Inter & Co - Q1 2024

Transcript

Operator (participant)

Good afternoon, and thank you for standing by. Welcome to Inter & Co's First-Quarter Earnings Conference Call. Today's speakers are João Vitor Menin, Inter's CEO, Alexandre Riccio, Senior Vice President of Retail Banking, and Santiago Stel, Senior Vice President of Finance and Risks. Please be advised that today's conference is being recorded, and a replay will be available at the company's IR website. At this time, all participants are in listen-only mode. After the prepared remarks, there will be a question-and-answer session. For this session, we ask you to write down your question via the Q&A icon on your screen. Your name will then be announced, and you will be able to ask your question live. At that point, a request to activate your microphone will appear on your screen.

If you do not want to open your microphone live, please write down "no microphone" at the end of your question. In this case, our operator will read your question for you. Please note that there is an interpretation button on your screen where you can choose the language you want to hear: English or Portuguese. Throughout this conference call, we will be presenting non-IFRS financial information. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliations of the company's non-IFRS financial information to the IFRS financial information are available in Inter & Co earnings release and earnings presentation appendix. Today's discussion might include forward-looking statements which are not guarantees of future performance. Please refer to the forward-looking statements disclosure in the company's earnings release and earnings presentation. Now, I would like to yield the floor to Mr. João Vitor Menin.

Sir, the floor is yours.

João Vitor Menin (CEO)

Thank you, operator. Hello everyone. Thanks for joining us for our 1Q earnings release. As we generally do, I will start with a quick overview of our strategy, to then pass it to Xandre and Santi that will cover the rest of the presentation. I will then close with a final remark and open it for Q&A session. Jumping to page 5, I will start with a quick update on this quarter performance and how this connects to our North Star, which is the 60-30-30 Plan. I'm glad to say that we reached almost 32 million clients this quarter. This increase in number of clients came together with an increase in our activation rate. We reached 55%, an improvement of 86 basis points just this quarter. On efficiency ratio, we continue making great progress quarter by quarter.

It stands today at 47.7%, which implies a strong improvement of 3.6 percentage points again just this quarter. And last but not least, our ROE is approaching the two-digit mark, closing the first quarter at 9.7%. We think this number is even more remarkable considering the high level of excess capital we hold. As I mentioned in the last earnings call, we are proud to be ahead of our North Star plan. It is strategically important for us to continue to be ahead of the plan while continuing to grow and innovate. Now, moving to page 6, here we see Inter from a growth perspective and how we are disrupting the Brazilian banking market. We can see this disruption from three angles. First, on clients. We have experienced strong expansion in our client base, with a steady increase in the number of customers choosing to transact in our platform.

Second, on loans. Our portfolio has been growing steady, as more individuals and businesses finance their needs through our lending options. Third, on revenues. We have achieved robust growth, driven by increased client monetization across fees, savings, and credit products. These results show how Inter is delivering alpha by consistently over-delivering growth across client, balance sheet, and income statement metrics. Moving to page 7. Here I will cover our main business achievements this quarter. There are three particular things I would like to highlight. First, Loop. We are disrupting an outdated industry by integrating our existing verticals into a comprehensive rewards program. This initiative aims to drive client engagement and spending in our entire ecosystem. Second, we are scaling up our new credit lines. These are many: Pix Financing and Buy Now Pay Later in our Inter Shop. Lastly, we are strategically building our Global Account.

We are doing this by leveraging the robust app infrastructure we have established in Brazil and replicating it to the U.S. These three groups of business opportunities are strategically important to continue reinforcing the power of our financial Super App. To conclude on my side before handing over to Xandre, I would like to point out the three priorities that we have for the remaining of 2024. First, on the growth side, we expect to continue growing clients, loans, deposits, and top-line revenue. We will do that by continuing to innovate and delight our clients. Second, on the business side, we remain focused on increasing client engagement and principality. We are doing that by offering the broadest digital solutions on the market. Lastly, on the financial side, our priority is to continuously improve operational leverage and expand our NIM.

Streamlining our operations, optimizing the efficiency, and improving the portfolio mix, we aim to enhance profitability and financial growth. We believe that these factors will allow us to continue operating in a positive trajectory that balances growth with profitability. Now, Xandre will walk you through our business updates. Thank you very much.

Alexandre Riccio (SVP of Retail Banking)

Thank you, João. Good afternoon, everyone, and thanks for joining us today. As João mentioned previously, from day one, we have been disruptors in the banking industry, allowing us to gain market share in one of the largest banking markets in the world. Our focus on innovation has been instrumental to our success. The first quarter of this year was not different. We once again welcomed 1 million new active clients, bringing our total increment to 3.9 million in the last 12 months. This growth is on par with the previous 12-month period, however, with a 340 basis points higher activation rate. All of this while maintaining an extremely comfortable level of customer acquisition cost. This consistency in growth has put us in a very good position to compete in our industry, and each day we see market share gains across the markets we participate.

