Good morning, and welcome to the Intercorp Financial Services Second Quarter 2024 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'll open the floor for questions. [Operator Instructions]. It is now my pleasure to turn the call over to Mr. Ivan Peill from InspIR Group. Sir, you may begin.

Thank you, operator, and good morning, everyone. On today's call, Intercorp Financial Services will discuss its second quarter 2024 earnings. We are very pleased to have with us Mr. Felipe -- sorry, Luis Felipe Castellanos, Chief Executive Officer, Intercorp Financial Services; Ms. Michela Casassa, Chief Financial Officer, Intercorp Financial Services; Mr. Carlos Tori, Chief Executive Officer, Interbank; Mr. Gonzalo Basadre, Chief Executive Officer, Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer, Inteligo. They will 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. Otherwise, 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 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 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 second quarter 2024 earnings call. I want to thank everybody for attending our call today. I would like to start by addressing the macro situation in our country. In the first half of 2024, economic growth showed better numbers posting a 5.3% growth in April and 5% in May, mainly due to a recovery in the fishing industry with associated services, also just a rebound effect over the first half of 2023. In terms of inflation, it has decreased consistently as in April posted a 2.5% number, being the lowest among other countries in the region on that month. And in May, the inflation was 2%, continuing its downward trend. Better market sentiment from consumers and businesses lead us to expect that GDP will be at around 3% plus for this year, which is a recovery compared to last year. Under this scenario, IFS is showing improvement in its results. Our core banking franchise continues to advance with the strong growth in commercial banking and improvement in risk indicators. Although, we still face volatility in our investment operations, overall we continue in our recovery path. At Interbank, we have been able to grow our market shares in loans and deposits, growing significantly in commercial banking, now consolidating as the third largest bank in midsized companies and in total deposits. Even though cost of risk remains high, there is clear improvement, showing a downward trend as we expected. Finally, Interbank and Izipay continued working to create synergies, while Plin continues to engage more users. At Interseguro, we have seen relevant growth in Plin's mainly in private annuities and individual life, maintaining market leadership in annuities. Our Wealth Management business has had a positive quarter in its core business as the assets under…

Thank you, Luis Felipe. Good morning, and welcome again. To begin, I would like to review the macroeconomic outlook for Peru. On Slide 2, complementing what Luis Felipe just mentioned, we see signs of improvement in the macro environment. As GDP for the second quarter and specifically in the months of April and May, grew more than 5%, above market expectations. It is estimated economic activity accumulated 2.7% growth in the first half of this year. This was mainly due to the recovery of the agricultural and fishing industries with associated services. Additionally, pension plans withdraws and the availability of severance indemnity deposits contributed to activate internal consumption. In that line, expected growth remains biased to the upside as we expect GDP to grow 3% in 2024. This considers the base effect versus 2023, the improvement of public investment, some positive impacts from private investment and the recovery of labor-intensive activities. On the other hand, Central Bank has reduced reference rate by 200 basis points from 7.75% at its peak to 5.5% as of today. Inflation is already within its target range of at 2.3% in June with expectations anchored at 2.2%. This positions the Peruvian Central Bank among the first Central Banks to successfully control inflation. Additionally, the exchange rate continues to be the most stable currency in the region. On Slide 3, consistent with the previous slide, we observed progress as domestic demand; consumer confidence and business trusts materialize a change in their trajectory. As of April, we have seen growth in formal employment, especially in sectors linked to consumption and growth in real formal wages. During June [Technical Difficulty] increased 4.2% in real terms, which contributed to drive internal demand. Additionally, private investment accumulated two consecutive positive quarters during the first half of 2024. As so the…

At this time, we’ll open the floor for your questions. [Operator Instructions]. And the first question will come from Ernesto Gabilondo with Bank of America. Please go ahead, sir.

