Inter & Co - Q2 2023

Transcript

Operator (participant)

Good afternoon, and thank you for standing by. Welcome to the Inter & Co Q2 earnings conference call. Today's speakers are João Vitor Menin, CEO, Alexandre Riccio, Senior Vice President of Retail Banking, and Santiago Stell, 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 "no microphone" at the end of your question. In this case, our operator will read your question. Please note that there is an interpretation button at the bottom of 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'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. Let me introduce the agenda for today. Mr.

João Vitor Menin will start the presentation, sharing with you an overview of the vision and the main achievements of the quarter. Mr. Alexandre Riccio will cover the banking and transactional platform sections. Mr. Santiago Stell will present the financial performance section. Mr. João Vitor Menin will make some closing remarks, and we will proceed to the Q&A session. 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 afternoon, everyone, and thank you for joining our earnings call. This is a truly special quarter for several reasons. On one hand, it marks the one-year anniversary of our U.S. listing, which is why we are broadcasting from Nasdaq New York Studios. More importantly, this is a quarter of records, representing an inflection point in our history. If you recall what I said in the last quarter earnings call, I mentioned that our results were just a glimpse of our strong potential. Well, the glimpse is now a reality, reflected in the multiple records we were able to print in a single quarter. First, we combined both top and bottom line record performance. Second, we delivered our strongest operational results with record new active clients and activation.

Third, we launched our seventh vertical, which is loyalty, improving the value proposition for our clients with the new rewards program called Inter Loop. Lastly, we launched our global app, the first-ever in the banking industry. With all of that, I could not be more excited. I believe this shows our huge effort to deliver the best platform for all stakeholders. On page 6, we delivered an impressive combination of record figures. From a financial side, our gross revenue reached BRL 1.9 billion, 33% higher than a year ago, and it continues to be highly diversified, with a great balance between fees and NII. The top line growth was combined with a very disciplined cost control, which enabled us to deliver our record efficiency of 53%. We continued with our ROE-driven underwriting, enabling us to have strong NIM expansion.

On bottom line, we had our highest-ever profitability, both on pre- and post-tax basis. This is not just a few percentage points higher than in the prior periods, but multiple times higher, particularly on pre-tax basis, reaching BRL 80 billion. When we look at operations and innovations, I'm flattered to see also a series of remarkable milestones. We had another quarter, adding 1 million active clients, and we reached a total of 28 million clients. We continued improving our activation ratio by an impressive 68 basis points, surpassing 52%, our highest level since 2021. We continued innovating by launching Inter Loop, which we believe will drive strong engagement and activation. Additionally, we started operating our global app. Now we have our super app working seamlessly across geographies, same as Uber or Netflix. On page 7.

As an engineer, I am a builder by heart, and in that sense, I'm very excited with the launch of our loyalty product called Inter Loop. I had the same excitement when we launched our digital account in 2015, and also when we launched Inter Shop back in 2019. I'm fully convinced that we have all the elements to succeed in this new journey, such as 28 million clients, BRL 200 billion highest transacting per quarter, a state-of-the-art technology platform, and full banking infrastructure behind. I'm sure that we will disrupt this market in the same way that we did with digital banking a few years ago. On page 8. In summary, this is a quarter of records, the best one ever. It's a truly inflection point in our history that enable us to start seeing the full potential of...

Despite still being in day one and to have a lot to deliver in the next years, I'm happy to report real operational excellence and profitability. This innovative and profitable business model is gaining momentum as we continue to grow, gain market share, keep innovating, enhancing our super app for our clients, and lastly, expand our profitability for our shareholders. We're starting the second half of this year on a very strong note, with a momentum that enable us to continue delivering results over what was built so far. Thanks again for listening. Shane, please go ahead.

Speaker 11

Thank you, João, good afternoon, everyone. I'll start talking about our credit and funding capabilities. Jumping into our loans on page 10, I'll pass through some important highlights. Our portfolio grew by 5% this quarter, focused on high ROE products such as FGTS loans, which grew 26%, and home equity, which grew nearly 10% in a quarter-over-quarter basis. In credit cards, we grew 6%. In payroll and real estate, we continued improving our pricing and materially increased the average yields. The word that better describes this quarter in terms of credit underwriting is consistency.

