Inter & Co - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good afternoon, and thank you for staying by. Welcome to Inter & Co's first quarter of 2025 earnings conference call. Today's speakers are João Vitor Menin, Inter's Global CEO; Alexandre Riccio, Brazil's CEO; Santiago Stel, Senior Vice President and CFO. 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 out loud. 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 on the company's non-IFRS financial information to the IFRS financial information are available in Inter & Co's 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. Good morning, everyone. Today, I'm glad to share our strong financial and operational performance for this quarter, and even more thrilled about the future we are building at Inter. We are uniquely positioned to thrive in a rapidly changing banking industry. The market is moving towards a model that fits us perfectly. I believe we are living a secular shift with huge opportunities that we are already capturing. Let me explain why I am so confident on that thesis. Back in 2016, Brazil had a highly concentrated banking industry. That service was expensive, and services were costly for clients, with hidden fees and high charges for basic transactions. Since then, we saw a significant shift towards the digitalization of banking services. Over $20 billion were raised in the capital markets. The Central Bank of Brazil launched the Agenda BC+ to promote financial inclusion and competition.

Many niche players emerged, with us being one of the protagonists in this revolution. However, we took a different approach than most players. We chose to focus on sustainable products with a high level of diversification, both on fees and credit. Although Bancarization has made significant progress, mostly on transactional costs, it still relies on expensive unsecured credit, primarily through credit cards and personal loans. Since 2016, we have seen a threefold increase in this type of lending, placing Brazil within the countries with the highest credit costs. As I mentioned, we have taken a different route, which I have been vocal about for many years. We operate a mostly collateralized credit portfolio that promotes sustainability for both our clients and Inter. Beyond credit, we offer a wide range of services that contribute to a highly diversified revenue stream.

Our complete digital platform fosters client engagement, encouraging them to use Inter for their daily transactions, which results in a strong retail funding franchise. This is what I call Inter by design. We see the market moving in a direction that aligns with our strategy. Some examples are mortgages, home equity, FGTS loans, along with the new private payroll loan and the upcoming SMEB digital receivables. We have a remarkable success in these recently launched products, with market shares growing towards our 80.2% fixed share. In the following slides, you'll notice a secular shift opportunity stamp, highlighting the potential in the markets that we are already well positioned. Alexandre, please take over to elaborate on our business model.

Alexandre Riccio (CEO)

Thank you, João. It's exciting to see what we're building and the market opportunities on this secular shift. Hello, everyone, and thank you for joining us today. The first quarter was once again exciting for all of our businesses and reinforced Inter as a unique growth story. As usual, I'll highlight the performance of our seven verticals, which represents Inter's large and complete set of products and solutions. For the fifth consecutive quarter, we added 1 million new active clients, bringing us to a 57% activation rate. This is a result of our constant efforts to improve our onboarding process, including early activation strategies and also enhancements in hyper-personalization. Last quarter, we personalized the homepage according to each client's interactions with Babi, our customer service bot, and that increased the conversion of those clients by 12%.

On our business clients, we grew by 23% year-over-year, reaching 2.4 million clients. These clients show high engagement and increased our PAC levels. When we look at our banking performance, we observe seasonality effects typical of the first quarter, with lower liquidity and transactional volumes in the market. Therefore, TPV decreased when compared to the last quarter but has increased by 33% in the yearly comparison, reaching BRL 342 billion. Transactions made through Pix totaled BRL 315 billion in the first quarter, achieving an 8.2% market share. TPV levels across cohorts are steadily increasing, with newer clients transacting more and faster than older clients. Now, moving to credit, I'm pleased to report strong growth in our Consumer Finance 2.0 portfolio, which includes Pix Financing, Buy Now Pay Later, and Overdraft. In a yearly comparison, our portfolio grew by more than five times, reaching BRL 920 million.

This quarter, we expanded our product offering by including the new private payroll. In only 10 days, we added BRL 150 million in new credit to our portfolio through a 100% digital underwriting process. This product offers a significant opportunity for us, as it is a perfect fit for our business model: digital, low distribution costs, scalable, and collateralized, with little to no overlap with other credit products we already offer to our clients. Private payroll is also another secular shift opportunity, and we're seizing it. Also worth mentioning, our reshaping process on the credit card portfolio is underway, with the participation of installments in the total portfolio moving from 7%-9%. Moving forward to the investments vertical, AUC increased 54% on a yearly basis, reaching BRL 146 billion. Our engaged base also maintained growth, reaching over 7.2 million active clients.

One highlight of this quarter is that we achieved nearly 4% market share of Treasury Direct balance, growing 80 bps in one year. Also, great evolution in our third-party fixed income distribution and on Inter Assets Under Management when we look at the yearly comparison. Moving to Insurance, we had another record-breaking quarter. We have been experiencing significant growth and penetration, which we can achieve with the right targeting, quality products, and hyper-personalization. We reached nearly 8 million active contracts, growing 51% in just one quarter, and sold an impressive 3.5 million items. FGTS and Sortisinha, two low-ticket but recurrent products, continue to be the highlights. Shifting to our marketplace, we saw good numbers to start the year. GMV grew by almost 30% compared to the first quarter of last year, reaching BRL 1.3 billion.

