Good morning, and welcome to the Intercorp Financial Services Fourth Quarter 2023 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded. After the presentation, we will open the floor for questions. [Operator Instructions] It is now my pleasure to turn the call over to Ms. Valentina Porto of InspIR Group. Ma'am, you may begin.

Thank you, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its fourth quarter 2023 earnings. We are very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer, Deseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo; Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services. They'll be discussing the results that were distributed by the company yesterday. There is also a webcast video presentation to accompany the discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website, ifs.com.pe to download a copy. Otherwise for any reason, if you need any assistance today, please call InspIR Group in New York at 646-940-8843. 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 are made 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 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.

Thank you. Good morning all and welcome to our fourth quarter and full year 2023 earnings call. I want to thank you very much for attending. I want to start by making a brief summary of our strategy at IFS. You know that our aspiration includes: to become the leading digital financial services solution for clients, providing profitable products and services in our key businesses with the best digital experience for our customers, based on operational excellence and levered on advanced analytics and the best talents are our competitive advantage. This is the strategy we are employing and we continue to execute it with a long-term vision. Regarding economic environment, 2023 was a challenging year in Peru with virtually no GDP growth, and a contraction in domestic demand which translated into a deterioration of the payment capabilities of our retail customers. On the positive side, inflation decreased consistently during the second half of 2023 and the central bank has reduced the soles reference rate by 100 basis points during the year to 6.25%. Also, expectations of a strong El Nino phenomenon have decreased and for 2024, GDP growth of around 3% is now expected, which is a good recovery versus last year. Despite this challenging environment, IFS continues to show resilience in its core operations. In 2023, we grew our customer base and revenues and we continue to consolidate our results of our digitalization efforts. At Interbank, market shares across key business lines remain strong despite moderation in consumer loans as we are still digesting increased levels of cost of risk, mainly in the consumer finance segments. Despite of the challenging conditions, Interbank remains well-provisioned and well-capitalized. At Interseguro in 2023, we continued growing in premiums of individual life and retail insurance, while consolidating market leadership in annuities. Investment results continued to be solid in the company. Although global market conditions impacted negatively our investment results in our wealth management business, in 2023, Inteligo's results recovered from the negative profit posted in 2022. Finally, on payments, despite growth in merchants, volumes have moderated in 2023 and this has taken a toll in anticipated (ph) results. However, Interbank and Izipay continued working on creating synergies, while PLIN continues to accelerate within a fully interoperable B2B system. We remain confident that IFS will continue generating sustainable returns in the coming years as we are being cautious with our operations. Given the scenario we're facing today, we continue working on our long-term strategy, which is to ultimately empower all Peruvians to achieve their financial well-being. Now let me pass it on to Michela so she can give you a detailed review of our results. Thank you.

Thanks, Luis Felipe. Good morning and welcome everyone to Intercorp Financial Services year end 2023 earnings call. Today, we will review five sections of our earnings presentation, starting with the macro outlook for Peru. On Slide 3, complementing what Luis Felipe mentioned, the decrease in GDP and in inflation for four quarters in a row has triggered the first cuts in the soles rate, driving it down from the peak of 7.75% to 6.25% as of today. Inflation has decreased from a yearly 8.8% at the peak of June '23 to 3% as of January, already within the central bank's target. And exchange rate has remained relatively stable. 2024 is expected to be a year of recovery for the Peruvian economy with an expectation of 3% GDP growth, mainly due to the following reasons. First, the base effect versus the first quarter 2023, as no major disruption is expected now that El Nino seems to be cooling down. Recovery on public investment after the first year of the newly elected regional government. And lastly, more political stability which should positively impact private investment. On Slide 4, we wanted to point out your attention on the latest news on El Nino. After an inflection point in the probabilities of a strong to moderate El Nino as of the end of 2023, we have started the year with very high probabilities for a non-to-weak Nino. This is very good news for the country as the economic recovery could speed up if no further disruption takes place in the coming months. On Slide 5, we are providing the main operating trends for the year ending 2023 which are all within the latest guidance provided during September. First, we continue to register sound capital levels with Core Equity Tier 1 ratio closing the year…

Thank you. At this time, we will open the floor for questions. First, we will take the questions from the conference call and then the webcast questions. [Operator Instructions] And the first question will come from Ernesto Gabilondo with Bank of America. Please go ahead.