This discipline has enabled us to improve more and more the average yield of our portfolio with 200 basis points increase in a single quarter. We have been doing a very diligent job related to our underwriting capabilities and are already seeing the strong results of it.

On page 11, we present our asset quality metrics. Starting with the 15 to 90-day NPL, we saw an impressive decrease of 30 basis points in a year-over-year comparison. On the 90 days metric, which has an impact of changes in growth rates, the ratio increased 30 basis points on a quarterly basis, in line with the general market trend. We're happy to report that newer cohorts are consistently improving as a result of our more assertive and data-driven credit underwriting, as you can see in the bottom left chart. Finally, the NPL and Stage 3 formation reached 1.6%, in line with the market trends and our, our past performance. On page 12, we see that our cost of risk reached 6.5% in the quarter.

The increase, as mentioned in the prior page, is mainly associated with older cohorts of credit cards.

Aside of cards, our cost of risk is demonstrating a solid and stable trend of around 1% since the Q4 of 2022. Our coverage ratio remained constant at 130% by provisioning in line with the NPL trend. Overall, we see that our asset quality metrics are following the macro trend with similar behavior when compared to peers. On page 13, we can see the evolution of our funding base, one of the key competitive advantages of our platform. Our deposits grew 29% year-over-year, reaching BRL 33.5 billion in a highly fragmented base. With more than 13 million clients trusting us with their deposits. We continue delivering best-in-class cost of funding, reaching 63% of CDI in the quarter. Now, let's move forward to the transactional platform session.

We're glad to report our second consecutive quarter, adding 1 million new active clients, combined with the lower CAC in over two years. Our activation rate showed strong progress, increasing 68 basis points, surpassing the trend that started last quarter. We achieved these results with big data and AI, which allowed us to advance towards much stronger understanding of our customer profiles, behaviors, and product preferences. In addition, we have advanced significantly in the app personalization, which we presented early this year in our Investor Day. As an example, we have more than doubled the number of app home screens when comparing to the end of the Q1.

In terms of volumes, on page 16, you can see that debit and credit cards, as well as Pix, reached BRL 197 billion in TPV, which demonstrate our strong position in banking and in the daily lives of our customers. Interesting to note that credit cards continues to outpace debit transactions, providing us with a much higher interchange and profitability profile. In a cohort basis, as presented in the right chart, we can see the positive evolution in, one, increasing TPV across cohorts, and two, higher starting points, which is a strong evidence of better quality clients.

With our clients transacting almost BRL 200 billion per quarter in their daily banking activities, the cross-selling opportunities are notably higher. As we keep enhancing communication channels and create new engagement solutions, such as Inter Loop, this opportunity can scale even more in the future.

On e-commerce, we reached 2.7 million clients transacting during the quarter. Our momentum allowed us to continue growing our net take rate, which now stands at 9%, our highest level ever. On insurance, we saw a 46% increase in active clients as we evolve with our up-selling and cross-selling initiatives. Finally, on investments, which reached 3.6 million clients, we saw an impressive 66% year-over-year growth, along with a strong AUC that increased 41% to BRL 77 billion. These products boost ROE and consume no capital. As Ro mentioned in the beginning of the presentation, we are super excited with all the possibilities that Inter Loop is bringing as our seventh business vertical. We're using our robust banking structure as the backbone of this program.

The breadth of our platform dramatically facilitates the earn and burn opportunity, the opportunities, with the marketplace being the most obvious synergy. The solutions are already built, we just need to connect them. In that sense, Inter Loop leverages not only a strong potential of cross-selling, but also can create revenue streams such as, 1, earn versus burn spread, 2, breakage, 3, point sales, and 4, subscriptions, and much more. The idea is to connect all of our verticals with Inter Loop, creating a true gamification experience. Talking about our global solutions on page 19, we illustrate the evolution of this vertical. We're glad to say that it is performing at a pace much stronger than we anticipated, reaching almost 1.9 million global clients and $220 million in deposits and AUC.