Moving to page 11, we can see that the day-to-day banking remains the backbone of our financial Super App. Total TPV increased 42% on a year-over-year basis. This reflects the strong growth and adoption of our platform. This quarter, volumes from credit cards surpassed debit for the very first time. This shift contributed to a stable interchange revenue, even when compared to the seasonally strong fourth quarter. When looking on a cohort basis, we observe an encouraging trend. Newer cohorts show a steady increase in spending, reflecting their growing engagement with our offerings. Simultaneously, older cohorts continue to demonstrate robust growth as they mature. Moving to page 12, I'll talk about Inter Shop, insurance, and investments, all of which had great performance this quarter. Starting with Inter Shop, we were able to resume GMV growth while increasing net take rate.

We delivered BRL 1 billion GMV in a quarter typically marked by seasonal contraction. On insurance, we also had another great quarter, reaching more than 404,000 sales and 1.9 million active clients. These operating numbers supported a record-breaking BRL 52 million in net revenue for insurance. On investments, our cutting-edge product offering resulted in an impressive 61% year-over-year growth and an AUC reaching BRL 95 billion. On the global front, we're successfully replicating one of our most important competitive advantages, but now in the U.S., our strong deposit franchise. Our assets under custody and deposits in U.S. dollars have reached the impressive milestone of $460 million, reflecting a remarkable 223% year-over-year growth. We achieved almost 3 million clients in a vertical that is strategically important given its typical customer profile. I would also like to emphasize that this quarter, we introduced a new investment option for our clients, time deposits.

Despite being a recent addition to our lineup, we're thrilled to see the rapid adoption and growing interest in the product. Jumping into our seventh vertical, loyalty, we achieved 6.6 million active clients, bringing a net increase of 1.2 million. Loop, as we call it, is an evolution of our cashback program and had one more quarter of success. A few highlights are: we have rolled out more than 40 missions to enhance client spending, engagement, and activation. These missions influenced the behavior of nearly 1 million clients. Second, we have observed that Loop clients have a spending lift of 66% as compared to non-Loop clients. Third, we are consolidating all sources of cashback into points, and customer feedback has been extremely positive.

And last, from a financial perspective, we are observing a variety of benefits that go from profits made when selling points to interest earned on float to making spreads when points are burned. We're excited with all possibilities Loop will keep bringing us, especially after the launch of our new experience a week ago. Finally, before giving the floor to Santi, I want to talk about the expansion of our new credit lines. First, we're observing consistent growth in Pix Financing. Second, our Buy Now Pay Later offering is fine-tuned and gaining traction, supporting GMV expansion in Inter Shop. These two products, along with Bill Pay Financing, Cash Financing, and Overdraft, are growing and showing great potential. Delinquency readings are within our expectations. We're continuously fine-tuning user experience and flexibilizing credit policies to make the offering more broad. There is a lot of room to grow within our base.

The portfolio reached BRL 170 million in the quarter and is evolving at an encouraging pace. Now, I'll pass the word to Santi to present our financial performance.

Santiago Stel (SVP of Finance and Risks)

Thank you, Xandre, and hello everyone. Thank you for attending our call. Starting on page 17, we can see a strong performance on our credit book. After growing our loans several quarters at 5%, we are now at 4%, which is in line with first quarter seasonal trends reflecting marginally lower credit demand as a result of holidays and Carnival. On a yearly basis, our portfolio grew 28%, surpassing BRL 32 billion. Important to notice that we continue growing our loan multiple times more than the market, therefore gaining significant market share across products and diluting our cost base. Moving to interest rates on the top of the page, we can see an increase of 1.0% in the all-in loans rate in this quarter.

This is the consequence of one, continued growth in the high-margin portfolios, two, the repricing of the legacy payroll and real estate portfolios, and three, the higher-than-average inflation in the quarter. We'll go deeper into the full impacts of rates on the NIM page later. Going deeper on growth by loan type, we remain committed to deploying capital in the most profitable manner possible and therefore increasing the yields and ROEs on our loan portfolio. Our best credit products, FGTS and Home Equity, had the highest growth levels gaining scale within our loan mix. In FGTS, this quarter alone, we reached the highest underwriting volume on record, reaching approximately BRL 500 million in new loans at an average monthly rate of 1.8%.

On credit cards, we continue with the approach of prioritizing credit limits to existing and strong-performing clients, enabling us to increase by nearly 40% this portfolio while improving asset quality trends. Finally, on real estate and payroll loans, we balance growth with repricing to ensure that profitability continues to improve in these portfolios. Now, moving on to page 19, on asset quality, NPLs increased by 20 basis points, which is normal in first quarters as a result of less liquidity in the consumers as opposed to the prior quarters. On the other hand, we did see continuous improvement in the credit card NPL by cohort, together with the NPL and stage three formation. This performance is the result of continuous enhancements in the underwriting models, better risk management, and collection strategies.