Thank you. Hi, good morning, Luis Felipe and Michela, and good morning to all your team, and thanks for the opportunity to ask questions. I have three questions from my side. The first one is on your cost of risk guidance. So given that El Nino seems to have changed to a low non-impact, how should we think about the cost of risk in the first quarter of this year? You have a very strong reserve coverage ratio. So just wondering if there is a possibility that at some point in '24, we can have some reversal of provisions related to El Nino? And also, when do you expect the cost of risk to normalize to historical levels? Because the cost of risk for this year above 4.3, it continues to be high, your historical levels. Then my second question is on your NIM expectations. Want to double-check if I'm correct, can we expect NIM to behave between stable and NIM expansion of 20 basis points this year? And also would like to hear from you what should be the key drivers for NIMs in this year. I don't know if it will be the recovering loan growth, probably more appetite on consumer segment after leaving behind the impact of El Nino and also lower funding costs now that we are going through this easing cycle. And my last question is on expenses, we have seen that IFS has been doing an important effort to maintain costs under control. So how should we think about OpEx growth this year? Should be in line with inflation, a little bit above inflation? Just wanted to understand if you will continue to do investments in technology or disruptive initiatives. I also wanted to break it down of how much of the OpEx will be related to that. And also related to this question, I will also appreciate if you can share with us in which part of the P&L should we start to see the results or the benefits of all these new investments? Thank you.

Okay. Thank you very much, Ernesto. Let me give a crack at the introduction to the answer and probably Michela will help us with a little bit more detail. In terms of cost of risk guidance, El Nino actually, what's going on is we don't expect to have as strong rates and damage to certain infrastructure due to El Nino. However, we are living through El Nino phenomenon. It's been the case for the whole most of 2023 and we expect it to continue. As you've seen, temperature is really high, the sea temperature, the ocean temperature, is also high. So even though we don't expect a strong disruption to infrastructure unless the rains that are not expected now to happen, strongly do appear. No, that's something we cannot continue to rule out. The El Nino still impacts many of the industries of work in Peru, like fishing, like agriculture, in certain ways. So even though --again, the rainfall will be more moderate or not very important, we do see some disruption there. So we have to be careful when we talk about El Nino. Having said that, we do expect the second half to be better than the first half. And Michela will probably elaborate on that. And then on NIM, I think she also has some of the details. And in terms of expenses, the only thing I can tell you, and she can do some of the breakdowns that what we know as management is that what we can control is costs, and we're very focused on that. And that discipline will continue and it's built in two basic premises. Austerity in our operations. But the second premise is we continue investing in building our future. So we won't sacrifice the building of our real future for having this mindset of course going forward. No. But do we run a very focused on austerity culture that, as you can see, is giving good results in terms of operating leverage. Having said that, let me pass on to Michela, who I'm sure will give you a little bit more of detail on each of the subjects that you have raised. Thank you very much.

Thanks, Luis Felipe. Hi, Ernesto. Thank you for your questions. Let me go in order first with your question related to cost of risk. Okay. As you can see, the guidance that we are providing is to be below cost of risk of 2023. And if you see at the evolution of cost of risk during 2023, it has been going up during the third quarter and to a minor extent during the fourth quarter. Why is that? And we have discussed in the previous conference call, is specifically the consumer lending portfolio, the unsecured portion, and specifically related to the fact that with no GDP growth and sustained inflation, there has been a deterioration of the payment ability of Peruvian families. So now, in the second half of 2023, we also included within the forward-looking variables of our provisions a moderate Nino. And at the time it was something above PEN100 million. For next year what we are expecting is a first quarter, which is still high even with no Nino. And this is because the picking up of all the reschedulings that we have been doing during 2023 has matured a portion of it in the third quarter, fourth quarter, but we will still see some of that during the first quarter of 2024. After that, we should expect, or we are expecting downward trends in the cost of risk. And to the last question of the cost of risk part not related to when should we see historical levels, I think we will not go down to below 3% as was pre-COVID. And this is just because of the portfolio composition. Yes, we are expecting 2025 to be a level with much lower provisions at 2024, but I wouldn't expect that number to be below pre-COVID levels.…

Yes. Thank you very much, Michela and Luis Felipe. Just a last question. In your ROE, you are guiding an ROE above 12% this year, but when should we think about your medium-term ROE? I think in the past you were saying that IFS sustainable ROE is around 18%. So just wanted to hear from you, how are you seeing the ROE evolution in the next years? I understand this year will continue to be high in terms of cost of risk. But as you said, it could be normalizing to a cost of risk of 3% in the next years. That could be a driver. So just wondering, how should we think about the ROE evolution over the next couple of years?

Sure. I think. Ernesto, thanks for your question. ROE should start normalizing after 2024. So I'm not pretty sure. Maybe Michela can tell us, according to our models, 2025 will already be there, but we'll be targeting that 18% medium term. So hopefully we'll be able to reach it. And it's all related to the performance of the economy. And we have done our work in terms of changing the profile of our new customer acquisition in terms of credit cards and consumer loans. However, it has to react according to how the economy goes in the future. So our base case is that starting 2025 will be returning to higher profitability levels, and obviously, we have to pay close attention to the investment results, and that will be subject to the evolution of the international capital markets. I don't know, Michela, if you want to complement something else.

