Inter & Co - Q2 2024

Transcript

Operator (participant)

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

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

Sir, the floor is yours.

João Vitor Menin (Global CEO)

Thank you, operator. Hello, everyone. As usual, I will begin with a brief overview of our strategy before handing over to Xande and Santi. That will cover operational and financial metrics. But before we begin, I want to express my gratitude to Xande, our new Brazil CEO. Xande, I'm confident that you will continue to do an amazing job in your new role, leading our business in Brazil into a bright future. Now, let's deep dive into second quarter results. I'm very happy with our deliveries in our 60-30-30 plan this quarter. I can affirm that the combination of growth and profitability is propelling us to new heights. Once again, we are demonstrating our ability to deliver remarkable results by focusing on execution day after day. While constantly pushing for innovation and new ideas, we also delivered strong financial performance, ensuring that our business is here to last.

I would like to express my gratitude and admiration for our group of 3,800 employees. We're very proud to see that our company is producing alpha in the Brazilian banking market. A clear way to see this is in the pace of growth that we had in very important portfolios. We are growing multiple times faster than the industry, such as eight times faster in individual accounts and four times faster in FGTS loans. This reflects the beauty of our financial super app and the great ability to attract clients and cross-sell our products within the platform, therefore maximizing our market share gains. To really understand what I'm trying to say, let's spend some time on page seven. We can see here the opportunity we have to fish in our own aquarium.

We have scaled at the most difficult part, getting clients on board and building the product offering. Now, if we keep growing at the same pace for the following years, we can reach greater market share just by fishing in our own aquarium, meaning getting more business from our existing clients. Obviously, on top of that, we will continue bringing new clients, as we have done consistently for many years. As you know, we have one of the most complete product offerings in the market, serving multiple client profiles in one single app. To maximize conversion of our products, we rely on a strategy that are based on hyper-personalization, best-in-class UI and UX, and a unique digital journey for every moment inside the app.

Xande will present the details later, but just to give you a little sneak peek, our insurance vertical printed the best quarter ever, thanks to the amazing impact of integrated data, target campaigns, and the strength of our connected platform. What I mean with that is we are seeing incredible results by leveraging our data effectively and constantly pushing the boundaries of innovation. I'm personally passionate about the client experience and driving innovation. We will continue to enhance our UX and UI and introduce new features to provide the best possible experience. Moving to page nine, we can see our seven verticals powerfully working together. As an engineer myself, I like to say that all cylinders are working in perfect coordination, and this make me confident on the continued success of our platform.

By providing a complete range of personalized products to each client, we observe amazing outcomes across all verticals, which Santi will deep dive in the next page. Xande, please go ahead.

Alexandre Riccio (CEO, Brazil)

Thank you, João. Good afternoon, everyone, and thanks for joining us today. First of all, I'm extremely proud to assume the role of CEO, Brazil, and leading our operations. Having been part of Inter for 11 years, I can say that I have a deep passion for everything we have built so far, and of what lies ahead. João, once again, thank you for your support and trust, as well as of your forward-looking vision that constantly pushes us to be innovation pioneers. Going into the results, I'll start by focusing on the most important topic: our clients. We're happy to announce that once again, we welcomed 1 million new active clients this quarter. This figure has led to a sixth consecutive quarter of increasing activation, now standing at 55.3%.

Throughout the second quarter, we achieved a total of 33 million clients, successfully increasing the client base by 1.6 million. This demonstrates our ability not only to increase activation among existing clients, but also to attract a new pool of qualified clients, who are activating faster and engaging more with our platform. In addition to the total clients, I'd like to introduce everyone to some details of our business clients. We currently have over two million business accounts, growing at a fast pace of 21% year-over-year. These two million clients are highly engaged, with an impressive activation rate of 80%, in addition to higher deposits, TPV, and interchange levels. Last month, we announced the closing of the acquisition of Granito, renamed to Inter Pag, our acquiring business.

We're excited about this transaction, as we now will be able to fully integrate the business into our ecosystem. The transaction brings a long list of opportunities. Three examples are: first, cross-selling our banking products to all of Inter Pag's merchant clients. Second, cross-selling acquiring services to our existing base of merchants and individuals, hundreds of thousands of which already flow their acquiring receivables into our account. And third, building powerful bundles of banking and acquiring services to address retail clients currently under-penetrated in our base. In summary, we see opportunity ahead of us and are already moving to capture it. Turning our attention to page 12, the total TPV has shown a remarkable increase of 47% year-over-year, reaching BRL 290 billion.

Specifically, when we consider transactions made through Pix, we transacted over BRL 266 billion in a single quarter, capturing 8% market share of the total number of transactions. Also important was that for the second consecutive quarter, volumes and growth from credit cards have surpassed debit, resulting in higher interchange revenue and further improving the TPV mix. Moreover, as we have consistently seen in the past few quarters, we're continuously increasing TPV levels among both new and existing cohorts. This demonstrates the growing engagement of our customers with our product offerings, ensuring continued success. Moving to the credit side, I want to provide a brief update on our new credit lines expansion. Pix Financing, Buy Now, Pay Later, and our other unsecured lines.