The strong adoption of these products is related to its seamless UX into our go-to-market strategy that's focused on, 1, Brazilians who travel abroad and want to spend in a U.S.-issued card, 2, Brazilians who want to invest on Nasdaq or NYSE, 3, people who live abroad and send remittances worldwide, mainly immigrants, and 4, people who want to invest in real estate funds. We continue evolving to replicate our Brazilian offering in the U.S. with minimal investments by taking advantage of our flexible and scalable technology. By now, we already have deployed 5 of 7 of our business verticals in the U.S., all of them integrated into our global app.

In terms of products, we have in place remittances, store discounts, gift cards, debit cards, mortgages, and investments. As we move forward, we plan to add a full e-commerce platform, BNPL, and credit cards.

Important to note that we're coding in reais and monetizing in U.S. dollars. Santi will pass through the financial highlights of our quarter of records. Thanks, everyone.

Santiago Stel (SVP)

Thank you, Sander. Good afternoon, everyone. Let me walk you through the financial performance section. In the context of the quarter of records, revenue is certainly one of them. We reached $1.9 billion of gross and $1.2 billion of net revenue this quarter. In terms of growth, it's interesting to notice the acceleration of 12% in net revenues in a single quarter, marking the strong momentum of our franchise. Another important highlight is how balanced NII and net fees grew side by side, both at double-digit rates. On page 22, we can see the ARPAC evolution across cohorts. As we already highlighted in prior quarters, newer cohorts continue outperforming the older ones. In addition, when clients get to know our platform by using it, we see even higher ARPAC levels.

We believe that this trend will remain increasing as the new approach of client activation and the app personalization continues moving forward. On the right-hand side, we can see a stable ARPAC trend from a financial statements perspective in the strong growth in new active clients. Let's discuss about our strong NIM evolution on page 23. Starting with the NIM 1.0, which considers the full portfolio, including card receivables that do not accrue interest, known as à vista in Portuguese, we reached an impressive 8.1%, which is 70 basis points higher than the Q1 of this year. Regarding NIM 2.0, which considers only interest earning portfolio, the increase was even higher at 80 basis points, by far our best performance in several years.

When we look at the evolution of NIM since 2022, we can see four different stages. First, we converged our rates to the market level as we shifted from growth to growth with profitability. Second, we accurately repriced the legacy portfolio of mortgages and payrolls. Third, we're gradually changing the portfolio mix as we originate more of the high ROE products. Finally, going forward, we expect to benefit from the recent launch of Conta com Pontos, the scale-up of new products, and the decrease of Selic rates. Moving to the expense side, on page 24, we can see the effectiveness of our cost control initiatives. Our expenses decreased for the second consecutive quarter, even on nominal basis. When we look across lines, we can see a very stable trend in all of them.

With this disciplined focus on expense management, we still see a strong opportunity to continue strong operational leverage. Moving to page 25, we can see that these results are also visible in the ratio of active clients per employee, which is a good proxy of our workforce productivity. It now stands at 4.2 thousand, with the most notable evolution in a single quarter. The cost to serve also had strong performance, decreasing 20% in a year-over-year basis, standing today at 12.5 reais. I would like to highlight the importance of operating at such low cost to serve, as it gives us a unique competitive advantage vis-a-vis incumbent banks. Moving to page 26, and what is probably my preferred slide, the left chart shows the impressive work that we are doing at Inter on the operating leverage side.

We're being able to increase revenue and decrease expenses at an accelerated pace while delivering best-in-class products to our customers. On the right-hand side, I would like to highlight the remarkable improvement in our efficiency ratio, which is also one of the most important records of our quarter of records. We reached 53%, the second consecutive wall quarter, with nearly 900 bps improvement. As you can see, we had a great performance in personal and administrative expenses, with a decreasing trend in both lines. Recalling our Investor Day target of 30% efficiency, we are considerably ahead of schedule towards this metric. These results reinforce our strong commitment and discipline focus towards our five-year business plan.

Moving to capital on page 27, we recorded a CET1 of 22.8% in the quarter, which is the lowest capital consumption of a quarter since our IPO.

As mentioned in prior calls, our capital is fully comprised of top-quality core equity without any hybrid capital instruments. When we compare our CET1 level, it remains nearly twice that of the median of the 5 large incumbent banks of Brazil. Last, but definitely not least, another record of the quarter of records is profitability on page 28.