Ernesto, I mean, the cost of risk is not necessarily going down to 3%. It will go down to below 4%, but not necessarily 3.0%. Somewhere between 3% and 3.5%, I don't know exactly. In 2025 I mean, we could get back to the midterm ROE in 2025. Actually, the uncertainty there is if the bank goes back to the 17% to 18% ROE, that will depend on the speed of the recovery of the Peruvian economy, which directly impacts the consumer portfolio.

Okay. Excellent. Thank you very much.

You're welcome.

[Operator Instructions] Our next question will come from Nicolas Riva with Bank of America. Please go ahead.

Thanks very much, Michela and Luis Felipe, for taking my question. So I have a question on your Tier 2 bonds, the ones issued at the Interbank level at the bank level. So the bank already announced that you guys are going to be calling the outstanding of the 2029 Tier 2s in March just over $100 million. But you also have another Tier 2 bond that you can call next year. The economics are quite different from the '29, a lower coupon, a lower reset. So if you can discuss what we should expect regarding the call option on the 2030 Tier 2s next year? And then also earlier this year, to finance the call on the 29s, you issued [indiscernible], Tier 2 bond. And that's also like a legacy Tier 2 bond in the sense that there's no coupon deferral and there's no CET1 trigger for principal rider. My question is, why does the bank regulator in Peru allow banks to issue -- to still issue these legacy Tier 2 bonds rather than Basel 3 Tier 2s? Thanks.

Thanks, Nicolas. That's a perfect question to be answered by Michela. Go ahead, Ms. Michela.

Hi, Nicolas. Thank you for your question. Listen, first, related to the Tier 2 that will mature or will be callable during next year, it's something that we are expecting to renew for sure. We do need the additional $300 million of debt for our total capital ratio. And as why the super-intendency allows banks to issue old style bonds, that I wouldn't know the exact why, but what I can tell you is that, you know, Peru has been for a long period of time in stage that we always describe at Basel 2.5. The latest regulation that was issued during last year brought us to Basel 2.95 to say it in some way. And the only feature that has not been implemented is the one that you're asking. So everything else has been aligned to Basel 3. But the Tier 2 bonds have remained with those characteristics. So basically the one that we issued in January is an old style which at the end is pretty liked by the investors. And we are not sure really whether or not there is going to be additional regulation going forward. But if not, most likely the new that we will issue next year will also be in this way unless there are news in the regulation.

Okay. Understood. Michela, one follow on your prior comment. When you said we need the $300 million Tier 2 capital from the 2030s we expect, you mean -- in that sense you mean that you expect to call that bond and to replace it with a new legacy Tier 2 issuance?

I mean, we will need to evaluate of course, all the economics now, but -- which we will need to be in closer to the call date of the bond.

Okay. And just one last question on that. If you were not to call that bond, does it start losing capital treatment?

Yes, it does. 20% per year.

Okay. Thanks very much Michela.

Thank you.

The next question will come from Carlos Gomez with HSBC. Please go ahead.

Thank you very much for taking my call and thank you Michela and Luis Felipe. I joined late and I may -- you may already have answered this, but can you tell us your views about the level of indebtedness of the SMEs and the consumers in Peru? And what is a realistic outlook for credit growth, not only for this year, but for the coming two or three years? And second, during the COVID pandemic, you tried to make a push for SMEs through the Reactiva program. Where do you stand there? And do you have more ambitions to go in that segment? Thank you.

Okay. Yeah. Thank you, Carlos, for your question. The level of indebtedness in [indiscernible] let me take a crack to answering your question in two fronts. The first one, there's still lots of room in terms of increasing bank capitalization in Peru on the debt side. Okay. So I think we still stand at 40% total loans over GDP, and consumer loans is well below that. So the growth potential for the Peruvian system remains as strong as it has been in the last years. Obviously, we are undergoing a negative credit cycle right now, given economic conditions and the overall environment. But we know that that will pass and probably growth will return moving forward. And if that couple -- is coupled with the recovery of the economy, then growth will be even stronger. And the same happens for SMEs. I think one of the things in SME is the informality in Peru is an issue in order to be more aggressive, and so we are working on building digital capabilities and analytical capabilities to get to them. The push that we did during the pandemic working with Reactiva was very positive for us. It allowed us to learn very much about our clients in a segment that we are not really big. However, given current macro environment, we are not inherited (ph) in terms of taking additional risk. We are very aggressive, if you want, in our retail portfolio. We don't need to be -- to do that in our commercial portfolio that includes SMEs. So we do have a solid 3% market share. We are building detailed capabilities, analytical capabilities to serve that market. And we've learned a lot and we see what's working with them. However, until the cycle does not turn around, we'll probably remain in our conservative approach towards SMEs. The Izipay acquisition has put us very close to merchants, and that creates an avenue of growth for our customer segment that that company knows very well. And as Michela mentioned, we are already seeing [indiscernible]. So we have good assets in terms of take a crack at that segment without this proportionally increasing risk levels. I think that's it from my side, I don't know, Michela, if you want to complement something.

