in NIM is mainly the return on the portfolio, okay? And what we have seen, at least for the second quarter, is mainly coming from credit cards. So actually, what has happened is that, I mean, we are starting to see a growth in credit cards. But moreover, we've seen the different credit card products. We have seen an improvement in the cash part of it, which has higher yields. So basically, the average yield of credit cards has improved in the second quarter versus the previous one. And we expect that to be the case for the coming quarters.

So talking about specifically the risk profile, I mean, actually to be sincere, the risk profile that we have today in credit cards is below our appetite. And that is because with the 1/3 of the portfolio is disappearing and the low growth of the past month, actually, what has happened is that the overall credit card portfolio is at a very low level of risk, and that is reflected in provisions, as Luis Felipe says, but it also impacts revenues. So what we are trying to build up for the future is a better, let's say, risk/return formula where we will see cost of risk going up, but we are aiming at a higher increasing yields and revenues in order to improve the overall profitability of the business, okay?

And I will kindly ask you to repeat your second question because I am not so sure if I got exactly the point.

Yes, I was asking about the possibility of the Central Bank hiking rates, which we're seeing in other countries. And how will that impact your margins?

Well, as Luis Felipe mentioned before, we already have the cutting rates, if that is what you are referring to, and that has not materially impacted Interbank so far. Of course, we will need to see how the cash that -- I mean, there is a formula that has been established and that is monitored by the Central Bank that will update once every quarter, and we need to check whether or not that continues to decrease substantially. But so far, the impact has been marginal. What we have seen, though, is that impact that Luis Felipe mentioned before in the fees of credit cards related to the late payment fee. That one already was a hit of PEN 60 million to PEN 70 million this year. So that shouldn't repeat in the following months of the year.

Yes, Michela, I'm sorry, I think Alonso refers to the action that the Central Bank can take in raising the reference rate. And we are also in for...

Okay, okay. Sorry. Yes.

Alonso, we're waiting for that. Obviously, again, if the reference rate goes up, it would have an impact. In terms of the commercial business, as you know, we run it through spreads. So probably that won't affect very much. The repricing there is usually fast and simple. And then we will have to see what we do in the retail portfolio, probably mortgages, again, the new mortgages go out, we'll manage it based on spreads, that's easier. And then we need to see the impact on the other types of loans, like consumer loans or credit cards.

However, again, I think the offset into any potential increase is the increased risk appetite that we're having for the portfolio. So we do expect to -- if things go as planned, to continue bringing in customers that will come in with higher rates. So probably some offsetting will come from that front. But again, we need to wait and see what really happens in the announcement today.

Thank you. And there appear to be no further questions on the phone or on the webcast at this time. I would like to return the floor to Luis Castellanos for any closing remarks.

Yes, before closing, let me add something that we just learned a couple of weeks ago. We wanted to share also with you because it's the basis of everything that we do, which is our employees, and we have been -- Interbank has been named the best place to work for in Latin America. So we're #1 in Latin America, we're the Great Place to Work. We're very happy about that. We wanted to share with you not only because we're proud of our -- the way our employees are facing these testing times in terms of any kind of work that put to serve Peruvians. But also because, as you know, it's part of like core strategy in order to provide excellent service to Peruvians. So well, we maintained this good level of working environment. We were confident that our strategy will continue to be deployed. So that's from my part.

Thank you very much to everyone for attending the call. As you know, we have a strong franchise that is performing well. It's recovering nicely from tough times that we underwent during 2020, and we do remain confident that we will be up to the task for any challenge that comes in the coming months. We have a very strong franchise that is proving that has a diversification and focus in order to continue to drive good results while diminishing risks.

So with that, let me pass it on to Michela for closing.

Yes. Not much to add. Thank you, again, everybody, for joining the call. And we will see everybody again during our third quarter conference call. Thank you. Bye-bye.

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