On page 20, we can see a stable performance in the cost of risk metric, which remained flat at 5.2%. Our coverage ratio also remained stable at 131%, which means we continue provisioning in line with the NPL formation trend. Regarding loan mix, which could impact these two ratios, we have two opposing forces that offset each other. On the one hand, we are originating more FGTS and Home Equity loans, which should lead to lower ratios, and on the other hand, we are accelerating credit cards and Pix Financing. Therefore, the overall numbers remain stable and in balance. We continue to focus on improving our underwriting models together with the collection practices, which are the ultimate drivers of our asset quality trends.

Moving to page 21, we once again see our strong funding franchise, which reached BRL 43.8 billion and is the result of 15.7 million clients trusting us with their deposits. As mentioned many times before, we have a very attractive funding mix, with transactional deposits representing 32% of our total funding. We believe that this funding mix is one of the best mixes across Brazilian banks. In terms of growth, our funding base grew 1% this quarter, which was a good performance for a first quarter in the year, for instance, in the first quarter of 2023, we experienced a 1% decrease. Moving on to page 22, our cost of funding remains a key competitive advantage, and we can see this consistently over a long period of time and through the cycle of rates increasing, staying stable, and then beginning to decrease.

This quarter, our cost of funding was 61.9% of CDI, once again around 60% of the mark that we aspired to operate in. As rates decrease further, we should continue to benefit from this dynamic, given the structure of our balance sheet that makes Inter be liability sensitive. Moving on to page 23, once again, we had a great quarter in terms of revenue, reaching record-breaking numbers. We achieved BRL 2.3 billion and BRL 1.4 billion in gross and net revenue, respectively, this quarter. These levels imply a growth of 37% on a year-over-year basis and a 7% on a quarter-on-quarter basis. The main driver of growth was NII, which experienced strong performance through focus on improving asset allocation into profitable loan segments. Fees decreased marginally this quarter as a result of the strong performance it typically has at the end of the year.

On a year-on-year basis, growth in net fees was very strong, resulting in a 38% growth. Moving on to the unit economics metrics on page 24, here we can see that our RPAC remains stable as we continue adding 1 million active clients each quarter, as Alexandre mentioned. This results in a stable RPAC of approximately BRL 30 per month. On the cost side, we continue to improve significantly our cost-to-serve metric, which reached a record low level of BRL 11.8. Our margin per active client reached a record of BRL 18.5, which is 23% higher than a year ago. Moving on to page 25, we present here the evolution in terms of our net interest margins. Despite being a quarter when the percentage of demand deposit within our deposit mix is typically lower than in other quarters, all of our NIMs had a strong performance.

Starting on the top of the page, both our NIM 1.0 and 2.0, with and without the non-interest accruals of credit cards, known as à vista in Portuguese, increased 20 basis points this quarter. When we look at the risk-adjusted NIM, which deducts cost of risk, performance was even stronger, reaching records in both the 1.0 and 2.0 metric. This strong performance is the consequence of the following factors playing out consistently for the past several quarters: one, improvement in the repricing of legacy real estate and payroll loans; two, change in the loan mix towards the most profitable credit products; and three, the lowering of the cost of funding. Let's move now on to page 26, where we show our improvements on the operational leverage trends. On the left chart, we can see that we're able to further increase the gap between the growth of net revenue and expenses.

These expenses remained flat, while net revenues grew 7% this quarter. With this dynamic, we continue to expand the gap between the two curves on the left graph, which is our goal in terms of operational leverage. As a result, our efficiency ratio improved 370 basis points to 47.7%, as João mentioned at the beginning. We celebrate this milestone of penetrating the 50% mark and highlight that this is one of the three key ratios we target for our 60-30-30 North Star, in which we are way ahead of our goal at this point in time. To close on my side, here we show our performance in terms of profitability. We deliver a record ROE of 9.7% by printing our best-ever net income of BRL 195 million. On a pre-tax basis, we reached BRL 274 million.

This continued growth in profitability on a quarter-by-quarter basis strengthens our confidence in being on the right path to deliver a healthy combination of growth and profitability while building a franchise for the long run. Now, I'll pass it to João for his closing remarks. Thank you.

João Vitor Menin (CEO)

Thank you, Santi and Xandre. As we saw in this presentation, we are disrupting the market by staying true to our mindset of builders and innovators. We truly believe that we are creating a unique, special, and built-to-last financial platform. In the first three months of this year, our robust financial and operational performance showcased that the model is maturing and showing the true merits of its design. These achievements also highlight the resilience and effectiveness of our business, as profitability is effectively combined with disruptive growth. Finally, the performance of the first quarter of the year two of the 60-30-30 Plan, set us on a good pace, and therefore, we are full steam ahead for the coming quarters and years. I would like to thank our amazing team of employees for their hard work and to our shareholders for supporting us since the beginning.