... We accelerated our path to profitability, delivering BRL 64 million of net income at a 14 times increase in our pretax basis to reach an EBT of BRL 80 million. This is our highest profitability since our IPO back in 2018. We couldn't be more excited about what's coming next. Now, João will share with you his closing remarks. João, please go ahead.

João Vitor Menin (CEO)

Thank you, Santi. Thank you, Santi, for highlighting all the important topics of our quarter of records. Before moving to Q&A, I would like to say that these results were possible because, first, we have a very disciplined focus on increase our revenue, scaling up the products in our platform. Second, we optimized our cost structure. Third, maintain our strong innovative DNA approach. As you can see, Inter is at its inflection point, delivering strong results, still with the best yet to come. Thank you, clients and investors, for your valuable trust. Thank you to our employees to make this incredible quarter of records possible. Like I already said, we're starting the second half of this year on a very strong note. We will now start the Q&A session. Thank you very much.

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 "no microphone" at the end of your question, and our operator will read your question aloud. Our first question comes from Mr. Thiago Batista from UBS. We are now opening the audio so you can ask your question live. Please go ahead, sir.

Thiago Batista (Senior Equity Research Analyst)

Hello, can you hear me?

Operator (participant)

Loud and clear, sir.

Thiago Batista (Senior Equity Research Analyst)

Okay, perfect. Thanks, guys, for the opportunity. Very good earnings. Congratulations. I have two questions. The first one about the Conta com Pontos. Is fair to say that the vast majority of the conversion of the demand deposits to the low-cost time deposits were already done, and but we were not able to see yet the full impact of this change in the P&L. Only to see if the improvement in your profitability coming from this change will appear going forward. Second, if I look for your ARPAC, and I mean, looking to the net ARPAC, we saw some expansion this quarter to something close to BRL 30 per month.

But this is still about 10%, 12% below the peak, let's say, one or two... one year ago, more or less. If you look for the chart that you show, about the net ARPAC by cohorts, we also, it's possible to see that the new vintages are a little bit worse than the average. My question is, are the new clients of Inter a little bit worse than the previous clients, or the bank more conservative credit approach is causing this slightly lower net, net ARPAC for the new clients?

Alexandre Riccio (SVP of Retail Banking)

Hi, Thiago. This is Alexandre speaking. Thank you for the question. I'm gonna start with the Conta com Pontos one, and Santiago Stell will take the second part. Conta com Pontos is part of a larger program, as , called Inter Loop. We launched this about two months ago as our loyalty program, and we're really seeing it as an opportunity to be our seventh business vertical. It's a full rewards program, and it connects our Inter, our ecosystem, and gives even more possibilities to our clients, right? Instead of being limited to receiving cashback in e-commerce, investments and credit cards, which was the case before, clients can now earn points and have the freedom to choose how to burn these points.

Options to consume points now already range from, like, cashback, discounts in Inter Shop, airline miles, investments, donations to multiple charities. This donations part is super nice, and we have a lot more to come. The key strategy with Inter Loop is to, in the short term, as it applies to customers, to retain, engage, and monetize further our existing base, and also to attract new customers with a more comprehensive offering that's flexible and suitable to a wider range of preferences. In the long term, we believe that this has poten- it has the potential to be a business by itself. João mentioned in, in his remarks, that with our 28 million clients, the full banking platform and the state-of-the-art technology, it's a low-hanging fruit-...

That was demanded by our customers, so we're eager to pursue this, this challenge there. As we deep dive into Conta com Pontos, it's one of the possibilities that we offer to our clients to earn points inside Inter Loop. Clients earn points, given certain rules as a function of their transactional account balance. The way it works is the customer's overnight deposits are invested on a CD, and the CD yields are converted each into points. Nothing changes in the client's experience besides receiving points. The yields on a transactional account for Inter, on Inter's perspective are optimized. Finally, on the implementation of the project, we did convert about 75% of the demand deposit balance, but this move happened mostly in June.

we had about one third of the month of the revenue optimization or the, the balance on reserve requirement optimized. we still have a lot more to see in the Q3 and Q4.