Thank you. Hi, good morning, Luis Felipe and Michela, and good morning to all the team. Thanks for the opportunity. My first question will be on the wealth management business. So probably, it's a question for Bruno. We continue to see that the earnings are still very volatile. I think this was the only subsidiary that what you said as you explained because of the performance of the investment portfolio. So I would like to see your thoughts on if there's like some future strategy to manage more stable earnings in the subsidiary? And my second question will be on asset quality. So we noticed the NPLs increased quarter-over-quarter, but cost of risk declined in one of your peers recently anticipated that the microfinance sector and some specific SMEs and retail segments could remain challenging in the second half. So I wanted to hear from you if you are sharing the same thoughts? And if you think that those risks are already considered in your assumption for the cost of risk trending down. And my last question, if you can elaborate a little bit more on the potential drivers for the second half to achieve the ROE above 12% again in the second half? Thank you.

Okay. Ernesto thanks very much for your questions to get organized. So let's go first with Bruno.

Yes. Good morning, Ernesto. So with regards to Inteligo's results, a couple of things. First, highlighting what Michela already said through the presentation is that we've been seeing very strong growth in assets under management since basically starting the fourth quarter of last year and going through this year, and that trend continues. So I think that's -- we would anticipate fee income to continue to build strongly in comparison to the previous periods. So that would be one source of stable revenues. The other with regards to the portfolio on your specific question, a few things that we've been doing. First of all, we have been increasing our fixed income holdings and at the same time, making sure that those are booked in a way that the impact are -- they don't impact our P&L on a monthly basis because what we're trying to do is generate income from that. And so in the past, we had a lot of that impacting P&L instead of net equity, okay? So we've made that change, and we continue to do so. The second part of it is we've been de-risking our portfolio. But as you know and from what we've been seeing in the market for, I don't know, the last year-and-a-half or so, we have to be patient with that because we don't want to realize losses or sell and rebalance our portfolio at a bad time. So we've been very careful and taken the opportunity to do so throughout this year. And going forward, we think that our portfolio is going to be in a much better place. And hopefully, we are going to continue to be able to reduce the volatility that we have seen basically in the last 12 months to 18 months in their portfolio.

Thank you, Bruno. And Ernesto, on your two questions, let me first give it a crack and then I'll pass it on to Michela or Carlos, so they can complement. But yes, our cost of risk is coming down basically for; I would say a couple of factors. First, we've been taking actions throughout last year that obviously that takes some time, but it's already showing up. So the profile of our portfolio is different to what we had some months ago. And the customers that had high PDLs have already been provisioned. So the portfolio has cleaned in that front. Second, we've been targeting lower-risk customers. So that also has an effect. And third, there's been a mount, but still mount, but at least recovery of the economic conditions overall. So that's what makes us to expect that this improvement and will continue in the coming months as we continue to de-risk the portfolio tactically and strategically. I would say, tactically because we decided to go strongly over other segments, including corporate banking and medium-sized bankings and also higher income segments. And I guess, that we've been positively surprised by the traction that we've had with those types of customers. So that's something that has impacted positively the results of the bank. And then jumping a little bit on your third question, if this path continues and the cost of funds continue to go down as we do expect that only those two factors will have a positive impact on the ROE itself. So as Michela mentioned during the call, we do expect that Interbank's ROE and Inteligo's ROE, given a stabilization of market conditions will boost ROE for the second half of the year. I'll stop there and maybe Michela and Carlos can complement anything that I have not mentioned.