Before moving to the Q&A section, I would like to extend an invitation to all of you to attend our Tech Day on May 13th, 3:00 P.M. Eastern Time. This will be live in NASDAQ New York office with virtual streaming for people to also attend remotely. During this event, we will deep dive into Inter's key competitive advantage, which is our technology platform. You can find all the details for the event on our investor relations website. Thank you for your attention and for joining us for this earnings presentation. Operator, we can now open it for questions. Thank you.

Operator (participant)

We will now begin the question-and-answer session. Once again, for this Q&A session, we ask you to write down your question via the Q&A icon at the bottom of your screen. Your name will then be announced, and you will be able to ask your question live. At this point, a request to activate your microphone will appear on your screen. If you prefer not to open your microphone live, please write down "no microphone" at the end of your question, and our operator will read your question aloud. Our first question comes from Mr. Tito Labarta from Goldman Sachs. Mr. Labarta, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Tito Labarta (Analyst)

Hi, good afternoon. Thank you for the call and taking my question. I have 2 questions if I can. 1, just some good loan growth, asset quality held up despite some seasonality. Just thinking from here, I mean, how much of the pickup in NPLs do you think was related to seasonality and in terms of continuing to grow the loan book close to this 30% level? How comfortable are you in being able to continue to do that? And then my second question, really just to clarify a little bit, the decline in the capital ratio in the quarter. I see here that you paid a dividend, I guess, from the bank to the holding, but it looks like the reference equity fell even more than what the dividend was. It looks like the dividend was $125 million, if I have it correctly.

But just if you can clarify a little bit that decline in the reference capital in the quarter and how much of it was related just to the dividend payment? Thank you.

Santiago Stel (SVP of Finance and Risks)

Hi, Tito. Thank you for the question. Santiago here. So on asset quality, we think it was mainly due to seasonality. We are operating at the delinquency levels, both in terms of NPL formation and cost of risk, that we think that we will be operating throughout the year. We have some upside to potentially be operating below this level, but it will be around this ZIP code. Keep in mind that we are increasing underwriting on certain unsecured lines that will put some pressure on those ratios. On the other hand, we are growing FGTS and Home Equity, which tend to compensate. We are solving for risk-adjusted NIM. We have said this in prior calls. That's what we care the most about, which is what we get to take home in terms of paying the bills, both in interest expense and cost of risk.

Then in terms of capital, what we had was several factors playing in. On the one hand, we had AOCI, or the mark-to-market of the securities portfolio, which is positive in some quarters, negative in others. In this quarter, it was negative by BRL 50 million. It goes directly to equity, and it impacts the regulatory capital or the reference capital, as the regulator calls it. We had dividends from the bank into the holding level, which I will dive in a bit deeper now, for approximately BRL 160 million. And we also had a capital contribution from the bank to the broker-dealer in Brazil, the DTVM, for BRL 140 million. That will be reversed once the central bank recognizes the consolidated capital of that. So that BRL 140 million was temporary. We also see the AOCI also as temporary because it has these oscillations back and forth.

Those three together explain the change in the Reference Capital. But the most important thing on capital that I would like to highlight is that we are solving for financial performance. In that sense, we created an organizational structure, a corporate structure, which now has the Inter & Co holding with the follow-on that we did at the beginning of the year. Together with the profits that we're increasingly creating, we do expect to have a bigger percentage of our excess capital up in the holding level. This is more efficient for the performance of the company. We will keep, obviously, a cushion of operating with a comfortable level of CET1 at the Brazil bank level, but the excess capital will be increasingly more based in the holding company.

Tito Labarta (Analyst)

Okay. No, that's pretty clear. Thanks, Santiago. Just to follow up on the first question, so the 30-ish% loan growth, you feel pretty comfortable that you'll continue to be able to grow at that pace?

Santiago Stel (SVP of Finance and Risks)

Yes. We think it's going to be in the 30s. Obviously, the second half of the year is the most active one, so that will determine the final outcome. We saw that in the last year when we had an acceleration towards the end. The first quarter wasn't bad. 4%. It was higher than prior first quarters. But we will see as the year goes by.

Tito Labarta (Analyst)

Perfect. Great. Thanks, Santiago.

Santiago Stel (SVP of Finance and Risks)

Thank you.

Operator (participant)

The next question comes from Mr. Thiago Batista from UBS. Mr. Batista, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Thiago Batista (Analyst)

Hello. Are you hearing me?

Operator (participant)

Loud and clear, sir.

Thiago Batista (Analyst)

Okay. Perfect. First of all, congrats, João, Alexandre, Santiago, for the results. Very strong numbers. I have two questions also. The first one about the Pix financing. How much transformational can be the Pix financing for Inter? Do you believe that this can really change the profitability or change the business of the bank, or how big this can be? The second question about Inter's hedge strategy. So we are seeing interest rates increasing a lot in the last couple of months in Brazil. So how is Inter doing its hedge strategy?