In the quarterly comparison, we had an inspiring increase of almost 90%, reaching a combined of BRL 330 million in portfolio. This is one more important step in bringing our unsecured products to full potential. In the beginning of the third quarter, we expanded our Pix Financing offering to the entire credit card base. One more element to sustain growth. Moving to page 13, in the e-commerce vertical, we have achieved the best growth level of the post-pandemic days. In the annual comparison, we increased our GMV by more than 50%, surpassing BRL 1.1 billion in the quarter, with more than three million clients making purchases within the period. On Loyalty, a vertical that completed one year in June, we achieved impressive eight million clients, demonstrating our strength in launching and growing new products that have strategic fit with our platform.

Those clients are highly engaged, spending 2.7 times more than non-loyalty clients and generating an RPAC that is 1.7 times higher. Moving to page 14, on the insurance front, we are very happy to report one of our best quarters ever. Our sales have exceeded 1 million for the first time ever, far exceeding what we have experienced in the previous quarter, and we have seen a 39% quarterly increase in the number of active clients. As a result, we now have 2.6 million active insurance clients, an amazing number. We're also proud to have successfully launched new products in this vertical, such as the FGTS loan insurance. This product integrated seamlessly into the FGTS loan product user experience, and this is a great example of our hyper-personalization strategy, as previously highlighted by João.

Turning our attention to the investment, investments vertical, we had a quarter of encouraging growth. Within a year, we have increased the number of active clients by around 60%, reaching 5.7 million. Furthermore, we have surpassed a significant milestone of BRL 100 billion in AUC for the first time, and are already close to BRL 110 billion. This achievement showcases our cutting-edge product offering in this vertical and the evolution of our distribution capacity. Moving to the next page, last but not least, on the global front, as mentioned by João, we're continuously advancing in replicating one of our key competitive advantages in the U.S., our robust deposit franchise. We're excited to report that our assets under custody and deposits in U.S. dollars have reached the milestone of $516 million, reflecting an extraordinary 133% year-over-year growth.

This achievement underscores our strong performance in the U.S. market. Within this vertical, we have successfully acquired 3.3 million clients, comprising of higher income Brazilian clients who frequently travel and invest in the U.S. This means a higher quality customer profiles in terms of spending, engagement, and RPAC levels. This growth and engagement in our global operations encourages us more and more to dedicate to expanding our reach and delivering valuable financial solutions to our clients, regardless of geographical boundaries. With that, I'll pass the word to Santi, who will cover the financial performance section.

Santiago Stel (SVP of Finance and Risks)

Thank you, Xande, and congratulations once again on your promotion. Now, let's deep dive in our financial performance of the second quarter. Starting with our loan book, we delivered 35% growth compared to the same quarter of 2023, resulting in a portfolio of BRL 35.7 billion. Once again, FGTS and home equity continue to be key drivers of this credit growth, with impressive year-over-year increases of 93% and 50% respectively. As João said, our focus on hyper-personalization has opened up new opportunities to optimize our distribution capabilities. Great examples of these improvements in distribution through hyper-personalization are FGTS and Pix financing, which are fully digital products with remarkable growth and profitability profiles. Now, speaking about the implied rates on the top of the page, the stability that we can see is attributed mainly to two factors.

The first, the overall lower interest rate environment in the entire banking system compared to a year ago when Selic was much higher. And two, with the lower inflation in the quarter, which affected mainly our real estate loans. We believe that the performance in terms of yields was very strong, with an all-in loans rate of 21%, which is twice the level of CDI and is the highest we had at Inter in the last four years. We'll go deeper into the full impact of rates in the new pages. Let's go deeper into our loan growth by product, which reflects our continuous commitment on deploying capital efficiently. Our top-performing credit products, such as FGTS and home equity, experienced remarkable growth and now represent 15% of our loan book. Regarding credit cards, we remain focused on allocating new limits for existing clients with strong risk-adjusted prof- profiles.

This strategy has resulted in nearly 40% increase in credit cards in the last year. Both SMBs and real estate loans grew around the yearly average of our loan growth of 35%, while personal loans, which is mainly comprised of payroll loans, had a small negative growth. But when excluding the portfolios acquired nearly two years ago, meaning looking only at the portfolios that we originated internally, we had a positive growth of 4%, with nice acceleration towards the end of the quarter, reflecting the success of the new digital initiatives ongoing in this product. In terms of asset quality, we saw stable trends across metrics. Both NPLs, 15-90 days and 90 days plus, presented slight improvements in the quarter.