This quarter, 8% of the on-heads GMV was generated through our Buy Now Pay Later operations. This unique combination enables us to leverage our fee revenues while also generating interest income from higher margin unsecured credit operations. Our global front is growing at an accelerated pace, with clients increasing 41% in the year, totaling BRL 4.1 million. Global AUC grew around 20% in the quarter, with a highlight in the deposit balance, which increased almost 30% in only one quarter. Recently, we announced the launch of our investment accounts for Argentinians through a partnership with BIND, an Argentinian bank. Through this product, our clients will have access to a product very similar to our global account used by Brazilians. Finally, we surpassed 12 million clients in loyalty, our last business vertical.

With several ways for them to earn and redeem their points with Inter Super App, those clients become the most active within our platform. They tend to generate many times more RPAC than regular clients and use 2.3x more products. This quarter, we added one more airline to the Burn portfolio, and we will keep evolving the offering. Last but not least, talking about market share, on page 23, we can see a great evolution for many products. We are effectively providing our clients with access to our extensive range of solutions and increasing our share of wallet. This evolution is happening both on credit and fee businesses, and we gained more than 40 bps of market share in 7 of the 10 presented products. As we continue to expand our product offerings and enhance client engagement, I am confident that we will further solidify our position in the market.

Now, I'll pass the mic to Santiago, who will cover the financial part.

Santiago Stel (SVP and CFO)

Thank you, Alexandre. Hello, everyone. Starting with loans, we had another great quarter. Our total loans grew 33% over the last year, three times more than the Brazilian market. Notably, our FGTS and home equity products have been once again the key highlights, growing 43% and 45% year-over-year, respectively. Both products have very attractive returns and have been instrumental in improving our credit portfolio profitability. Payroll and personal loans also had great performance, with a 7% growth this quarter, jumping from BRL 5.2 billion-BRL 5.7 billion, the highest growth in many years. As shown in this slide, we outpaced the market growth in most of our portfolios. FGTS and home equity grew about twice as fast as the market, continuing to gain both market share and prominence in our loan mix.

Credit cards also grew nearly twice the market, all while maintaining our risk appetite and improving asset quality metrics. On mortgages, we continue to gain share with accretive returns and have been recently favored by competitors being less active as earmarked mortgage loans' availability decreases. We are also seeing an increase in underwriting of payroll loans and had a strong start in the private payroll market, reaching nearly BRL 200 million portfolio in just 10 days of originations. Overall, healthy growth trends across profitable and sustainable products. Moving to our asset quality page, our metrics showed further improvement, even though first quarters are typically more challenging given lower liquidity among individuals. The 90-day past due loans ratio demonstrated a strong performance, improving 10 basis points, going back to 2022 levels.

The credit cards MPL, when analyzed across cohorts, continued to show strong performance, validating the improvements made in our underwriting models. Finally, MPL formation remained stable at 1.2%, a decrease of approximately 30 basis points over the last 12 months. Main improvements came from credit card portfolio combined with strong performance in the collections front. On this page, we can see the evolution of our cost of risk metric. To keep improving our financial reporting KPIs, we included all the securities that generate provision expense in this ratio. This quarter, we reached a 4.6% cost of risk level, improving 20 basis points relative to our prior quarter and experiencing the best performance since 2022. Furthermore, our coverage ratio has increased from 136%-143% due to significant organic improvements in our MPL levels, as seen on the prior page.

We had another strong quarter of funding growth, increasing 35% on a year-over-year basis and surpassing BRL 59 billion. This growth was primarily driven by time deposits, which is mainly explained by SELIC increases and the success of My Piggy Bank, our product through which clients can easily invest in fixed income. At the same time, the decrease in transactional deposits was impacted by seasonal effects, as it happened in prior first quarters. It is also important to mention that our active clients had an average of BRL 1,930,000 in deposits, the second highest in our history. Lastly, our loans-to-deposit ratio decreased from 75% to 72%, marking the high growth in our funding franchise. The healthy growth and funding mix demonstrated on the prior page enabled us to have an industry-leading indicator among Brazilian banks and fintechs.

Our cost of funding stood at 63.8% of CDI this quarter, decreasing 1.9 percentage points year-over-year. Jumping into our revenue page, we achieved a BRL 3.2 billion in total gross revenue and BRL 1.8 billion in net terms, a year-over-year growth of 38% and 31%, respectively. The growth in fee was affected by seasonal factors, particularly due to the decrease in TPV and GMV, as well as changes in the resolution 496Cs, which requires us to defer credit revenue fees through the life of the loans. On the NII front, the strong performance was primarily driven by improvements in our mix towards higher ROE products, ongoing repricing, and increased returns in our investment portfolio. As we are experiencing higher engagement, as presented by Alexandre, we observe acceleration in revenue in both new and older cohorts.

We surpassed BRL 116 gross RPAC in mature cohorts, demonstrating the sustainability long-term relationship we are building with our clients. In the first quarter, net RPAC was impacted by fee revenue performance, as explained earlier. We expect RPAC to resume growth in the second quarter as credit penetration continues to increase and the deferral impact begins to dissipate. On the other hand, our efforts to optimize operations and streamline expenses contributed to our CTS to decrease 6% in the quarter, achieving BRL 13.1 per client. Now, let's dive into our NIMs. It's important to highlight that we have updated the NIM methodology to better capture our financial performance by including cash and equivalents from compulsory notes in the Central Bank and excluding Interbank on lending.