João Vitor Menin (CEO)

Thiago João Vitor speaking. Thank you for the question. I'm going to cover the Pix financing part of the question, then Santi will cover the hedge. We are very excited with the Pix financing product. We have been saying for a while that we see the 2.0 consumer finance in Brazil starting to play out. And what do you mean by that? We see with the Pix finance different from the rotativo e parcelado on the credit cards as a more active product, a more interest product for us to deploy our capital. We can manage better the interest. We can manage better the moment where we do the underwriting. We have less intermediaries on the process, such as the card companies, the acquirer companies, and so on. We started about one year or so, even less, with Pix financing.

And so far, the delinquency is better than the credit cards, and the economics are better than the credit cards. And we're still improving. We're still rolling out that offering for our clients, as we always like to say at Inter when it comes to credit underwriting. We like to move forward, but with cautions. But we see it as a big addressable market for Pix finance. So very excited with what we have seen so far. And again, just to remind the market, we have 80% of penetration on Pix, so we will be able to play a very good role on that product going forward.

Santiago Stel (SVP of Finance and Risks)

Hi there. Santiago here on the hedging side. What we started to do at the beginning of last year was to hedge the originations, not the stock, the originations of the loans that had more than one year of durations.

This was payroll, FGTS, Home Equity, and traditional mortgages. We have been doing that since. Now that the interest rates went up a lot, we paused. We will resume once we see the rates going down. So we are smoothly increasing the level of the ratio, of the hedge ratio in the long duration portfolio. We expect to do this, or we seek to do this, to have less volatility in the results. We think this is a strategy worth doing, but we don't want to rush in overhedging too fast when we still see some potential for rates to go slower. But overall, that's the strategy so far.

Thiago Batista (Analyst)

Very clear, João and Santiago.

Operator (participant)

The next question comes from Mr. Pedro Leduc from Itaú BBA. Mr. Leduc, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Pedro Leduc (Analyst)

Thank you, guys, and congrats on the quarter. I'd like to pick your brains a little bit on loan book. It's growing very well, and we know that credit cards especially. So first on that, what led you to have more comfort in this? What are you doing different? What kind of clients are you going after? User profile on these cards. And then on the overall loan book pace, 30% yearly growth, if that's the level we should see also for the remaining of the year. Thank you.

Alexandre Riccio (SVP of Retail Banking)

Hi Leduc. This is Alexandre speaking. Thank you for the question. So as you know, credit card is an important product for transactional banking vertical and a key driver of principality. So growth there is aligned with our short and long-term objectives. With that, when we think about specifically the first quarter, we had a few factors contributing to growth. First was Loop. So our loyalty program is gaining a lot of traction. We've deployed several missions, and these have been drivers of a lot more use on our cards, with a lot of focus or a good contribution from higher-income clients also that use the upper-scale products. This is being good. A second part is an early contribution in the total portfolio coming from Pix financing and also bill pay and cash financing. It's growing, so it starts to contribute for the growth of the portfolio.

Also, last but not least, the continuity of our usual growth. That includes new clients from onboarding that we continue underwriting credit limits, and we're having good engagement. New clients for the credit card product coming from the behavior models. We're also very active on underwriting those limits and a big focus on gains of share of wallet on existing customers. So clients that are already using credit cards, we've been doing all the typical increases of limits. And again, with Loop, it's easier to sell this engagement. So we'll keep working in this direction throughout the year. And that's good here for the business. When moving forward the growth, it's going to be in the ballpark that Santiago just mentioned.

So we're going to be in the 30s, and with the credit profile evolving in parallel with good growth on FGTS, so products with low delinquency, balancing with products that might have a little bit more delinquency. And so we see growth and NPLs at good levels as we saw in the first quarter.

Pedro Leduc (Analyst)

Thank you and congrats again.

Operator (participant)

Our next question comes from Ms. Neha Agarwala from HSBC. Ms. Agarwala, we're now opening the audio so you can ask your question live. Please go ahead, ma'am.

Neha Agarwala (Analyst)

Hi. Thank you for taking my question. Just a quick follow-up on the previous question regarding the unsecured credit lines that you're now expanding into. We've seen a lot of players offering Pix financing now. Even the incoming banks are increasingly improving their offering in Pix financing. How do you think Inter can differentiate, or you don't require differentiation given that you have 8% market share of Pix transactions? You could continue to grow aggressively on Pix financing. And this BRL 170 million number that you've shown this quarter, where could this be by the end of this year, roughly? Where do you see these new lines growing into, at least by the end of this year? That would be very helpful for us to kind of anticipate what kind of growth we should imagine. Thank you so much.