The only thing I would add is that from all the new clients that we started working with during the Reactiva loans, in the small business segment, okay, we were not able to lend to many of them. I think it's somewhere below 15%, the percentage of loans that we were able to renew without the guarantee of Reactiva. But what was really positive news from that was that the number of clients increased substantially in that segment, and also the float with that segment, so deposits. And together with those deposits, fees coming from transfers and also trading income. So there was a side business coming from that segment with the Reactiva program. And when we move upwards to the mid-size company there, the impact was even higher. We were able to replace Reactiva loans there. I think it was around 40% or something like that. And also the collateral business, trading income and fees, was very important. And I think that that, together with some other things that we have been doing in the mid-corporate segment, has allowed us to reach the number three position in the market as of year-end. We used to be number four. Now we are number three in the market.

Thank you. And you said your market share is, did I understand 3% or 13%?

No, in the small business it's only 3%.

In the small -- that is small business, that's not SMEs, right?

A proportion of both, mid corporates plus small business, yes.

Okay. And I think my other question was in terms of, in actual numbers, well, yes, there is a lot of potential for growth. How much would you expect your portfolio to grow again, not only '24, but also '25, '26?

In that specific segment sorry or overall?

Both.

Okay. No, I mean, the guidance that we are giving for total loan growth for next year is mid-single digit. Okay. Actually, we are expecting a little bit higher increase in loans in commercial banking and a little bit lower in retail banking, because still the consumer portfolio will grow marginally, we believe.

Thank you so much.

At this time, we'll take the webcast questions. I would now like to turn the call over to InspIR Group. Please go ahead.

Thank you, operator. The first question comes from Daniel Mora of Credicorp. In 2024, can we expect a stable NIM given that with the increases in rates it remains stable at 5.5?

Let me take that. Daniel, thank you for your question. I guess we commented that before. Yes, we are providing guidance for a stable NIM which is the result of decreasing cost of funds from the cuts in soles rates, but also some pressure in the yield on loans due to the portfolio mix and its evolution.

Thank you. And as a follow up to that, when do you expect to reach the peak in provisions and the peak in non-performing loans?

Peak in provisions? I mean, we believe that the high quarters have been already the third and fourth quarter, but the first quarter, 2024, is still going to be a high cost of risk for the consumer portfolio. After that, we expect cost of risk to start to go down and eventually normalize in the coming quarters.

The next question comes from Nancy Lopez of UP (ph). What was the main trigger of a change on retail loans to a more expensive maintenance ones?

Can you read it again? Sorry.

What was the trigger -- the main trigger on retail loans to more expensive maintenance ones?

To more expensive maintenance ones? Is that the question?

Yes.

I mean, maybe if I can comment on the portfolio mix. What has been happening in the past two quarters is that consumer loans, the unsecured portion, has been decreasing because of the risk profile. That is the main reason why, while we have seen a continuous growth in mortgages, in payroll deductible loans to the public sector employees, and also in commercial banking.

The next question comes from Daniel Merida of PUCP. Good morning. Thanks for the presentation. Can you please give an update about your buyback program?

Sure. The buyback program was put on hold a few months ago. Actually, after the latest update that we gave during, I think it was three quarters ago, we have not pursued any additional purchases and it is in kind of a wait-and-see position, given that we are now focusing more on maintaining the capital levels, given the macro outlook that changed not dramatically during the last half of 2023.

The next question comes from Ernesto Gabilondo of Bank of America. How should we think about the dividend payout ratio this year?

Hi, Ernesto. I think you can hear me now. I'm sorry, I had some problem with my microphone. Well, it's basically our policy. You'll have to take into account 45% of the bank and I think, like 50% of the insurance company and a bit of the Inteligo, which results are not very high. Then we take some cash into the operating company to -- sorry, into the holding company in order to cover expenses and debt service. So it should be -- I think we're announcing it pretty soon. So you can work through the numbers. I don't know if we can tell the number right now. We still have to go through the process of IFS Board and shareholders meeting in order to approve it. And -- but that's the way we build up our dividends. And it's based, remember, on local government. So I worked through the numbers, but it's too early to actually mention it. But probably we will have a dividend. So that's good news.

At this time, there are no further questions. I'd like to turn the call over to the operator.

Thank you. There appear to be no further questions at this time as well on the audio side. I would like to turn the floor back over to Ms. Casassa for any closing remarks. Please go ahead.

Okay. Thank you very much. Thank you, everybody, again for attending our call and for the questions. And we'll see each other again for our first quarter results. Thanks again. Bye-bye.

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