Santiago Stel (SVP)

Then on, on ARPAC. Hi, good afternoon, Santiago here. We're very happy with the performance of the ARPAC this quarter. Still more, more to go, but at the end of the day, it's a race between the numerator and the denominator, no? With revenues, which has been growing very well, particularly this quarter, and new active clients with 1 million new per quarter, which also has been performing well. When we look at the underlying dynamics for this ratio, we see new active clients at close to a record coming into Inter, which for us is super important. It means that they like the platform, and they, they continue selecting it. The new cohorts are starting at slightly higher points, which is a reflection of the profile of the clients.

On average, the clients we're bringing now are around 30 years old, with slightly higher income than the than in prior quarters, like the ones we had in 2020 and, and 2021. Then we have dynamics on new products that have been recently launched, which are still to be penetrated in the, in the existing clients, and that will also drive ARPAC higher. Overall, we, we, we look at it on a cohort basis and with these underlying trends, which we think are flowing well, and eventually will- it will adjust because revenue will end up growing more than, than net new active client growth going forward.

Thiago Batista (Senior Equity Research Analyst)

Very clear, Santiago and Alexandre.

Santiago Stel (SVP)

Thank you.

Operator (participant)

The next question comes from Mr. Yuri Fernandes from JPMorgan. We are now opening the audio so you can ask your question live. Please go ahead, sir.

Yuri Fernandes (Senior Equity Research Analyst)

Thank you. Congrats for the strong quarter, João, Alexandre, Santiago. I have a first one regarding payroll. When we try to see the implied yield, we see a big increase on, on personal loans, right? That's mostly, I guess, payroll. The gross financial income for the, for this line is up maybe 40% quarter-over-quarter. Just checking the box here, what drove this increase on payroll? Is, is basically the repricing, is this FGTS mix, how sustainable is this, and you should see more room for higher yields on payroll? I can ask my second question later. Thank you, guys.

Santiago Stel (SVP)

Thank you, Yuri. I can take that one. It's a mix of two factors. One, the loan mix, more towards FGTS. We added this quarter, the breakdown of FGTS, together with the breakdown of home equity in the loan breakdown, to be able to see this more clearly. The growth has been heavily skewed towards these two ROE products, high ROE products. On rates, payroll loans, we are originating very diligently above 1.7%. The curve has been going down, so the spread has been increasing. We're evaluating the new levels to originate in the second half as Selic moves, but so far, what's reflected in the Q2 is an origination rate that has stood above 1.7 on payroll.

On FGTS, we increased from, from 2 to around 2.1%, 2.15%, the monthly rate, and that is driving the overall personal loans rate, up.

Operator (participant)

The next question... I'm sorry, sir, go ahead.

Santiago Stel (SVP)

A second one, Yuri, you had a follow-up?

Yuri Fernandes (Senior Equity Research Analyst)

Thank you. I, I wasn't able to unmute myself. Thank you very much, Santiago. Just on Granito, I guess on your equity income, you had a loss, this quarter on the equity income line. Just checking what happened there, if this loss on Granito was a one-off, just some color on the equity pick up, line. Thank you.

Alexandre Riccio (SVP of Retail Banking)

Hi, Yuri, João Vitor here. Yes, we have a loss on the income from Granito, which is a one-off, yes. Though we are very excited with the Granito business, we just changed the management. We have a new CEO, Enrique, that came from Fiserv. The Granito business is very important for us to have a full service platform for our business account, which is performing really, really well. I believe that it's gonna be a great-

João Vitor Menin (CEO)

... A great moment to have for our business account and also for, for the, the acquiring business, going forth. Thank you very much.

Operator (participant)

Our next question comes from Mr. Eduardo Rosman from BTG. Sir, we're now opening the audience, so you can ask your question live. Please go ahead.

Eduardo Rosman (Senior Equity Research Analyst)

Hi, good afternoon. I have two questions here. First one is on asset quality. When do you think we can expect to see a, a real improvement in, in NPLs and the cost of risk, right? I think, if we look to your results, all the lines are moving in the right direction, so we're just missing this one. If we see cost of risk moving down, I think the, the ROE jump will become more clear and allow it to everyone. The second question has, has some sort of a relationship as well, has to do with principality. We saw most banks and, and retailers facing challenges with NPLs within the riskier individual lending sectors, right?