João Vitor Menin (CEO)

So Neha, João Vitor speaking here. Thank you for the question. As I told you before, it's a mantra at Inter. We like to move forward, but with cautions, mostly on unsecured credit portfolio. But the good news is we're putting these new products up and running. The clients are adopting very fast. And lastly, the way that people buy this product with us, it's 100% digital through our app in a very seamless way. This helps us to grow fast. And also to mention, by having the best cost of funding in the market, we can have a very good profitability on that. We have been tracking the delinquency of the product, Pix financing, Buy Now Pay Later for our Inter Shop, the boleto payment option, and the withdraw option with Pix.

So far, as I mentioned before in the previous question, the numbers are better than the credit card, and therefore, the economics are much better without the intermediaries that I also mentioned on the previous question. So our appetite for this consumer finance 2.0 is big. I believe that, as you said, having a big market share on the market, a good cost of funding, and a very seamless way to hire the products, we believe that we will gather, again, with cautions, a big market share of the market going forward.

Neha Agarwala (Analyst)

Understood, João. Thank you. If I can just follow up on the cost side, I mean, we continue to see very good cost control, and that has definitely helped in boosting up the ROE. What kind of levels do you have for this year in terms of cost control? Should we see continued kind of cost performance, or can we see big moves this year? I think the biggest move happened last year, but what kind of expectation can we have for this year in terms of cost growth and cost control measures? Thank you so much and congratulations once again.

Alexandre Riccio (SVP of Retail Banking)

Thanks, Neha. This is Alexandre speaking. So on cost control, one reality is we keep surprising ourselves. We expected it to grow marginally. It's not that we expected it to grow aligned with revenues. We want to gain efficiency, right? So we need operating leverage. And we need this to happen. But with technology, with gains from implementation of new technologies and all the projects that we've been doing to keep costs under control, we've been surprising ourselves quarter after quarter. As we look forward, we still see a little bit of what we said in the last quarter call, which was having the costs growing at about half the pace that we see revenue growth. So that's kind of how we are aiming and how we are running the company.

João Vitor Menin (CEO)

And Neha, here's João speaking.

Just to complement Alexandre, it's important to mention that it's not by accident that our expenses are growing way less than the revenues. We need to think that by design, Inter was structured without the big IT legacy systems, without the branches, 100% cloud-based, with a very developed database. So we are working with that, putting all the technology that we have in our kitchen under the hood to work and to improve the number of clients that we can serve per active employee, the number of products that we can offer in our super app. So all of this combined have been helping us to achieve this operational leverage. And we believe that we're just scratching the surface. So we see how we have been able to reduce from almost 90% cost to income to 47% cost to income in just maybe 3 or 4 quarters.

It's really a very good achievement. I believe that this metric is going to be maybe the one that you're going to get first in our 60-30-30 Plan. Very excited with the cost control with the operational leverage that we are putting in the balance sheet.

Neha Agarwala (Analyst)

Super. Thank you so much.

Operator (participant)

The next question comes from Mr. Flavio Yoshida from Bank of America. Mr. Yoshida, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Flavio Yoshida (Analyst)

Hi guys. Congrats on the strong print. So I have two questions here on my side. The first one is on engagement and principality. So in fact, we see many banks talking about seeking clients' principality. And I was wondering, what do you think it's key to get the clients' principality? So I have a view that credit limit is very important, but I'm not 100% sure about it. So if you could elaborate on this, on how to increase engagement levels, it would be great. And then my second question is on the coverage ratio. So you are seeking growth on unsecured credit lines, right, including credit cards. You are running with a stable coverage ratio around 130%. But when we see other banks, other listed banks' historical data, we see an average around 200%. So how comfortable are you guys with this level?

Do you think it will be necessary to drive this coverage level up considering that the loan mix is getting riskier? Thank you.

Alexandre Riccio (SVP of Retail Banking)

Hi, Yoshida. This is Alexandre. Thank you for the question. So I'll start with the engagement and principality part, and then Santi will talk about the portfolio and risk part. And what we see is first, strategically, how do we position ourselves to gain principality, to have high engagement? It's about several things, so not only credit card, but a lot about the product. So we've been differentiating ourselves since the early days back, like IPOed in 2018, and invested a lot in bringing many different products to our Super App. So a lot of transactional banking features. So we have today the best Pix in the market based by the central bank rating system. And that's an important one.

But then we have a lot of different verticals, including insurance, a very complete investment platform, all Inter Shop, adding a lot of value to customers. More recently, our Global Account offering that drives tremendous engagement from a lot of upper-scale clients. So having the Super App offering with all the products within the same app at a seamless user experience is for us the biggest driver of principality. People don't need to leave Inter's app to take care of their entire financial lives. We'll keep moving there and to get more principality. When we get more to the tactics, to the tactical action items, then we do a lot of things to make sure that we bring everything that I talked before as soon as possible to Inter.