Regarding NPLs and Stage Three formation, we experienced a slight increase in the metric as a result of the second quarter of 2023 credit card cohort, which presented higher than average delinquency. We think that this effect is specific to this cohort and will reverse in the coming quarters. Now, moving on to page 20, we can observe that our cost of risk metric improved 20 basis points to 5.0%, or 10 basis points to 5.3%, if excluding anticipation of credit card receivables. These levels are the lowest we have seen since 2022, and reflect how we continue to improve quality of the underwriting model and the collection practices. In terms of our coverage ratio, it remains stable at 130%, indicating that we are provisioning in line with the NPL formation trend.

Passing here to page 21, we are pleased to once again highlight the robustness of our funding franchise, which reached BRL 47.8 billion. A key highlight is how retail and fragmented our funding base is, with more than 17 million clients trusting us with their savings. Another key highlight, mentioned many times before, is the mix, with transactional deposits accounting for 32% of our total funding base. In terms of growth, we have seen a remarkable 9% and 34% increase quarterly and annually, respectively. In terms of transactional deposits, specifically, this quarter alone, we grew BRL 1.3 billion. Moving on to page 22, as we mentioned before, we firmly believe that our funding mix sets us apart from other financial institutions in Brazil, and provides us with a notable competitive advantage in terms of cost of funding.

In this particular quarter, we reached a cost of funding of 6.8%, which is the lowest since I joined Inter at the beginning of 2022. Once again, we are thrilled to report another great quarter in terms of revenue, breaking previous records for the second consecutive quarter. We achieved gross revenues of BRL 2.4 billion, with a net revenue of BRL 1.5 billion. These numbers reflect a substantial 29% year-over-year growth, and a solid 7% quarter-over-quarter growth in total net revenues. Both fees and NII experienced robust growth, further validating the effectiveness, effectiveness of our hyper-personalization and marketing efforts. Let's now turn our attention to the unit economic metrics highlighted on page 24. We're pleased to report that our ARPAC increased to BRL 30.5 per month.

This growth is a result of further engaging and monetizing our clients through our broad suite of high-value products. On the cost side, we continue to make significant improvements in our cost to serve metric. This positive trend has been consistent over the last five quarters, reaching a record low level of BRL 11.1. This demonstrates our ability to efficiently monetize our customer base while capturing economies of scale. Let's now deep dive into our interest income, specifically focusing on NIMs, as presented on page 25. Starting from the top of the page, both our NIM 1.0 and 2.0, with and without the non-interest accruals of credit cards, known as À Vista in Portuguese, are showing a positive upward trend compared to the prior quarters.

It is important to note that we face a negative impact of from IPCA this quarter, inflation, which contributed to a slower growth in the quarter, particularly on the real estate loans. When we consider the risk-adjusted NIM, which deducts the cost of risk, the performance is even stronger, further highlighting the consistent positive trends and reaching record levels. Maximizing the value of our capital allocation is a key priority, that with consistency quarter after quarter, results are visible, and with the continued repricing and new consumer finance initiatives ongoing, we're optimistic on the continuous improvement in the coming quarters. As seen on page 26, we had a modest 5% growth in expenses this quarter, following a 0% increase in the prior one, therefore, also increasing 5% in the first half of this year, relative to the fourth quarter level of 2023.

But more importantly than the growth levels themselves, we can affirm that our marginal spending is strategically allocated to investing in three main areas: people, technology, and branding. This reflects our mindset of creating long-term value of our franchise by investing more in these specific areas. Another worthy aspect to highlight is our marketing expenses. We launched a targeted campaign aimed at increasing brand awareness. Since this campaign was launched, we have seen a notable 25% increase in searches for Inter and a 20% increase in our app downloads. Regarding personal expenses, we strategically increased hiring in key areas, such as IT and commercial teams. We continue to see significant opportunities for us to achieve operational leverage, as highlighted on page 27.

On the left-hand side, you can see that we have successfully increased the gap between the growth of our net revenues and the growth of our expenses through time. As a result, our efficiency ratio on the right side reported at 47.9%, firmly ahead of our 60/30/30 plan. These charts reflect the merits of our digital banking model, where we can scale up our business significantly while maintaining a controlled cost structure that services our clients in a state-of-the-art digital manner. To conclude, I'd like to highlight our strong performance in terms of profitability as presented on page 28. This quarter, we achieved another record-breaking ROE, surpassing the double-digit mark, reaching 10.4%. Our pre-tax income reached nearly BRL 300 million, and our net income reached BRL 223 million. This performance shows our commitment and discipline to drive sustainable profitability.

Now, I will pass the floor to João for his closing remarks. Thank you.

João Vitor Menin (Global CEO)

Thank you, Santi. For my closing remarks, I would like to enforce three important topics from the last quarter: one, the execution of our 60-30-30 plan; two, the recent additions on our senior management; and three, the launch of our latest product, our social platform. The 60-30-30 is on track, with consistent growth in total clients and ROE, and stable efficiency ratio. To help us on our plan, we recently announced some updates to our management team. On internal side, as we mentioned before, Xande is now our Brazil CEO, and Rafaela Vitória has taken over as our new Investor Relations Officer. In addition, over the past few months, we have welcomed several new members to our team, such as Rui Leandro, Mônica Saccarelli, Fernando Bachine, and Marcelo Dantas.