Yes. Maybe a little bit more in relative terms, Ernesto, is that when you look at our portfolio, I mean, Luis Felipe already mentioned that the riskier part of the consumer book has decreased. It has already de-risked, okay? So this is the first consideration that is clearly showing in the downward trend of cost of risk of credit cards and personal loans, and we have seen this very clear this quarter. And the second question, which I think is very relevant given the macro scenario, is our different strategy in commercial banking, which has always been much more conservative. First, because of the incidence of the small businesses in our portfolio. Remember that we only have like 3%, 4% market share in SMEs, the small ones, and given that we've been lending in Impulso MyPeru, the cost of risk of that segment has significantly decreased. So it has decreased, I don't know, like 700 basis points over the past year, okay. So we don't have a big portfolio in the micro segment, which is the one that is hit because only now you start to see the problems in that segment that was held first by Reactiva, then by the multiple extension that the Reactiva program had for that specifics. And the second portion of our more conservative approach in commercial loans is in the mid-sized companies, where when you look at our PDL ratios, it's the lowest in -- between the four big banks in the countries. It has always been the case because we are conservative and we focus on the better risk profile clients. So I guess, you see a continuous deterioration of PDL ratios in the system of mid-sized companies and small businesses. But it's not the case and not to that extent in the Interbank portfolio. And linked to that, the trend in the ROE for the second half is actually coming from two specific things is the ROE of Interbank that with a lower cost of risk starts to get closer to the target level. So we have seen already a double-digit ROE Interbank this quarter, and that ROE should just continue to grow in the next quarter because of a lower cost of risk. And the second one is Inteligo. Of course, there is a little bit more of uncertainty there, given market conditions, but we expect a much higher ROE for the second half of the year at Inteligo when you compare it to the first half. I'm not sure whether this covers it up, Ernesto.

No, very detailed. Super helpful. Thank you very much, Luis Felipe, Bruno, and Michela.

Thank you, Ernesto.

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

Yes. Hello, good morning, and thank you for taking my question. I wanted to ask you first about the -- you mentioned Reactiva and the guarantees and the fact that the new program also has guarantees. What was your experience with the performance of the Reactiva program? I mean, do the guarantees significantly reduce your cost? And does the government incur significant cost in that type of program? Second, we know that there was a savings bank that failed in the quarter. How do you see the financial system in general? And are you concerned perhaps by some of your counterparty risks? And finally, could you elaborate on the reason to integrate Izipay and not have it a separate segment anymore, there was actually quite useful to be able to monitor. Thank you.

Yes. Carlos, can you repeat your question number two, please? I didn't get it very well.

I think my question was in regards to I think [indiscernible] was the one that failed and whether you are concerned about other institutions in the financial system in Peru.

Okay. Okay. Great. Let me start addressing that question. So I think that we are not concerned about the financial system. I think that the system -- the Peruvian system is very well regulated. It's very well provisioned. It's very well capitalized. Obviously, with so many months of low growth. Even last year, we had a small recession, things are complicated for some institutions, especially the ones targeting the higher risk segments. But it's not something that is affecting the majority of the institutions I would tend to believe and understand that these are isolated cases. So there's not a significant concern. I think that super advisory by the SBS is working well, and they are very preemptive in making sure that things don't get complicated for customers. So that's on that part of the question. And our exposure to those types from the Interbank's perspective for those types of institutions is negligible, extremely limited. So there's no evidence on that front from the Interbank perspective as well. Then on the experience of the Reactiva and Impulso, I'm going to pass it on to Carlos as well as question number three, however, it's two different things. Reactiva was something that was built to face COVID. We had a positive experience, but different to Impulso, which is a program targeted to boost recovery from last year's issues. So there are two different programs. In both cases, our experience has been positive. But let me pass it on to Carlos Tori, so he can complement that. And on your question about Izipay and Interbank as well.

Thank you, Luis Felipe. And exactly, the -- let me go through Reactiva, first. It was a program during COVID, which came with funding from the government, a very, very low cost rates and long-term. The experience has been good, obviously, both for our clients and the system as well as for the banks. The loans were very small. So the operational process of disbursing and getting back the guarantees from the Board and set up wasn't perfect, but it's worked well. And we still have a small outstanding, but that portfolio basically is being repaid most of it at the end of this year, and there's going to be very little left for first quarter of next year. Impulso, it's a different program. It does have a guarantee for the government depending on the size of the loan; it goes from like 60% to like 90%. But it comes with our funding and the -- so the economics on those loans obviously reflect a lower risk, but also have more economic return for the banks. So it's a different program, does give the clients in longer-term funds, which is very helpful for them, and it gives the economy a boost. But it's a different program, I would say, better and more sustainable. It's probably more comparable to similar programs that we see in other countries in the region. And it could be a program that it stays along the next couple of years. So very different to Reactiva, both post and is that -- I don't know that has your --

Well, actually, I'm curious about your credit loss experience in these programs. And I understand there are different types of companies.