Both our NIM 1.0 and NIM 2.0, which excludes the non-interest receivables, are consistently showing growth over the past four quarters, achieving record levels once again this quarter. As mentioned already, NII growth and, by consequence, NIM expansion are the result of our disciplined capital allocation strategy, which has compounding results quarter after quarter. When we consider the risk-adjusted NIM, which deducts cost of risk, the performance is even stronger, growing 20 bps quarter-over-quarter. Regarding expenses, we are able to decrease our overall expense base by BRL 10 million, demonstrating our commitment to cost control and operating leverage. We delivered this improvement while continuing to invest in technology, focusing on process optimization, automation, and providing a seamless experience to our clients. Keep increasing the gap between net revenue growth and expense growth is one of our key goals.

For another quarter, we were successful in increasing revenue at a faster pace while maintaining our costs under control. As a result, our efficiency ratio once again decreased, reaching BRL 48.8%, a 130 bps improvement relative to the prior quarter. Finally, I'd like to highlight another quarter of success in our journey towards our profitability goals. We reached 12.9% ROE, excluding minority interest, and a record net income of BRL 287 million. Our consistency of progress quarter by quarter is remarkable, in our opinion, as you can see on this slide. As João and Alexandre mentioned, we are increasing our profitability by offering a sustainable menu of products, making these results of very high quality. Now, I'll pass it back to João for his closing remarks. Thank you.

João Vitor Menin (CEO)

Thank you, Alexandre. Thank you, Santiago. As we approach the halfway mark for our 60-30-30 plan, I could not be prouder of the progress achieved so far. We ended the first quarter with 38 million clients, a 48.8% efficiency ratio, and a 12.9% ROE. As I always say, every new quarter is our best quarter ever. It is not just about these numbers. It is about building the future. As I said, we are leading the market shift with our inter-by-design approach, thanks to our sustainable win-win model that benefits all stakeholders. A special thanks to our team for making this journey so amazing. Operator, you can now open for the Q&A session.

Operator (participant)

We will now begin the question and answer session. Please note that, in the interest of time, we will allow each participant to ask one question with one follow-up for each question. 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 out loud. Our first question comes from Mr. Pedro Leduc from Itaú BBA. Mr. Leduc, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Pedro Leduc (Partner and Brazil Financials Equity Research Analyst)

Hi, good morning, everybody. Thank you so much for the call and the question. Congrats on the quarter. Two quick ones, please. Do you have any first comments to make on the private payroll product? What have been the learnings so far? If there is some sort of volumes that you can share, if there is any impact on this quarter whatsoever. Then second, on your NIM trajectory, we had a nice another advance this quarter. If you can help us also understand the moving pieces here, if there is more pricing, if some of the treasury yields, what played against or in favor, essentially trying to gush if we can expect a continued expansion in NIMs in the next few quarters as well. Thank you.

João Vitor Menin (CEO)

Hi, Pedro. João here. Thanks for the question. I'm going to cover the first part, and then Santiago will mention about the second part of the question. First of all, regarding the private payroll, as I mentioned on the call, we are very excited with the product. It's music for our ears because at the end of the day, what we call inter-by-design, it's all about that. A good product, a huge pent-up demand where we can benefit from our funding franchise, our 100% distribution channel. It is very good news for us that we have this product up and running. As always, at Inter, we like to proceed fast but with caution. We could be growing faster than we are, but we also are trying to understand all the nuances of the product.

Long story short, very good opportunity for Inter for us to capture a big market share on this product in the years to come. Okay. Santiago will comment now on the capital. Thank you.

Pedro Leduc (Partner and Brazil Financials Equity Research Analyst)

No impacts in this first quarter, right, João, from the new product yet?

João Vitor Menin (CEO)

No, no impacts yet.

Pedro Leduc (Partner and Brazil Financials Equity Research Analyst)

Thank you.

Santiago Stel (SVP and CFO)

Leduc, thank you for the question. On NIMs, this is the result of our capital allocation strategy that we have been working with for many years by now. We think that the consistency of the results in the curve of NIM, both before and after cost of risk, speak for themselves. There are a few elements playing that we covered in our calls that continue to be true today, which is one is the credit mix continues to improve. The credit mix, even within the secured component, we have these products like FGTS and Home Equity. We have 30%-40% marginal ROE. On the mix, also, we have the fixed financing, the buy now, pay later, and now the private payroll that João alluded to, also improving the yields as a consequence of mix change.

The second element is within each of the specific portfolios, the interest rates are also going up, particularly on the long portfolios. As you know, the payroll and the mortgages, a lot of which were issued when the SELIC was low. Now we are originating them at marginal ROEs of around 20%, and therefore, the performance increases. The last point is on the yields of the investment portfolio. We have been also working on improving those yields, which are now about 100% of CDI. That combined with the capital optimization at the holding level, which, as you know, we have been moving part of the excess capital from the OpCo to the HoldCo, and therefore having some benefits that are not reflected in the NIM. They are reflected in the effective tax rate, but we can gross it up on the NIM.

All that together is yielding these strong results. The good thing is that we have a lot more to continue improving on this front. The majority is still to come, particularly from the consequence of mix improvements. The Inter-by-design is playing out pretty well. Private payroll is an example of that. We started operating that product from the very beginning of the first day. We are excited that that will be another lever on the NIM expansion that we did not have, obviously, planned when we presented the 60-30-30, nor when we did the budget for 2025. Hopefully, we will continue growing and improving our NIMs as a consequence of that new product too.