All of them bring extensive market knowledge from top financial institutions in Brazil and abroad, and will add strong value with fresh perspectives in their respective fields. On the board front, we announced Jim Allen as our new independent board member, bringing decades of experience into our board. Guys, welcome to the team. Last, but certainly not least, as part of our commitment of staying ahead of the market, today we launched our social platform. Through this platform, our clients will have the opportunity to engage in discussions, share their experience with our products, and invest collectively, all of it in our financial super app. Thank you very much. Operator, let's move to 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. Gustavo Schroden from Bradesco BBI. We're opening the audio now, sir. Please go ahead.

Gustavo Schroden (Equity Research Director)

Hi, good afternoon, everybody, and thanks for taking my question. First of all, congrats to Xande for the new role. Well-deserved, and all the success for you in this new role. So my question is regarding the NIM adjusted by risk, right? We could see an improvement quarter by quarter, quarter-over-quarter, but the increase was mainly driven by the lower cost of risk, while the NIM was stable quarter-on-quarter. I'm trying to understand how we should think of this in the coming quarters?

Because in my understanding, when I see the implied interest rates that you are charging in the credit, which is at 200% of a CDI, while the securities gains are at 100% of CDI. So I believe that this potential increase in NIM would come from or would be driven by you improving the capital allocation, increasing the exposure to the credit. So my question here: Is this right?

So my point, is this correct, if you think that as you improve the capital allocation, this NIM should improve in the coming quarters, and the NIM adjusted by risk will remain this in this improvement track, considering both sides, cost of risk under control and the NIM with credit improving? So this is my question. Thank you.

Santiago Stel (SVP of Finance and Risks)

Hi, Gustavo. Thank you for the question. So I'll break down the question in two parts, on the NIM part, and then on the cost of risk, 'cause both parts affect now the risk-adjusted. So on the cost of risk side. We think that we should continue to be able to operate in the range of 5.0%-5.5% cost of risk. We continue to work actively in managing credit card exposures and improving that performance on a cohort-by-cohort basis. We have some portfolios that tend to improve that ratio, as are FGTS and home equity and real estate, the collateralized ones, and then we have others that tend to increase that cost of risk ratio, as Pix financing and buy now, pay later.

Altogether, we think that they will net each other, and we should continue to be operating with this range. Obviously, quarter-by-quarter we might have some volatility, but it will remain within that range. Now, moving to NIM side, you know, the pure NIM side before cost of risk, we have a few dynamics playing out. We still have on payroll loans, which hasn't grown yet, and on real estate loans, which has grown, a lot of upside in terms of increasing the average rate of those portfolios. We have a better mix playing out. We said many, many times that FGTS and home equity are gaining share in the portfolio. Jointly, they represent 15%. The two new ones on top of those are Pix financing and buy, and buy now, pay later. We will see how much they, they will represent in the future.

We have high hopes, but it's still uncertain on how much they will grow to. And then, what we also have is what we call a good problem to have, is that we had a lot of liquidity flowing into our system. Now, we grew BRL 4 billion deposits, and the loan book grew a portion of that. So when that extra liquidity comes in, it is temporarily yielding 100% of CDI, therefore, it doesn't necessarily increase the NIM. It is NII accretive, but until we deploy it in the loan book, we take some time. So, all of this together, we do see upsides in the NIM before cost of risk.

It will not be every single quarter linear, but we mentioned many times that around 20 basis points per quarter is what we see over the coming quarters, and then on cost of risk, staying around the level, as I mentioned at the beginning.

Gustavo Schroden (Equity Research Director)

Oh, perfect. Very, very clear, Santi. If I may just a follow-up here, especially on the Pix finance and buy now, pay later and the other, unsecured loans. You reached the BRL 303 million in the quarter, so a 90% growth quarter-over-quarter. Should even if assume some deceleration in this, in this space of growth, I think that, at least at our estimates, it is possible to reach something around the BRL 900 million-BRL 1 billion loan book in this segment. Do you think it is reasonable to work with this number?

Alexandre Riccio (CEO, Brazil)

Hi, Gustavo, this is Xande speaking. Thank you for your, your message in the beginning. So when we think about the, the Pix financing portfolio, we're more solving for growth in all the unsecured lines, right? So Pix financing, Bill Pay, cash financing, buy now, pay later, and the, the overdraft. We're thinking of in all of those together, we are aiming something close to BRL 1 billion, maybe a little bit under that, but that's what we're working for. But one message I think it's important, and I'd like to bring, is not about just portfolio size, but also revenue formation, especially when we think about the, the credit card portfolio. Today, our mix is about BRL 1 in interchange fees for every 1.2 reais in credit revenue from credit cards.