You have a, a peer which is, which is Nubank, that clearly stood out, . One of the reasons which is, is the strong principality with clients. , you also have you have been showing there are a lot of clients of Inter that use Inter as the number. Their, their primary choice. What have you learned and, and, and what can you, let's say, use to, to be better prepared in the future, once you, you have to resume growth on, on these risker lines again? Thanks a lot.

Santiago Stel (SVP)

Thanks, Rosman. I'll take the first part, and João Victor will take the second one. On asset quality, we're increasingly more optimistic as we've been doing the work behind the scenes very thoroughly for several quarters. I would split up on non-cards and cards. On non-cards, if you see in the disclosure, the cost of risk remained flat at around 1.1%, and this applies to around 70% of the loan portfolio. Non-cards, there hadn't been any issues, which is what we expected, so that is great news.

On cards, the way we analyze it is on a cohort by cohort basis, and we added the disclosure last quarter, and we updated this one to be able to see how the cohorts perform and how they improve. In addition, we have implemented main strategies in the cards portfolio, which include increasing limits for high-performing clients and reducing limits for clients whose credit profile have deteriorated. Overall, we think that with a better mix on origination and the great work that the risk management and collection team is doing, we expect a second half of the year with a trend improving relative to the first half. Even if we look at June numbers, and the dynamics relative to what we had at the beginning of the Q2, we're already seeing that trend improving.

João Vitor Menin (CEO)

Rosman, here's João Vitor. I'm gonna take the second one regarding principality. This is, by the way, is a metric that we have been improving so far, so we've reached almost 70% principality on amongst our clients, so we're improving quite fast, to be honest. Regarding the connection between principality and NPLs, we don't see that as the main thing for us to underwrite well, to collect well, and therefore, have a good NPLs. We do think that, essential as Santi mentioned, the right credit modeling, plus a very, very good collection process, is the one that are going to drive the right NPLs down the road. By having the clients using us, which is the principality that you mentioned, we can also help to gather some information.

Again, it's not a silver bullet. It's important more to bring more revenue streams using other verticals than to, to reduce the NPLs. That's how we see principality versus NPLs trend.

Operator (participant)

The next question comes from Mr. Rafael Frade from Citi. We are now opening the audio so you can ask your question live. Please go ahead, sir.

Rafael Frade (Equity Research Director)

Hi, guys. good afternoon. Congrats on, on the, the strong results. I have two questions here. One is related to how are you positioned for, for potentially the easing cycle in terms of interest rates? I saw that there was an increase of around BRL 3 billion related to hedge for interest rates, so I would like to understand a little bit of how this reflects your positioning. The second question is related to expense. When you look, you had a huge decline in headcount since the end of the last year. When you look for personal expenses, specifically, we didn't see reduction. In fact, we still see those expenses going up. Just like to understand if we don't have the impact of the lower headcount yet.

It was, I don't know, there were some severance costs in the middle of this process. Just to understand a little bit how this should evolve. Thank you.

Santiago Stel (SVP)

Hi, Frade. Good afternoon. I'll take that one, both of them. Starting with the rates front, just to revise the structure of our balance sheet, we first, we are highly unlevered. You'll see the one, of 22.8%, and additionally, we have a much higher funding base than what we have loans. In summary, we're liability sensitive, and we, we expect to benefit from a Selic reduction. The impact is, more or less, depending on, on, on the way that plays out, but the impact for us is, is positive, and we, we see that as one of the factors driving NIM expansion towards the second half. In terms of, of personal loans, we have a few dynamics playing out.

First, we had several costs, so around half of the reduction that we have in personnel, it was voluntary. The other half, half was involuntary or company induced. In addition to that, as we recorded positive profitability, we started provisioning, according to accounting rules, the long-term incentive plans and compensation for the team. Both things together made the number on personal expenses go up by around 9%.

Neha Agarwala (Senior VP and Equity Research Analyst)

Okay, thank you.

Operator (participant)

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

Pedro Leduc (Financials Equity Research)

Thank you so much. First, great job again on efficiency. , if you could talk a little bit more on, on, on the cost, savings fronts that you found, if growth projects, more costs that are core, that you've come to optimize, maybe some learnings, so we can start to draw some dynamics here for, for the next few quarters. And not worry much if maybe you push something forward to 2024, or most of it is really, here to stay. That would be great. Thank you.