Pedro Leduc (Partner and Brazil Financials Equity Research Analyst)

Amazing. Thank you so much.

Operator (participant)

Our next question comes from Mr. Gustavo Schroden from Citi. Mr. Schroden, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Gustavo Schroden (Equity Research Director of LATAM Banks and NonBank Financials)

Hi, good morning, everybody. Thanks for taking my question, and congrats on the results. I have two questions as well. The first one is regarding the loan growth, excluding the prepayment of receivables, loans, grew, like 20%, 21%. My question is, should we expect some acceleration in the coming quarters? How do you see the challenging environment regarding inflation and high interest rates? Should we expect the bank accelerating this loan growth? Also, a few words about consumer loans, which reached the BRL 920 million. What is the level we should expect that could reach in 2025? My second question is regarding the margin per active customer, as you showed in our slide 31. We saw an increase in gross RPAC and a decrease in cost to serve, but there was a negative impact on net RPAC.

Could you explain what is this negative impact in the net RPAC? It was related to 4966 rule, or, I mean, what can explain this decrease in net RPAC and, as a result, in margin per customer? Thank you.

Alexandre Riccio (CEO)

Hi, Gustavo. Thanks for your question. This is Alexandre speaking. I'll start with the credit growth. For this year, we're expecting growth in the range of 25%-30%, even excluding the anticipation of credit card receivables. Credit lines like the private payroll that João explored in the previous question is going to likely boost it because it's something totally new, and we see no room for cannibalization of the existing portfolio. That's going to be on top of our normal growth. Micro-improvements that we've been doing in all the credit modeling are going to help this growth also. We'll keep executing smart strategies so that we can grow as we have been growing the last two years, right, without lowering the bar on credit quality. This is very important for us, and we're excited with the year to come.

So far, no impacts on inflation and interest rates, which has a lot to do with the Inter-by-design, right? 2/3 of the portfolio collateralized, 1/3 not collateralized, and very diligent on all the modeling and policies on the non-collateralized part. This is part of the story. When we move to the consumer finance 2.0, Pix financing, and things like that, we continue to be excited about it. The product is growing, so we had more than 30% growth quarter on quarter in the total portfolio. We're optimizing volume as we go in a mix of volume and pricing to make sure that we bring the NII that we need to bring at the same time that we address clients. We see the potential for this portfolio to reach somewhere around BRL 1.5 billion.

Maybe we'll have to navigate through the year to see how it goes, but that's a number that we can name, about $1.5 billion coming from this $920 million. One next step that's going to be interesting is we're going to launch a variation of a credit card, which we're going to call Intercard, where we're going to be able to address clients with a credit limit to be used in platform and on Pix credit. With this product, we're going to be able to address a client that has a credit rating that's marginally lower than the ones that have a full credit card. We're also hoping to see good results from this strategy, from this product.

To finish on our consumer finance 2.0 portfolio, we have not seen any delinquency variations from what we have been discussing in the prior calls, meaning that we have healthy delinquency on all of these products. Thank you.

Santiago Stel (SVP and CFO)

I will take, Gustavo, the other part, which had to do with the margin per active client, which is another way to ask RPAC. The RPAC in this quarter, the net RPAC, net cost of funding, decreased, and therefore, the margin per active client also did. This is a consequence of a few factors. On the one hand, fees were affected this quarter for seasonal and non-seasonal factors, and therefore, impacted revenue and revenue per active client too. We added 1 million new active clients this quarter, which is what we did in most of the last quarter.

We maintained the capacity to attract and retain the clients, and that delivered to the RPAC. The good thing is that when we see it on a cohort basis, we see very strong performance, both before and after cost of funding on the cohorts, and that gives us confidence that the trend is moving in the right direction. Lastly, there are two fronts of very strong improvement that we've had recently that are not measured in the RPAC, but they should in a way, which is the cost of risk or delinquency levels and the efficiency that comes on the tax side that affects also RPAC. Putting all that together, we're confident that the monetization of the clients, which is what the RPAC should answer, is moving in the right direction.

As long as we continue in this level of clients and extracting value from them from a financial perspective, we're happy with the trends.

Gustavo Schroden (Equity Research Director of LATAM Banks and NonBank Financials)

Okay. Thanks for the answer. Just to follow up on this last one, Santiago. So this, let's say, small decrease in net RPAC was related to fees. Is it correct to think this way?

Santiago Stel (SVP and CFO)

Yes, because on the NII side, the performance was strong. Fees, and if you want, I can tackle that one, which is the underlying question. Fees decreased this quarter by approximately BRL 100 million from the fourth quarter level. The fourth quarter is always a very strong quarter. We had around BRL 40 million lower fees coming from interchange of cards and Intershop, which is normal because the fourth quarter is a lot stronger. We had one-off factors, which is partly from capital gains on Interpac. The last is the 4966 rule, which forced us to defer around BRL 20 million of fees associated with mortgages and real estate loans throughout the life of the loan. It is BRL 40 million from seasonal factors of interchange and Intershop, BRL 40 million from Interpac.

Then 4966, we deferred around BRL 20 million, which will come along the life of the contracts. Initially, we have that impact. Those three things together show that decrease of around BRL 100 million versus the fourth quarter, which when you then divide it by clients, it impacts the RPAC.

Gustavo Schroden (Equity Research Director of LATAM Banks and NonBank Financials)

Oh, super clear, guys. Thank you very much.