If we look at the competition, they're today at about 1 to 3 in credit. So the idea is to move closer, so close this gap. We want to move from this 1 to 1.2, to 1 to 2 as quickly as possible. Obviously, maintaining our risk appetite under control and delinquency under control. Thank you.

Gustavo Schroden (Equity Research Director)

Thank you very much.

João Vitor Menin (Global CEO)

Gustavo. So, João Vitor here, just to add on Santi and Xande, one thing that's very important on this new portfolio, this consumer finance, is what we have been saying for a while. We are improving the risk/reward equation. So when we do the Pix finance, and when we do the buy now, pay later, we have the same risk that we used to have on the credit cards, on the parcelado sem juros, but now with more yields on the Pix financing and with take rate on the buy now, pay later. So the change on the economics is very important. So as Xande mentioned, grow the volume, the amount of the portfolio, but grow a lot the profitability, the revenue that we're gonna make on this, on this new portfolio.

So this is the good thing: better risk/reward.

Gustavo Schroden (Equity Research Director)

Okay, very clear. Thank you for, for the answers.

Operator (participant)

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

Eduardo Rosman (Senior Analyst)

Hi, hi, everyone. Congrats on the numbers. I think I have a question to João Vitor, right? 'Cause Inter has been very successfully improving its ROEs. However, these improvements, they not necessarily will come in a straight line, right? And from time to time, the company will need to invest, you know, thinking about, you know, medium, long-term projects, right? So I think this includes, you know, the U.S. expansion, for instance. I think, João, I did an interview with Brazil Journal recently, where he talked about it and how he thinks it's a cheap call option, right? So my question is, João, how to balance, you know, growth, investments, you know, and profitability, right?

How can you help us to understand what's really kind of a maintenance, OpEx, and what is a, it's a CapEx for the future? Thanks.

João Vitor Menin (Global CEO)

So Rosman, João Vitor here. Thanks for the question. So if you listen to the interview, I mentioned that I like that when you are really, really innovating, you are generating value without a lot of CapEx and a lot of OpEx. So most of the things that we did at Inter in the past, we didn't spend a lot. So let's think about the Inter Shop, for instance. We just came with that idea out of the blue. We're able to use the same components in our app, the same things on our platform, and we're able to generate a lot of revenue. So we are always trying to raise the bar, how can we innovate our platform? How can we cross-sell, upsell without the burden of investing a lot?

When you think about the combination of ROE and growth, it's important to highlight that when we launched the 60-30-30 plan back in January 2023, we stated that it was, and it still is, a plan for both growth and profitability. I want to make it crystal clear, we are a growth company. We're not an incumbent company. We are here to grow the business, to grow the revenue. But the good thing, Rosman, that we can do that both. We can both grow and now also improve our profitability. That's what we're proving now in 2024. Of course, it's not gonna be linear.

It's not that we want to keep improving our ROE faster and faster quarter-over-quarter, but long term, long term, what we see is also that the operational leverage really kicks in. So we're adding more revenue, adding more revenue, and diluting our fixed costs. So this is very important. This trend is here to continue, so we're very confident on both growing, innovating, bringing more revenue, but also delivering our profitability. So it's a good balance. And actually, at the end of the day, Rosman, this is my role as the CEO. I need to balance these two things on the right way with the right time. We need to see the context of the market, and I believe that we did that very well in the past, and we're gonna keep doing that, going forward.

Eduardo Rosman (Senior Analyst)

Great. Thanks a lot, João.

Operator (participant)

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

Yuri Fernandes (Executive Director and Equity Research Analyst)

Thank you, everybody, and congrats, Alexandre, again, for the promotion. I have a follow-up on the margins on the implied rates. I know, like, hedges, they tend to bring, you know, like some difference in the numbers. But when we go to the personal loans and credit cards, we note a decrease on the quarterly implied rates, right? And I know, I guess, Pix is within the cards and maybe, and correct me if I'm wrong here, and I think like the overdraft and other lines, they are within the personal loans. So my question is, should we not see, you know, those lines moving up, as you continue to deliver on this mix towards, I would say, a more profitable product?

It was a surprise to me that, you know, we saw this small decrease, and what happened, you know, for this? Thank you very much.

Santiago Stel (SVP of Finance and Risks)

Hi, Yuri. It's Santi here. So, thank you for the question. On personal loans, the improvements will be slow but steady. Relative to a year ago, we're now at 100 basis points higher in the rates that we disclosed today. If we measure that relative to CDI, even more, we do have the majority of that portfolio is a consignado payroll-deductible loan, and we had a portfolio or a series of portfolios that we acquired, or INSS retirees that had higher interest rates. Those are expiring and maturing, and that has pushed a bit down the rate.

But overall, we do see a continuation of the improvement in the coming quarters and the consignado digital, these digital initiatives that are being taken place, together with more portability and a lower rate environment than what we had a year and two ago, with some growth on that portfolio, that repricing today should be faster going forward.