Santiago Stel (SVP)

Thanks, Leduc. On expenses, we were quite aggressive, both on personal and non-personal. We closed the year in 4,100 employees last year. We reduced 300 headcount and another 400 in the Q2. Now, we expect to stay roughly at this level for some time. We want to see the platform responding with this level of employees. We have some impressions that potentially we can improve in the future, but for now, we want to cruise at this level for some time. This has already been an interesting effort that the organization has adjusted pretty well. On non-personal expenses, there is a mix of variable expenses, many of which are vendors or providers like Mastercard, Salesforce, AWS, et cetera.

Those are contracts that are not that fast to renegotiate, or, or it takes some time to deliver operational leverage, but we're working on them as well. There's a large collection of expenses that are being monitored by our expense committee, that meets every Friday morning and is led by João Vitor personally, and that has many improvements to happen still in the second half. Overall, if you remember, we wanted to have at least 10 percentage points of operational leverage in the year, which was going from 70 to 60. We are 53. What we see in terms of this ratio for the second half, is to stay as close to a 50% as we can.

The majority of the, of the improvement was done, with a bit, a few more percentage points to come, but, not in the 900 basis points magnitude that we had in the first and the Q2.

Operator (participant)

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

Neha Agarwala (Senior VP and Equity Research Analyst)

Hi, everyone. Thank you so much for taking my question, and congratulations on the, on the great quarter. Just quickly following up on the cost side, regarding the CAC, which went down, on, on a positive note, and we saw a big reduction in the marketing expenses. Could you please elaborate on what areas specifically have you cut regarding the marketing, and, and how sustainable do you see that in the coming quarters? Thank you so much.

João Vitor Menin (CEO)

Hi, Neha, João Vitor speaking. Thank you for the comments. We do see an opportunity to keep improving our marketing costs for acquisition. Not only that, we believe that the competition is slowing down, has slowed down a lot, and also not only regarding competition, but we have been improving our platform since then. New products, new features, and therefore, we are gaining new clients with more engagement and new clients at cheaper than we used to do before. The trend for CAC is very good. We believe that, again, we don't think we will have tens of platforms being a winner of this digital banking business.

We believe that we are ahead and are capturing all the benefits of this position that I just mentioned to you. Again, the best app, the right pricing, the right products, and this is what it's really driving our low CAC and high engagement since the mid-.

Santiago Stel (SVP)

... mid, last year, this trend should continue going forward.

Operator (participant)

The next question comes from Mr. Tito Labarta from Goldman Sachs. We are now opening the audio so you can ask your question live. Please go ahead, sir.

Tito Labarta (VP)

Hi, good afternoon. Thanks for the call and taking my question. , congrats on the strong results. Question on loan growth rate good growth this quarter. Just think about the outlook going forward with rates coming down. You mentioned asset quality, perhaps, maybe some positive signs there. Is there room to accelerate loan growth from here? Which segments would you feel most comfortable growing in? Then, just kind of related to good improvement on the margin, but as you continue to grow the loan portfolio and if there's any more repricing how high or how much more can the margin improve from here? Thank you.

Santiago Stel (SVP)

Hi, Tito. Thanks for the question. On, on loan growth, we reported 5.4% this quarter, which is an annualized of, of above 20%. We think, at the very least, we, we would like to have this area of growth, if not more. We would actually like to have a second half closer to 30% annualized than to 20% annualized. We want to do that very meaningful in terms of use or capital allocation. We have been prioritizing higher ROE products, which are mainly, but not exclusively, FGTS loans and, and home equity. We think that we are well positioned to, to accelerate on, on traditional payroll loans and, and real estate loans as well as, as well as the SMEs.

The decrease in the rates will help on the demand side and the portability side, which is something that was a bit tougher with the Selic at 13.75. Then we have the scaling up of new products. Now, we have launched overdraft, we have launched Buy Now, Pay Later, and those are products that are doing the baby steps, but we have a great potential to penetrate our client base with them as well. We think that overall, these, together with maintaining the higher ROE discipline, will be a driving force for the need to stay in the high single digit, as we have reported this quarter.

Operator (participant)

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