Santiago Stel (SVP and CFO)

Thank you, Gustavo.

Operator (participant)

Our next question comes from Mr. Mario Perri from Bank of America. Mr. Perri, we're now opening the audio so you can ask your question live. Please go ahead, sir. My apologies. We are now receiving a question from Mr. Tito Labarta. Mr. Labarta, we're now opening the audio so you can ask your question live. Mr. Tito Labarta from Goldman Sachs. Thank you, sir.

Tito Labarta (VP of Equity Research, Securities, Asset Management, Equities, and Capital Markets)

Yes. Thank you. Hi, everyone. Good morning. Thanks for the call and taking my question. My question is on the efficiency ratio. You kind of addressed it a little bit, Santi, discussing fees, but we did see some seasonality on fees, but also saw some good performance in expenses in terms of benefiting maybe from seasonality, although on a year-over-year basis, expenses are still growing a bit faster than revenue. Help us think about the outlook for expenses and how efficiency should continue to improve throughout the year to eventually reach that 30% long-term target. Thank you.

Santiago Stel (SVP and CFO)

Hi, Tito. On expenses or efficiency in general, we had two factors that played out in the second half of last year, and that's the reason why we went from roughly 48 to slightly above 50, which had to do, one, the consolidation of Interpac in the third quarter, and also efficiency in the investment portfolio, as we mentioned in prior calls. Those two things together impacted at around 300 basis points the efficiency from the second quarter to the third quarter of last year. We then ran two quarters above 50. This quarter, we were able to see more operational leverage as a consequence, mainly on the expense front, where we were able to control expenses and take the overall number down nominally by BRL 10 million.

Going forward, we think that the efficiency ratio improvements will come mainly as a consequence of top-line growth being more than the growth on expenses. We have said, and Alexandre mentioned at the beginning of this call, the loan book, we are seeing it growing 25%-30%. On top of that, we will have margin or we hope to have margin expansion. Therefore, revenues will grow north of that loan growth level. Expenses will grow at a fraction of that. It is difficult for us to anticipate exactly what level, but that delta in the growth ratios of both levels are the ones we are seeing. To get to the 30% by 2027, end of 2027, it is one and a half to two percentage points improvement per quarter.

If you do that linearly, obviously, life is not linear, but if you do an approximation of that, it is in line with what we see. Again, as I mentioned, it will be a consequence of more performance on the top line than on the expense front. This quarter is a signal in that direction, 130 basis points improvement of operational levers.

Tito Labarta (VP of Equity Research, Securities, Asset Management, Equities, and Capital Markets)

Great. Thanks, Santiago. That's helpful. Maybe just a quick follow-up on that. What are your main sort of expense drivers from here? I mean, you had Interpac last year. We saw personnel and marketing was down quite a bit on the quarter. It seems like you should have a lot of operating leverage. Where do you still need to invest? What's still driving expenses higher? I would think it should be a little bit more steady regardless of what happens with revenues, just to put it into context.

Santiago Stel (SVP and CFO)

For our expense base, approximately one-third is salaries and personnel. On that one, we have a lot of room for operational leverage. Within the remaining two-thirds, a big component of that are technology-driven expenses, like big suppliers from abroad, cloud computing, etc. They are working to have more operational leverage, but initially, they are not so meaningful as they grow with the volume of the business and therefore their variable expenses. We are working very heavily on improving the quality of the contracts that we have with these suppliers to effectively have operational leverage as we move forward. There are other expenses like branding and fixed expenses that are within the other two-thirds that we can have as well operational leverage. That is part of the work we are doing with the team. The final lever that I would mention is AI.

We already see AI playing both on the cost front and the revenue side an important role, but it's yet at the very beginning. On the cost side, for example, the customer service department and the fraud are two very clear examples where we are within an advanced level of development. On the revenue side, the hyper-personalization that we mentioned exactly a year ago when we did the tech day in New York. When you open the app, the app is highly personalized depending on the person and even depending on where the person is. If it's in the airport, it gets a travel insurance offering or an FX offering. We are having AI playing a role on the revenue side as well. Long answer, but basically, we're actively driving the outcome to make the variables, the expense lines more fixed and less variable.

As we do that and we evolve, the operational leverage should be more meaningful.

Tito Labarta (VP of Equity Research, Securities, Asset Management, Equities, and Capital Markets)

Okay. No, that's super helpful, Santiago. So 1/3 on the salary and personnel, there should be a lot of operating leverage. It's the other 2/3 where you're working to see where you can improve?

Santiago Stel (SVP and CFO)

Exactly. Thanks, Tito.

Tito Labarta (VP of Equity Research, Securities, Asset Management, Equities, and Capital Markets)

Perfect. Thank you, Santiago. Bye.

Operator (participant)

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

Thiago Batista (Executive Director and Head of Banking Research)

Hello? Are you hearing me?

Operator (participant)

Yes, we can hear you, sir. Go ahead, please.

Thiago Batista (Executive Director and Head of Banking Research)

Okay. Okay. Congratulations for the results and thanks for the opportunity. I have two questions. The first one on the global account. You guys are interactive with more than 4 million clients. It's amazingly strong, especially if you compare with your 22 million effective clients as a whole. Can you share with us the profile of those clients and your strategy on how to, looking forward, how do you believe the global account will evolve? The second one on asset quality. The numbers of this quarter were more than positive on asset quality. We saw a small decline in EPR ratio. Cut-off risk also declining. This level of NPL of around 4% and cut-off risk of 4.5%, is this the normalized level? Or can we see further improvement, especially as credit card things that have improved a lot, at least looking to the stage three.