Yuri Fernandes (Executive Director and Equity Research Analyst)

Okay, thank you. And regarding the card, similar, similar approach, Santi, like, should we continue to see now this recovery and moving up as Pix gain traction there?

Santiago Stel (SVP of Finance and Risks)

Yeah, so the main driver there in change of cards, no doubt about it, is Pix Financing. As I mentioned in the prior question, we have been accelerating from the beginning of the year, but since it's a newer product, it's difficult to model to which level it will grow. It's a very short product, so we are running and trying to extend to our client base, but, but we need more time to assess on how much it will grow. But as it gains share within credit cards, interest rates of cards will obviously go up. The average interest rate on these loans is 6% per month.

Yuri Fernandes (Executive Director and Equity Research Analyst)

Okay, super clear. Thank you.

Operator (participant)

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

Tito Labarta (VP and Senior Equity Analyst)

Hi, good afternoon. Thanks for the call and taking my question. A couple questions, if I can, actually. First, just on the hirings in the quarter, I mean, do you think that was more of a one-time thing? Do you expect to do more hirings? You know, just, I know you're still on track for the longer term, you know, 30% efficiency, but just in the more short to medium term, how should we think about efficiency and any other hiring plans that you may have? And then a second question, just, you know, and congrats, Santi, with the promotion. But, you know, with that promotion, João Vitor, now you're more of a global CEO.

You know, in the past you had talked, you know, about the U.S. could be 50% of the business. I don't think those are necessarily the plans today, but just... I mean, do you expect to spend more time looking at the U.S. or other expansion plans? Yeah, how do you think about other potential geographies and how much they, they may contribute to earnings or profitability over the coming years? Thank you.

João Vitor Menin (Global CEO)

Well, Tito, João Vitor speaking. Let's start from the last question, last comments on expansion. As I also mentioned on the interview I gave to Brazil Journal, that Rosman mentioned earlier today, it's not about only the U.S. business. About having our global account initiative available for other countries, as you mentioned, and as of today, the Brazilians are the only one using that. We believe that we're going to be able to offer this amazing product, which is a huge success among the Brazilians, to other individuals all over the globe as well. Also, being more in this strategy and going, thinking the future of Inter, with this new, let's say, position, I have been very focused, and I love that, to be honest, on the UX, the UI, and the technology behind the scenes.

So for us to be ahead of the competition, for us to be the most innovative company, we need to think about what we're going to launch next, how's our UI performing, how our UX... And not only that, do you think that we're going to be a bank that's going to-- a platform that we're going to interact with our customer only through an app? Or do you think we're gonna use our applications on the back end to integrate, to interact with our clients through voice, through text, through WhatsApp? So I'm really trying to put this in place together with Guilherme, our CTO. I really love to not only to build the best products, but to facilitate how the clients engage, embrace, and use that products with us.

The other question regarding hiring, as also I mentioned to Rosman on the previous question, we're playing here for the mid-long term. I would say that more for the long term. And I like to say to our team here and to our Thais, our head of IR, that my dream is to have millions of employees, no problem, but we need to make sure that they are generating value for our company. And mostly on technology, on the commercial side, that's where we're investing more of these new hires. Just for you to have an idea on that, we added 195, we call GoTechs, last quarter. We did a big program here in Brazil. We were able to bring, we believe, very, very talented guys to help us on IT.

They just joined us. They're gonna help us a lot building these new products, evolving these new products. And we also bring a lot of people on the commercial side because we believe that these guys are the ones generating revenue for our platform. But all that said, we're still committed to our 60-30-30 Plan, which we want to get to a 30% efficiency ratio, and therefore, we don't see our platform getting a lot of new hires without bringing the revenue together. So what we see is that we invest in technology, we invest in market, and we invest in these new hires, but we get more, I would say, the double in terms of revenue that we're putting in terms of expense. This is the right equation for us.

So that's it, Tito.

Tito Labarta (VP and Senior Equity Analyst)

Great. Thanks, João Vitor.

Operator (participant)

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

Pedro Leduc (Brazil Financials Equity Research Analyst)

Yeah, thank you so much. First, on the service revenues, a nice, nice increase here, line commissions, capturing things as insurance. If you can talk a little bit more about it, if this quarter had any specific boost to it, or if it's really a new run rate level you're reaching here for services. On the loan book side, credit portfolio, you had a significant increase in credit card anticipation. If this is already something that has to do with integration of Granito or not yet? These two questions. Thank you.

Santiago Stel (SVP of Finance and Risks)

Leduc, Santi here. Thank you for the question. So on commission and brokerage fees, which grew from BRL 146 million to BRL 189 million, meaning almost 30% quarter-over-quarter. No, we did not have any one-offs of any type. This was pure organic growth. The main driver was Inter Shop. Inter Shop had 50% GMV growth relative to the same quarter of last year, BRL 1.1 billion, very nice acceleration. On top of that, which is not in this number, buy now, pay later attributed to this, is also scaling up nicely.