No, it was very low, very low credit loss, much lower than --

But that's after the guarantee, I would imagine or before the guarantee.

Both actually. But yes, after guarantee, definitely, yes. Yes. Yes. I mean after guarantee much lower than the rest of our portfolio and before guarantee, it's similar to our portfolio, yes.

Yes, best of luck. Okay. Thank you.

And then on Izipay, so the rationale behind the acquisition of Izipay and the vision going forward has always been the integrating it to the business of the bank. There are a lot of synergies, particularly with our commercial banking segment, in terms of bringing in the flows and having the flow and strengthening the relationship with the clients. And also on the payment side, there are a lot of synergies in terms of which systems and which networks we use to transfer payments and the funds. So we've been going forward with that strategy. We've made some more changes to foster that those synergies and working together. So we feel like the standalone financials of Izipay no longer reflect the actual results because there are different things going on. We will continue to show the operational numbers and transactions and things like that. But yes, so that's the reason why we haven't shown the Izipay numbers. I hope that explains it. We -- having said that, we have seen, as Michela mentioned, a very strong increase in flows from Izipay to the bank and obviously, strengthening relationships on our commercial clients in those flows.

And do you continue to operate -- sorry. Now I was going to ask on Izipay, do you continue to operate with your former partner with Scotiabank?

No, no. Actually, Carlos, that -- what Carlos mentioned, we acquired 100% of Izipay many months ago. So that's why we --

No, no, no. I understand that. So the question is whether that has meant that Izipay's relationship with Scotia has stopped to become smaller?

No, no, no. We continue to offer them some services. We offer services to many financial institutions. And yes, the relationship with Scotiabank and credit exposure has remained stable. There are different things that go up and down. We give them several services but it hasn't decreased due to the change in ownership, yes.

Next question will come from Alonso Aramburu with BTG. Please go ahead.

Yes. Hi, good morning. Thank you for the call. I wanted to ask about loan growth and margins and the relationship between the two. You mentioned allowance needs to improve in the second half of the year. I'm just wondering how much of that is on the asset side, a higher yield potentially as loan growth accelerate in the retail side, how much of that is on the funding side as where it continues to come down on your funding cost continues to decline. And related to that, when do you expect a pickup in growth in credit card channel. Thank you.

Great. Michela?

Yes. Alonso, hello, good morning. Let's start with NIM. What we are seeing for the second half of the year, I mean it's tough, okay, because the dynamics because of the portfolio mix, the yield is still slightly going down. But there are a number of things that should help a little bit into loans, but we believe most of the recovery should come from the cost of funds, okay. But the thing that could help yield on loans is that we are expecting the decrease in the consumer loan portfolio, I mean, to start stabilizing, no, so not that much decrease. And the second thing is that in Impulso MyPeru does not renew, and we don't have more funds to do that. We will start replacing and growing with some loans which have a little bit higher yield, okay. So that should help. But for sure, for what we've seen in the first half of the year in what -- because of what has already taken place in our funding base and our cost of funds, we expect that trend to continue and to be the main positive contributor, if you want the NIM. Now on the growth of credit cards and personal loans, actually, that is also a little bit tricky because up until the official figures that we've seen at system level of June. Now those two products have continued to shrink, and we're talking about all the banks. We are all shrinking. And this is mainly due to a number of reasons. For sure, the liquidity, so the severance funds and the private pension funds are making people -- are helping people to repay their debt. That's good on provisions. It's not good for growth. But the second thing is also that we have not seen yet a strong recovery of employment and of demand, like a sustainable one that would push clients to start taking new debts, okay. We have seen a recovery. And in July, it has been very important in credit and debit card turnover, so the usage of credit and debit cards. So that's positive news because that is the base then for financing. But I guess, July will also be a month of decrease at system level because you have, besides what we have seen in June, also the extra salary for dependent employees. So I guess, it's going to be a decrease in what we are expecting in our estimates is just a stabilization and not yet a growth up until year-end.

