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. [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 fourth quarter 2022 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; Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo; and Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They will be discussing the results that were distributed by the company on Monday, February 13. There is also a webcast video presentations 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 are not future economic circumstances, industry conditions, the company's future performance or financial results. As such, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued on Monday, February 13. It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services for his opening remarks. Mr. Castellanos, please go ahead, sir.

Thank you very much. Good morning and welcome to our fourth quarter and full-year 2022 earnings call. Thank to you all for attending today's call. I wanted to start by making a brief summary of our strategy, the [indiscernible] that we are deploying on IFS in order to reach [Technical Difficulty] 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're 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're facing, but we remain committed to helping Peru and Peruvians to overcome…

Thank you, Luis Felipe. Good morning everybody and welcome again everyone to Intercorp 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 3 and 5, 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 PEN403 million, 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, respectively. When looking at the full-year figures, reported earnings reached PEN1,671 million or PEN1,448 million when excluding the one-off registered in the third quarter, due to the accounting revaluation from book value to the price paid of the previously owned 50% of Izipay at Interbank. 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…

Thank you. [Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Hi. Good morning, Luis Felipe. Michela, 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 time line to achieve that? And then my second question is a follow-up on your 2023 guidance. Just 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 most at double digit or do you think will be above inflation plus certain digital investments? Any color on that will be very helpful. Thank you.

Okay. Hi, Ernesto, thanks for your question. It's really a very profound question that probably will require many minutes of 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 2-tier digital strategy. And the first part of the digital strategy, what we call the first tier, essentially 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've made lots of progress there. As you know, 71% – 70% plus of our customers do not touch a branch in the interaction with Interbank for the last 30 days, for instance. So that's moving ahead. And then we have the other part, while we've got the second part, tier 2 part…

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 Izipay 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, it's 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 bases. 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 8%. And I'm providing the breakdown there. That 8% is coming from a 20% growth in everything related to digital transformation, payments, et cetera, and all the other numbers are single-digit growth. Okay. And this is the reason why we expect the operating leverage for Interbank to continue to be positive next year with revenues that will continue to grow double-digit because of rates and everything that we are seeing and expenses growing only single-digit at Interbank. 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…

So, this is super helpful, Felipe and Michela. Thank you very much.

Okay, great Ernesto. Thank you.

Your next question comes from the line of Yuri Fernandes with JPMorgan. Please go ahead.

Thank you Luis Felipe, thank you Michela. I have a question regarding your cost of risk. It should increase, right, as per your guidance? So, if you can share like your expectations, maybe you should use a lower GDP and this is basically expected loss model being a little bit more punitive, or if you are seeing like 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 adjusted mean should still be fine this year. So, like 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 bps margin expansion. So, your NII this year, assuming your guidance for loan growth should easily increase [20-plus percent] [ph]. And as you said, you are 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 question. I'm actually going to pass it on to Michela. Yes, overall, I think she's going to go into details, but it's basically a mix change that we're seeing. Also, we are seeing low growth impacting all last year and will continue during the next year. It 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 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, consumer continue growing, but also deteriorating macro variables that will have an impact in the payment capacity of Peruvians. You're taking off a very, very low – lots of liquidity into the system in the last year 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, 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 restaurant 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 that I've mentioned. And so, maybe now I'm going to stop and pass it on to Michela to make a couple of precision 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 are 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, now 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 sustaining 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 even bigger. And on top of that, we have the disruption of the protest. So, we have been doing in December and in January, some rescheduling 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 quarters of the year, of course, will depend on what happens with the process and with the outcome. Now, everything that we…

Perfect Michela and Luis. Thank you very much.

Thank you, Yuri.

[Operator Instructions] Our next question comes from Andres Soto with Santander. Please go ahead.

Thank you. Good morning to all. 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 – sorry, I mean the general segment. What are you expecting for banking, insurance from management and payments?

Okay. Thank you, Andres. That I'm going to pass on to Michela straight.

Okay, Andres. Here, I'm going to tell you in the medium-term that we are expecting that some of them has slightly changed versus the past, but what we are expecting is, I mean, the bank to be between 18%-19%, we are 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 this conference call. Inteligo should be above 20%, the same as payments. Okay. So 18%-19%, 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, that has there some expenses, which include mainly the expenses, the [taxes] [ph] [indiscernible] for the dividends and some minor, let's say, operating expenses coupon of the $300 million bond that we issued for the acquisition of Sura. So, a combination of the 4 subsidiaries plus the holding, it's what leads you to the around 18%.

Perfect. That's very clear, Michela. 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 makes you – 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 Goncalo for insurance.

Yes. So at Inteligo, fixed income is about 65% of the portfolio. Duration of the portfolio today is between 4.5 and 5. What to expect? We think we're getting towards the latter end 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. And then so that should be positive. And again, well hopefully, volatility will come down on the equity side as well. So, it should be a much better year we hope for the investment in the portfolio on the Wealth Management side.

Okay. So, with regards to Intersegula, around 80% 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, our fixed income portfolio.

Okay, thank you.

Thank you, Andres.