And then the other one was insurance, so we had a nice growth on that front as well, which has to do with many factors, but the one that would stand out is the FGTS insurance that we launched at the beginning of the year, has had great adoption throughout our client base, and that has pushed up. The other lines also grew a bit, but those were the main two drivers. And then in terms of, can you remind me the second one?

Pedro Leduc (Brazil Financials Equity Research Analyst)

The credit card participation-

Santiago Stel (SVP of Finance and Risks)

Yeah

Pedro Leduc (Brazil Financials Equity Research Analyst)

... on the loan book.

Santiago Stel (SVP of Finance and Risks)

Yeah, so now what we did here, as I mentioned before, we were, we are blessed on having a very nice inflow of deposits from our clients. So that's, as I... We mentioned with João, a good problem to have. We deployed as much as we could in our loan portfolio, which is the accretive long-term way to do it, but temporarily, we deployed in different cash options that try to yield a bit more than just CDI, and this is one of them. Now, buy portfolios of anticipated portfolios of credit card receivables, we get a margin over the CDI. These are short portfolios, but we park the cash there with a bit of an extra yield until we are able to deploy in the loan portfolio.

Pedro Leduc (Brazil Financials Equity Research Analyst)

Okay, and this has nothing to do with Granito yet, and if you can comment on how it cycles in the second half?

João Vitor Menin (Global CEO)

So Leduc, João speaking. I'd like to comment on Inter Pag. Actually, Granito, we renamed it to Inter Pag. We don't have a connection with that yet, but on the other hand, I would like to express how excited I am about this integration. To be honest, it surpassed our expectations, and I believe it will crush it on SMEs and acquiring. Just by changing the name, we see a big inflow of clients asking for the acquiring product at Inter. As Santi mentioned, we have a very good cost of funding, short-term funding through our demand deposits that will serve very well on this strategy. Of course, we still need to integrate a lot of things. So, for instance, Granito, now Inter Pag, has its own app.

Now we are integrating the app to our PJ, to our business app, and I'm very excited that we'll be able to do something amazing with SMEs down the road. But so far, what we did was pretty much with other players on the market, we were able to buy the receivables, and not a lot through Inter Pag yet. But very excited with what we can do on with this platform embedded in our super app.

Pedro Leduc (Brazil Financials Equity Research Analyst)

Amazing, João. Thank you. Thank you, Santiago.

Operator (participant)

Our next question comes from Ms. Neha Agarwala from HSBC. Ms. Agarwala, we are 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 so much for my question. Thank you so much for taking my question. Two questions. First, follow up on the last point. Can you talk a bit more about what is your ambition regarding the SMEs? We saw good growth in the number of SME accounts that you have. You're talking about good uptake from the Inter Pag, the acquiring solutions. So, and, and we understand that SME is a space which is not very penetrated. There are not a lot of digital banks which are focusing solely on SMEs. So what is the opportunity you see there, and how would you like to position Banco Inter for the SMEs? And my second question is on the BNPL product. Could you talk a bit more about the BNPL product that you have, mostly on your Inter Shop?

What percentage of GMV are you now financing, for your customers? What is the take rate that you get on the BNPL product? A bit more color on that. Thank you so much.

Alexandre Riccio (CEO, Brazil)

Hi, Neha, this is Xande speaking. Thank you for your question. I'll start with the SME part. So in terms of positioning, we have almost two different strategies that are converging now. First is an SME lending that we've done for many years, and that's growing, and we have a very good momentum. And the second one goes back to what we started in 2019, which is the SME accounts. These accounts have grown a lot. They're super popular already. So we are currently at about two million clients that have a variety of profiles. About one million are MEI, which are small entrepreneurs in Brazil. Then we have about 600,000 micro-businesses, 200,000 small businesses, and the remaining, which is a little more than 100,000, are larger businesses.

This amounts to about 10% of the companies in the country already with us, banking with us. The profile of these customers today leans more towards services, given that our offering up to till now was more of a digital bank. We didn't have acquiring. We did sell the prior product, the prior product of the old Granito, but not integrated as Inter Pag, so we didn't have a robust offering for retail. So on a few things, account usage is very heavy on the transactional business today, so we're super under-penetrated on everything else. This means a lot of opportunity for growing clients, bringing clients in with a more robust offering... and also increasing the share of wallet of high value add products. This is when Inter Pag comes in.

So we believe that we're gonna be able to do a lot of nice things with Inter Pag. So cross-selling, as I mentioned, and I'll call it, like, bi-directional, in Inter into Inter Pag, Inter Pag into Inter. This is something that we will do. One of my favorite approaches that we're already putting together is product bundles, with banking and acquiring. Now we can think of a client as unique, and sum the revenues for both sides to see where it's interesting to grow. And with that in place, we can do a strong go-to-market in the retail business of all sizes. So again, we have the balance sheet, we have the credit products, and now we'll have the bundles, and this excites us to keep growing on SMEs. And João will take the second part, Neha. Thank you.