We saw almost 100 bps QvQ decline in the stage three of credit card. So this is the normal level, or we can see further improvement going forward?

João Vitor Menin (CEO)

Thiago, João Vitor speaking. I'm going to cover the first one regarding the global account. To be honest, I think that we haven't been able to explain exactly our view for the global account. Let me try to do that again. I'm very excited with that product. The reason why with the global account in place for Brazilians today and later on for other geographies, we can play a very good arbitrage. What do I mean by that? We can bring the top clients from Brazil, Argentina now, for instance, we're going to launch in the coming week, in the coming month, and price accordingly for US dollar-based products such as remittance, debit card, credit card, shopping, loans, loyalty, everything that we have in our super app.

This vision of getting the best clients, the premium clients from that region, from that geographies, and pricing them very well, therefore producing good returns for us on products that they cannot access through their domestic counters, is the main vision for the global account. It has been playing really, really well in Brazil, as you mentioned. I am very excited with that, with this opportunity to connect millions, I would say, tens or maybe hundreds of millions of clients later on in the future with this product profile. I agree. They are very good clients. I would say that they are actually the best clients that we have at Inter, better RPAC, very good cost to serve them. I am very excited with the success of the global account so far, but still, I think that a lot to come on that front.

I'm really, really excited with this vision that Inter had two years ago. Now, Santiago will cover about the NPLs and coverage ratio. Thank you, Thiago.

Santiago Stel (SVP and CFO)

Thiago, on the asset quality front, we are very pleased with the performance that we had in the past few quarters. Also, we're pleased with the first quarter, which is a quarter which is typically tough because individuals have less liquidity in their pockets. Despite that, we were able to improve the NPL. Ultimately, the level at which we will be running going forward will depend on the mix. We're seeing now many products starting to scale up more. Private payroll is one of them, which the delinquency level is something that still we need a bit more continuity in the product to see where it stabilizes. Then we have the unsecured products that are growing that are yet more in the portfolio, but gaining some participation like buy now, pay later and fixed financing.

When we combine that with the portfolio that we're running for longer, the real estate and the FGTS home equity and empresas, then the mix will be the ultimate driver of that level of delinquency. What we are trying to maximize, as I was mentioning before, is the evolution of the risk-adjusted NIM. Ultimately, what we care the most on maximizing is that variable. For example, on private payroll at the rates that we're originating, and even if there is some rate compression with the liquidity levels that are higher or much higher than the public level payroll ones, we would have an accretiveness or an improvement in the risk-adjusted NIM. It's a mix. At the end of the day, it's a question of the mix evolution through time that will define what asset quality level we have in the NPL side.

Thiago Batista (Executive Director and Head of Banking Research)

Oh, thanks. Thanks, João and Santiago.

Operator (participant)

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

Yuri Fernandes (Executive Director and Equity Research Analyst of LATAM Financials)

Thank you. Hi, Santiago, João, Alexandre. Good afternoon. Good morning. I have also a question regarding asset quality, but now regarding stage two. When we go to your stage three formation, it was great, but stage two went up a lot driven by credit cards, basically. It was a migration from stage one into stage two. If you can comment a little bit on this, is this regarding Pix? Is this mix? Is this a worsening asset quality ahead? Just trying to understand why there was an increase in stage two, and not only an increase, but also the coverage of stage two for credit cards went down when we do loan loss reserves divided by your balance, right? This used to be higher and went down this quarter. I would like to understand what happened here with stage two on credit cards. Thank you.

Santiago Stel (SVP and CFO)

Hi, Yuri. Good morning. On stage two, it's just a consequence of the 4966 requirement. There is a reassignment from stage one to stage two of loans that have a higher probability of default. Therefore, we reassign them from stage one to stage two. Nothing different in terms of performance or delinquency of the credit card clients. If you look at the cohorts that we closed in the presentation, we see the new ones coming in at strong levels in line with the more recent quarters as well. It is a requirement that the model does with the higher probability of default cohorts being moved to stage two.

Yuri Fernandes (Executive Director and Equity Research Analyst of LATAM Financials)

Thank you, Santiago. Just on the resolution 4966, correct me if I'm wrong here, but I understood from the past that even you have two accountings, right? You have your accounting in Brazil and your accounting under IFRS 9. You are trying to keep both. You do not need to have different filings, right? You are implementing some of the Brazilian IFRS into your international IFRS so you can have more comparable. Is this the reason why we see fees and stage two now being impacted? Just trying to understand because some investors, they ask us why you are being impacted by the Brazilian accounting changes. Sometimes I'm not that sure about the reason why your accounting is changing.

Santiago Stel (SVP and CFO)

Yeah. We've been reporting in IFRS since 2022. What the 4966 does is that it converts the local accounting towards IFRS, but it has certain minimums that are more rigid or different than IFRS. We need to comply with those as Banco Inter, as a Brazilian bank that needs to comply with it. The impacts that we saw are primarily what we mentioned, the fees, the deferability of them, in the stage two formation that we just spoke about. Then on the write-offs, which was a big debate that we spoke and we did so with many, we kept the 360-day period for the write-offs, but there was also a debate if that would change for more or not. For comparison purposes, we decided to keep it as it was since it was within the 4966 and both IFRS 9 norms.