Your next question is a follow-up from Yuri Fernandes with JPMorgan. 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 refinanced loans? Like you use to migrate to Stage 2, Stage 3? Like if you had to move some loans to that, like how should we think about provisions for refinanced loans? Thank you.

Michela?

Yes, let me take that. Yuri, I mean actually, under IFRS, these clients, some of them already had a significant increase in their risk profile. So, they were already on Stage 2. Okay. So, the fact that we have rescheduled them on some sense is not impacting now provisions, of course, if they, at the end, pay. So, what we need to see is the behavior of the refinance clients because the portion of them that then may not pay, of course, they will go to Stage 3 and require more provisions. Okay. And I would say that a big portion of them were already on Stage 2. And then we also have the impact of forward-looking and the expert criteria that we have in the consumer portfolio. Specifically, that is, kind of a buffer not to cover some of those clients who might not pay those reschedules. Now, I mean, 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. That are very far away from what we did in COVID. We're talking different dimensions now because this is kind of more, I mean, localized north, 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.

Thank you, Michela.

Our next question comes from Juan Recalde 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 divestments growing more than 100% year-on-year. So, the question there is related to, so what part of this growth is related to Izipay? And the second question related to this would be looking forward, should we expect acceleration? And what, kind of growth should we expect for SME loans in 2023? Thank you.

Thanks, Juan, for your question. Yes, we've grown very nicely in SMEs during the last year. Remember that we are coming from a very, very small market share of around 2.5%, 3%. So plenty of room there. As you recall, we participated very actively in Reactiva for this type of customers. So, we were able to get connections and get to know them better, enhance our models and the whole freedom 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 months 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 Izipay. 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 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 InspIR Group.

Thank you, operator. We have some questions from the webcast. The first question is coming from Greg Mitchell from ABP 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 2-tier 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 7,400 employees. Today, we're operating with around 6,000 employees. Okay. So, that's the direct impact in there of efficiency. However, it's not that every branch that we’ve closed gets away people. We are hiring new people like for our call centers. Again, the digital model brings in places where you need to reinforce your relationship with customers, but that's all in all the numbers, around [1,200] [ph] less employees than what we had when we had the whole branch network. Okay. And then 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 it [Technical Difficulty]. 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 this into other areas. We started by technology. We expanded from technology to digital then to retail, and we continue to expand that. Now, 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 sales, agile teams, tribes and all that. You take a look, hopefully, we will resemble more Spotify in terms of the way they operate than [Technical Difficulty]. That comes with giving the new talent more empowerment, more responsibilities, the ability to take away high vertical structures and all that to become a much more lean 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, [Technical Difficulty] but we're moving towards agility and scale if you want throughout our operations. So, I hope 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 [indiscernible] from Prima AFP. When will the interoperability Plin-Yape 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, were – and the April interoperability will be between Plin and Yape. And then in June, July, every bank should be able to interoperate through a cell phone. But most – well, most clients are already here in Yape 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 starting July. So, that's kind of the – that's the interoperability. There's no other services – 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'll answer your question and talk 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 [chart] [ph] is executing our strategy and making sure [IFS grows] [ph] based on core strategic pillars, that's what we're doing. Then in terms of extraordinary dividend or buyback, we're always analyzing that. We have – we're not – we have not taken any decision. It's obviously under [indiscernible] when we see where the stock trades and the opportunities that that brings. Obviously, you have to go by the book things, but 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 Fabrizio Enrique Lavalle from Profuturo AFP. Given the Central Bank recently stopped hiking rates, how much time do you expect NIM 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 Michela can complement. 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 increase in rates. We really don't know if this post that Michela mentioned where it will take the Central Bank. It might really pause or it could regain in terms of traction for further rates. All depends on how inflation happens or not. But let me pass it on to Michela to see if she has a little bit more color in terms of the timing.

Fabrizio, 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 in 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 NIM. NIM has improved, I mean, substantially during last year, but it is just a fraction of the increase in rates that you've seen. We've had during 2022, more than 500 basis points increase in soles and also a very big number in dollars. And the increase in 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 rate. I hope that helps.

The last question comes from Daniel Mora from Credicorp 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 NPLs? What is the guidance of credit card loan growth in 2023 and expectations of NPLs 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?

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 re-composition of our whole book customers that because of the situation during COVID, just decrease 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 has 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 a guidance provided by Michela, low double digits in terms of that. And the guidance on cost of risk is there. We do expect, given the situation, cost of risk improvement 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 survival benefits, kind of annuities. Retirement annuities are practically nonexistent after the 95.5 low, which allow people to withdraw their funds from the AFP when they reach retirement. So right now, it's mostly disability or survival 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 level similar to what we had in that year. Now right now, it's been 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 or survivor benefits insurance. But again, because we already have no annuities sold for retirement, that part of the business is not impacted. Now, with our other products, life insurance, bank assurance and digital products, they are – we expect to continue very high growth that we have seen last year. We're talking about our digit growth, and we expect that to continue. We haven't found any de-acceleration in any of those products.

Great. Thank you, Gonzalo.

At this time, I'm showing no further questions. So, 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. Casassa 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.