So for example, when we think Pix, an important part of the process is to get one of the clients' main Pix keys, as they're called in Brazil. We've been doing a lot of that. On getting clients to engage with credit card limits, you need to have a loyalty program that has to be complete. We're doing a lot of missions to make sure we bring those clients. And as we go, we're being able to engage clients with the more value-added products such as Pix financing. I'll pass the word to João, who is going to fill in with a little bit with some items.

João Vitor Menin (CEO)

No, Yoshida, just to add on top of Alexandre's comments, I would say that two things are very, very important to have the best product on the street. By having the best product, you have client principality.

I would say it's the combination of innovation and technology. So as we told before, our technology is the best in class. And we have this culture threat. Great. We are a very innovative company. So when you combine these two things, we are always the first mover on the new trends that we see on the digital banking environment, digital banking market. With that in place, the clients are embracing more and more and more Inter as their first option in the digital banking industry. And now Santi will cover about the coverage ratio for our portfolio.

Santiago Stel (SVP of Finance and Risks)

Hi Yoshida. So on the coverage ratio, we have two different realities. On the one hand, we have the unsecured part, which is around 30%. That has coverage ratios which are higher than 130%. And then the secured part, which has a lower.

The blended is what the market sees, which is the 130. But inside that, there are different realities. And what we have is a big level also of fragmentation or diversification on individual clients within the portfolio. So what we will see is how the portfolio mix evolves through time. So far, the change has been too significant that 30% now stands at 32%, the unsecured part. So it wasn't something that merits a substantial change in the coverage ratio. But if we do happen to have a bigger growth or a bigger share on the unsecured part, we would assess and adapt accordingly. But we do not see our portfolio in the future having a mix significantly skewed towards unsecured. We do imagine unsecured growing beyond the 30%, but nothing substantially higher than that.

Flavio Yoshida (Analyst)

All right. Great. Thank you.

Operator (participant)

The next question comes from Mr. Yuri Fernandes from J.P. Morgan. Mr. Fernandes, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Yuri Fernandes (Analyst)

Thank you, guys, and congrats on the quarter. I have a question regarding payroll loans. You provide the breakdown of personnel, excluding FGTS. So assuming the ex-FGTS is basically payroll. It has not been growing. So I would like to understand what has been your view on the product. Is there any challenge in originating this more digitally? Whatever you can comment on your expectations for this, the more traditional payroll, let's put it this way. And also, if you can comment a follow-up on this question on potential changes to the product. So today we see lower rates, like rate caps from the government. But we also see the government going for some kind of marketplaces for payroll, kind of potentially making it easier for digital guys like yourselves to maybe offer some of those products.

So whatever you can comment on those initiatives, if you believe they will happen, if you have any timing, I think it can also help. So basically, what is happening because you are not growing? And can you accelerate growth if we see changes for this product? Thank you.

Alexandre Riccio (SVP of Retail Banking)

Hi Yuri. This is Alexandre speaking. Thank you for your question. So starting with the traditional payroll loans, I'll cover a few different topics that we're seeing and how we're approaching the product. So first is like portfolio management. Our focus is on having a healthy and profitable portfolio. Having said that, we're happy that even on a stable portfolio in size, so we remained in the BRL 5 billion ballpark, we grew our implied rates by 80 basis points in one quarter. So this was very positive, and there is a lot of room to keep this trend given our discipline in pricing and the rates of the overall portfolio that are considerably lower than the current levels. Second, in terms of origination channels.

As we have communicated before, we've been evolving from an origination that used to be mostly omnichannel, which is like digital with human support, to a hybrid of omnichannel, so the same one as before, and a digital-only origination. We see early results already happening of the digital-only origination with a lot of INSS through WhatsApp going on already, and we're confident that we should resume portfolio growth throughout 2024. These, I believe, are the main points as we think about the traditional payroll, so we'll keep the discipline to grow on this portfolio. When we think about everything that we've heard in the market, so we've heard noise on the FGTS product. We believe this product is here to stay. It's the lowest cost loan or loan that a normal worker can get in Brazil. This is a product that we do 100% digitally.

We're confident it's here to stay. And on the other issues that we've heard through the last few months, private payroll can be a gigantic opportunity, although it might take longer to see it implemented. And last, we've heard a lot about INSS, digital INSS, and that one is probably one that we're going to see in the short term. So this is going to be like a portal from Dataprev who manages the INSS payroll loans, and we're going to be able to put our offering there along with other competitors. And given our differentiated cost of funding, we should be able to use that as a great opportunity to grow and attract clients as we can comfortably underwrite at the lower end of the market prices with very good ROEs.

João Vitor Menin (CEO)

Leduc, João. Sorry, Leduc, just one Yuri, sorry. Yuri, just one thing. Just to complement on Alexandre's comment.