Yuri Fernandes (Executive Director and Equity Research Analyst of LATAM Financials)

No, no, thank you, Santiago. We may say that maybe you are a little bit more conservative. Congrats about keeping the write-offs and change. That's good for us here when we analyze it.

Santiago Stel (SVP and CFO)

Yes, we believe it's more conservative, and the comparison versus prior peers makes it easy, and therefore, the modelability of Inter, it's cleaner for investors and analysts. Thanks, Yuri.

Yuri Fernandes (Executive Director and Equity Research Analyst of LATAM Financials)

Thank you.

Operator (participant)

Our next question comes from Mr. Marcelo Mizrahi from Bradesco BBI. Mr. Marcelo Mizrahi, we are now opening the audio so you can ask your question live. Please go ahead, sir.

Marcelo Mizrahi (Equity Research Analyst and Head of LATAM Banks and Financials)

Hi, my name is Marcelo Mizrahi from Bradesco BBI. Two BBIs, but talking about our questions, most of the questions were already answered. My question is regarding the interest-earning assets or the interest-earning portfolio of the credit card. We saw very good numbers, better, higher interest-earning assets, of course, thanks to the size and narrative. Looking forward, my question is, if these interest-earning assets compared to the total portfolio, in your view, will be the same, or do you believe that the recurrent level is a little bit lower than the level that it was in this quarter? It is important to look for that during the strategy. Looking for the strategy that the bank is on the credit card, focus on the client. If you guys believe that this level is recurrent, thank you.

Alexandre Riccio (CEO)

Hi, Marcelo. This is Alexandre speaking. Thank you for your question. The dynamic that we saw on the credit card portfolio is exactly what we wanted. We want to increase the percentage of installments in comparison to the revolving credit. That increases interest-earning. It is a win-win because in one sense, we help clients get out of the problems that they may have in credit. In the other hand, we increase our interest income, which is important for the business as well. Another point that is important is we lower the rates that customers pay in comparison to revolving. Revolving, we are talking like rates that can top above 15% a month. We reduce these clients to rates that could be starting at 5%, 6%. Really helping clients improve their indebtedness if that is what is happening.

The goal is to keep increasing this part of the portfolio that has installments. We have a long pipeline of products that we're launching in order to help clients. Just to give you an example, last month, we launched a product called installments on the total debt. As you know, in Brazil, we have the installments without interest that people can pay when they go to the retail and make their purchases. We're helping people with this product by organizing the number of installments they're going to have and the size of the installments. We've been having good adoption there. Again, it's all about the strategy. We set the strategy to move our interest-earning from around 20, which is where we were, to around 25-26.

We're going to fulfill these steps as we move along, bringing more interest income and ideally less delinquency, helping customers on a sustainable product. Thanks, Marcelo.

Marcelo Mizrahi (Equity Research Analyst and Head of LATAM Banks and Financials)

Thank you.

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 (Director, FinTech Specialist, and LATAM Financials Analyst)

Hi, thank you for taking my question. Just a few quick follow-ups. You mentioned you're launching a different credit card to increase the offering of fixed installments and BNPL. Did I hear that correctly? Did I understand that correctly? Why a different credit card? Why not with the current credit card? You would expand the offering there. I have a follow-up that I will ask.

João Vitor Menin (CEO)

Hi, Neha. João Vitor is speaking. You know already that I love to say that we are really building this consumer finance 2.0 for our clients and for Inter in a sense. And this card, which we call Intercard, is a 100% digital, let's say, credit card scheme network, I would say, in a sense, is to help us to foster more engagement with clients through our buy now, pay later at Intershop, through the fixed credit and other products that we're bringing to our ecosystem. With that in place, we can disintermediate interchange fees that the networks charge, the MDRs. So there's a lot of technology behind that. And again, the only reason why we can do that is because we have the clients buying products and buying credit, I would say, in our platform in a true direct-to-consumer approach. And we're going to call it Intercard.

We believe that with that in place, we'll be able to bring more activity, more engagement from millions of clients that use our platform today for fixed financing, buy now pay later, shopping, and so on. That's the idea behind that. We're very excited with this product.

Neha Agarwala (Director, FinTech Specialist, and LATAM Financials Analyst)

Okay. So this is essentially like a pre-approved line of credit in the form of a digital credit card, right?

João Vitor Menin (CEO)

Exactly. That's the main idea behind the launch of this product.

Neha Agarwala (Director, FinTech Specialist, and LATAM Financials Analyst)

Okay. Part of the risk will also be offset by the lower expenses of operating the credit card in which you would have to incur the other fees that happens. I also saw that 8% of the GMV on the platform was in BNPL this quarter. It's a great number, and I think there's a lot of potential there. Could you talk a bit more about that? Are you offering BNPL? How are you choosing the customers within the Intershop platform whom you're offering BNPL? What kind of rates you are charging? What kind of customer performance, asset quality performance you're seeing for those clients? Is that inducing more customers to come and shop on the Intershop platform or not? Thank you so much.