Just to complement that, Alonso or just summarize, we have been issuing more cards in the last couple of months. So we're growing our portfolio. But -- and the usage has been good. So activation is up and clients are taking the value proposition. But as Michela mentioned, there has been low use of financing on those cards. One part of that has to do with the segments that we're going at, which also Luis Felipe mentioned, we're going a little bit lower risk. But also, there's been a lot of liquidity in the consumer segment over the last couple of months. First, due to CPS, the other is the funds from the AFPs, which have been we're in the middle of that or probably around 60% of the disbursements have been done. [Indiscernible] in July is always a very liquid month and that will continue for a couple of weeks. So it will be interesting to see what happens after that. We feel comfortable with the risk decisions that we have made but we would expect a little bit more financing on those new cards over the next couple of months.

The next question will come from Andrés Soto with Santander. Please go ahead. Andrés Soto: Good morning to all and thank you for the presentation. My question is regarding the long-term strategy and how do you see your loan book over the medium-term? Historically, Interbank was -- have an outsized exposure to consumer lending after what we have seen in this credit cycle. Has anything changed in that sense regarding your appetite for continued having the type of exposure and also considering that you have other initiatives targeting SMEs. Can we expect IFS after these be -- have a different composition? Or do you think that all those factors are rather cyclical and once the economy recovers, we should see a reshuffling of your loan book towards the more closer to historical levels?

Yes. Hi Andrés, thanks very much for your question. We've actually always mentioned that we like a balanced approach to our portfolio, like a 50% commercial, 50% retail. Obviously, some opportunities came in the last year that debalanced that a little bit more on consumer, but the view doesn't change. We want to go on a balance portfolio strategy. I think that's what has done IFS successful in the past, and that probably will be in the future. Obviously, certain conditions of the country are changing. As probably certain segments will be growing more than others and that's something that we need to review. But as of now, it doesn't change. We are going to go over our big new five-year plan strategy review and strategic planning process starting actually these days and it will go for a couple more months. So we're going to debate that. Obviously, Carlos Tori, his new role brings new ideas that will be welcome and discuss. And when we finalize that process probably we'll be able to share. But so far, we believe Peru continues to be a country of opportunities. The balanced approach is what we have, and that's what we will entered in during the following months as we continue to deploy our strategy. I think growth in core segments, digitalization and best use of analytics is going to continue strong. Andrés Soto: Thank you, Luis Felipe. And from that perspective, you previously mentioned that when you look at the long-term, you will -- we should expect IFS to have a different composition in terms of NIM and cost of risk. Can you remind us what do you see as sustainable levels for those variables to target your 18% ROE for the consolidated entity?

Yes. I can remind you of the 18% ROE. I don't have the details on the other. I don't know, Michela, we have long-term numbers for that, but 18% should be your driver, Andrés. Michela, I don't know if you can complement on that.

Yes. No. Maybe the only thing Andrés, that I will add is that, I mean, cost of risk should be, I mean, closer to 3%, okay. Most likely, it's going to be above 3%, okay, because of the portfolio mix and the things that we are thinking of growing in the different maybe risk profile, okay. But I mean, last number we have reported is still 4%. Now this number should go back in closer to 3% or slightly above 3%, also in the mid-term. Andrés Soto: Expectation on when cost of risk will normalize to this level?

Actually, you have seen already, the movement from 4.7% to 4%, we expect to end the year, I mean mid-3s, so close to 3.5%. So we expect quarter-over-quarter to continue the decline.

At this time, we will take any webcast questions. I would now like to turn the call over to Mr. Ivan Peill from InspIR Group. Please go ahead, sir.

Thank you, Operator. At this time, there are no webcast questions. So I'd like to turn the floor back to Ms. Casassa for closing remarks.

Okay. Thank you very much, everybody, for joining our call, and we will see each other again in August for our third quarter results. Thank you. Bye-bye.

Bye. Thanks, everyone.

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