It's important to mention that with the cap at 1.68, we see the average of the market with their portfolios at 1.75 ballpark. We have, as Santi mentioned in the past, our portfolio at 1.25 because it was underwritten, I'd say, two years ago. So we have a huge room to improve the monetization of our current portfolio, but not only that, to get market share from the market. And just to highlight, having the best cost of funding. Also, on this new product that Alexandre was mentioning, it seems to me like a déjà vu. I remember when Pix started in Brazil and we had all the costs with the cheapest tariffs, the interbanking fees that were pressuring our margins, and when Pix started growing, it was very good for us.

Imagine all the employees in Brazil doing the payroll loan through a portal, as Xandre mentioned, connected through our API in our super app. This would be amazing. We can see a proxy of that with the FGTS. The FGTS started, we were able to do that in a very, very seamless way in our app, and our underwriting is growing and growing and growing quarter-over-quarter. We're very excited that if it comes to happen, this new type of payroll loan is going to be very, very good for our balance sheet.

Yuri Fernandes (Analyst)

Super. No, thank you, João. Thank you, Alexandre. Super clear. Congrats, guys.

Operator (participant)

The next question comes from Mr. Andrew Geraghty from Morgan Stanley. Mr. Geraghty, we're opening the audio now so you can ask your question live. Please go ahead, sir.

Andrew Geraghty (Analyst)

Thank you for the opportunity to ask a question. I just wanted to briefly ask about how we should think about the income from derivatives portion of your securities income, which ultimately gets included in the NII. There was a pretty significant swing in this line quarter over quarter. Can you just kind of provide some more details as to what happened, and do you expect this to continue to be a tailwind for NII for the rest of the year? Thank you.

Santiago Stel (SVP of Finance and Risks)

Hi Andrew, Santiago, taking this one. So what we do is we break down the result of that derivatives, which are interest rates of the longer duration portfolios that I mentioned earlier in a question. We break that down by product, and we add that to calculate the implied rates at the portfolio level. We disclose that in the release. We disclose that in the Excel file of the IR website called Historical Series. And with that, you can see how the interest rates of real estate loans, personal loans, etc., perform through time. So I guess the way that we think about it is how will the interest rates, considering the hedges, evolve through time. And as Alexandre said, the payroll, which is the main part of personal loans, there we are still with a portfolio that is running at around 1.25% per month.

We originate above 1.6%, so those rates should continue to go up. The same thing on real estate, which is a bit more complicated because we have inflation-adjusted loans there, but they're also increasing the performance quarter by quarter. To answer the question, we do break down that at the product level. There is part of the hedge that touches directly the interest income as well, and part that goes to the derivative line. To see all that together, we do the work and we show it in the breakdown to calculate the all-in rates of the portfolios.

Andrew Geraghty (Analyst)

Got it. Thank you.

Santiago Stel (SVP of Finance and Risks)

Thank you.

Operator (participant)

The next question comes from Mr. Ricardo Buchpiguel from BTG. Mr. Buchpiguel, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Ricardo Buchpiguel (Analyst)

Good afternoon, and thank you for the opportunity to make questions. I have 2 here on my side. First, can you please share some light on when do you expect to have the NPL formation declining? And if you could provide an update for this metric so far in Q2, as we have April and a little bit of May numbers. I want to basically get an idea on when we could see cost of risk declining more, as a reduction on this indicator is very important for that. And for my second question, we saw that personnel expenses decreased by around 14% quarter-over-quarter due to, if I'm not mistaken, lower bonus provisioning. So I want to understand what was the rationale for that, and does it make sense to consider this level as a recurring base going forward? Thank you.

Santiago Stel (SVP of Finance and Risks)

Santiago here. On NPL formation, we did have two consecutive quarters of NPL formation decreasing. This one was margin of 4 basis points, but it is a lower number than in the fourth quarter despite the pressure that we have typically in the first quarter. We don't see this number changing too much. As I mentioned before in another question, we think that the asset quality metrics will stay at around these levels, potentially a bit better, but not meaningfully different from what we have now. The cost of risk was 5.2%. We see it operating also at around that level, maybe even closer to 5.5% throughout the year.

But ultimately, the second half drives more of the final outcome as there is more growth there, and we also have to see the level of penetration and success that we will have on the unsecured lines like Pix, credit, and Buy Now Pay Later, which are ramping up. In terms of the personnel expenses, we did have the same situation at the beginning of last year. We do have higher expenses of bonuses, a few of which are provisioned throughout the year, others that we decided to pay voluntarily in the fourth quarter. Last year was a very good year, so we wanted to recognize the personnel and the talent, again, the huge effort that the team throughout Inter put in a year that was very strong in terms of effort to get the results done. This year, we start at this level.

That number will go up throughout the quarters, but we tend to provision as the net income grows quarter by quarter.

Ricardo Buchpiguel (Analyst)

Got it. Thank you.

Operator (participant)

This conference call is now concluded. Inter's IR area is at your disposal to answer any additional questions. Thank you for attending today's presentation. Have a good day.