João Vitor Menin (CEO)

The good thing about having our clients buying within our platform is that we can control everything. We can control very actively the open-to-buy that they have, the rates that they're going to charge, the products that we want to offer them to buy depending on the take rate that we have. At the end of the day, the buy now, pay later, we see as a very, I'd say, win-win situation for our clients and for ourselves. I have always been vocal about this consumer finance 2.0 where we take out the intermediaries, then we share the economics of scale with the clients, and then we keep going on and we make this flywheel so clients are returning more to the platform. Regarding which clients do we offer that, it depends on a lot of things.

We can offer clients that cannot have a credit card limit approved yet or clients that they have a specific credit card limit approved, but they want to buy a larger item on our shopping, and this item might have a juicy take rate for us. That is the kind of data, that is the kind of input that we bring to the model, to our proprietary underwriting model, and you can do that in real time. That is the benefit of combining data and combining the platform through Intershop.

Neha Agarwala (Director, FinTech Specialist, and LATAM Financials Analyst)

Thank you so much. Very clear.

Operator (participant)

Our next question comes from Mr. Antonio Ruette from Bank of America. Mr. Ruette, we're now opening the audio so you can ask your question live. Please go ahead, sir.

Antonio Ruette (Equity Research Analyst)

Hi everyone. Thank you for your time. I would like to dive a bit deeper on NIMs again. If you could explore a little bit more, I think increase and expect your expectations for increase in terms of mix because we have now different trends in terms of payroll, credit cards, and financing, and also the use of excess liquidity. In short, how do you expect mix going forward and also what to expect in terms of repricing and use of excess liquidity? Thank you.

Santiago Stel (SVP and CFO)

Santiago here again taking that one. On NIM, there are three driving factors that I mentioned. One is mix. The other one is increasing the yields within the products. The last one is increasing the yield of the investment portfolio. In mix, we continue to see higher than average growth in the FGTS and home equity. Now, including within the unsecured, we are seeing also private payroll. Within the unsecured, the ones that are gaining share are fixed financing and buy now, pay later. The trend should be roughly in line with what we have seen. Maybe the toughest one to model is private payroll, but as João mentioned, we are seeing strong start there with that product.

Within rates, the ones that are still with the opportunity to continue seeing increase in the yields are on the mortgages and public payroll that are running at rates that are lower. On top of that, on credit cards, there's a dynamic of what we call the reprofiling of cards that Alexandre alluded to in the prior question, which we're trying to improve the monetization to the installments. In the investment portfolio, we did a strong improvement in the average yields that we have surpassing the 100%. We're also optimizing the holding structure. The majority of that benefit is in the effective tax rate. It does not necessarily reflect on the NIM, but it's part of the capital allocation strategy.

All of those together, what we've been seeing is that the risk-adjusted NIM, which, as I mentioned before, is the one we're trying to maximize, has been growing at an average of around 20 basis points per quarter. We think that that should continue to be the case in the coming quarters with this strategy continuing to play out as we have been executing it.

Antonio Ruette (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Our next question comes from Mr. Daniel Vaz from Safra. We're now opening the audio so you can ask your question live, sir. Please go ahead.

Daniel Vaz (Lead Research Analyst of LATAM Financials)

Okay. Hi, hi, João, Alexandre and Santiago. Happy to join for the first time after the initiation of Courage. I think most of the questions have been answered, but I'm trying to focus on the credit penetration. You improved meaningfully in the first quarter. Could you elaborate on what's driving that increase? I know it's penetrating more credit, but is it more about activating your existing client base, some specific products, or are new clients already joining with credit lines offered upfront, or any account changes that we should be aware of? Thank you.

Santiago Stel (SVP and CFO)

Hi, Daniel. Thank you for your question. This has a lot to do with the overall strategy and also what João mentioned earlier in the call about the secular shift that we're observing on and the Inter-by-design. With products such as private payroll coming in, the expansion of FGTS loans, and everything that we're doing credit cards, we've been able to bring a lot more people to the base and increase credit penetration. From a trend perspective, we'll have to work quarter after quarter and see where we get. The effort that we do internally is to keep boosting credit penetration, which has a lot to do with what we've been building, right? As most people know, when we onboard clients, just a small percentage of them get an automatic credit card limit, for instance.

Clients build behavior, and following the behavior, we give them a credit card limit, and we start engaging them with this credit product so that they can learn and we can grow. I would say this growth is by design, and we can expect to see more and more credit penetration within the client base as we move forward. Thank you. Thank you, Daniel.

Daniel Vaz (Lead Research Analyst of LATAM Financials)

Thank you and congrats.

Operator (participant)

This concludes our question and answer session. I would like to yield the floor back over to Mr. João Vitor Menin for his closing remarks.

João Vitor Menin (CEO)

Everyone, thanks again for listening to our earnings call. Just to summarize everything that we discussed here today, it's all about our Inter-by-design, how we envisioned 10 years ago to build this, what I call, unique platform in a win-win situation with the clients, reducing the debt service, being digital-first, having this consumer finance 2.0 in place in order to optimize everything, having this collateralized portfolio with many products also still to come, such as the digital receivables on the SME. The best funding class, really 100% digital retail-oriented. We're really happy that Inter is well-positioned. We prepare ourselves to be here today, sharing not only the results for the quarter, but already thinking about what's ahead of us, and we're very optimistic about the future.

I would like to thank all the shareholders that have been supporting us since we launched our digital free checking account in Brazil. Also, of course, last but not least, our more than 4,000 employees at Inter that work every day harder and harder to take us to the next step. Thank you very much to all of them, and see you soon on our next earnings call. Thank you very much. Have a good day. Bye.