João Vitor Menin (Global CEO)

Thank you, Xande. Neha, I'm gonna comment about Buy Now, Pay Later, but just to add on Xande's comment, and with all due respect to our contenders, to our competitors, I mean, the digital banks, we have by far the best product in business account, and for a lot of reasons. But we start by differentiating that we are a bank at the end of the day, and for our business account, this is very important, how you can offer, how you can serve a client by being a bank. And now the last thing that we didn't have was acquire, now we have by far the best product. It's still a blue ocean in Brazil, the business account. They are still underserved, overcharged in Brazil, not on the individual account.

The competition is big, but on the business account, most of the market are still underserved, overcharged. Huge opportunity for us. Going to Buy Now, Pay Later, as I have been saying for a while, I'm very excited with this product. We launched Inter Shop back in 2019, and we wanted to connect the engagement that we have with the clients, with the financing there. That's how you sell a product on the retail, by financing it. And what we're happy about that, Neha, that with small tweaks on the product, we can see that the volumes are growing. So we were doing, like, only BRL 100,000 per day, then BRL 200, BRL 500, BRL 1 million.

Now we're getting close to 2 million, 3 million per day in Buy Now, Pay Later, so it's already a big percentage of our GMV at Inter Shop. And the good news, with very good risk reward, as I mentioned. So I believe that the future of consumer finance Brazil is to offer together the product, good UX, good UI, and a good finance embedded. That's how we foresee consumer finance in Brazil, and not only for goods, for service as well. So we have here airline tickets, lodging, and everything to sell to the clients. And just to connect with one question that was made, I believe by Yuri or I don't know, I don't recall, about Pix Financing, these type of things together.

Pix Financing, Buy Now, Pay Later, slowly they are replacing the famous PSJ, parcelado sem juros, which is a problem in Brazil. So when we do the Pix Financing, the Buy Now, Pay Later, we're putting our balance sheet, our risk to work and get, yielded at the same time for the right client, for the right product. We can differentiate the, the rates for, this client, that client, if they are buying a service, a good. So we now have, all the, the, the hands on deck to improve the risk reward for consumer finance in Brazil. So Pix Financing, Buy Now, Pay Later together are outpacing parcelado sem juros, which, which is very good... which are very good news for ourselves and for the digital players, on the consumer finance, environment in Brazil.

Neha Agarwala (Director, FinTech specialist and LatAm Financials Analyst)

That's super clear, João. Thank you so much. I'll just follow up with Alexandre on the SME business. So, going to the SMEs, do you think you are getting SMEs by attracting them to your banking product and then cross-selling, acquiring? I believe that is the route which makes more sense for you, because your banking offering is probably much more superior to what your competitors offer. And who are you getting these customers from? I believe a lot of them use acquiring with either the incumbents, say, Cielo, Rede, Getnet, or maybe with the new ones, like Stone and Pag. Who are the main acquirers from which you... it's been a bit easier for you to gain SMB merchants from? Thank you.

Alexandre Riccio (CEO, Brazil)

Thanks, Neha. So the natural trend for us is to do the cross-sell, as you mentioned. So we attract customers based on the quality of our business account, which is, again, very popular, super good UX, both from both web and app. We did a large project in the last, say, two to three years, where we converged the experiences, and this attracts customers in high volumes, as we're seeing. And then the idea is. So what happened is, also to what you said, most of the revenue base that we already have from these customers are related to the transactional business, which is the core of the product offering today.

As we move forward with Inter Pag, we are deploying obviously the acquiring products, and we're gonna keep on growing and increasing both share of wallet of these customers, so bringing... acquiring share of wallet, for example-... and also exploring new products that we're launching internally, not necessarily through M&A. We're seeing new credit products being deployed. There is, for example, one that's popular in Brazil, FGI, we've been growing there. There is another one, which is PRONAMPE, which has more than BRL 100 billion portfolio in Brazil that we're gonna explore. So this is also good and has a very good... Can have a very good adoption rate with our base. So a lot of good plans to go there, and your approach is right.

But I wouldn't not explore also the opportunities to go to market and explore the retail opportunity now that we have the acquiring in-house. Last, before I forget, where are we acquiring these clients from? Primarily big banks. So that's where it's flowing. Customers are hurt there for years, mainly Peixotas, with super high fees, and we came up with the free offering back in 2019, and it was a big source of flow of customers from big banks to us to save on banking fees. Thanks, Neha.

Neha Agarwala (Director, FinTech specialist and LatAm Financials Analyst)

Very clear. Thank you so much, and congratulations on the results.

Alexandre Riccio (CEO, Brazil)

Thank you. Thank you.

Operator (participant)

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

Mario Pierry (Latin American and U.S. Financial Institutions Equity Analyst)

Hi. Good afternoon, everybody. Thank you for taking my question. Let me ask three quick questions. The first one is on page 22, right? You show your cost of funding as 6.8%. This is the lowest level since the second quarter of 2022. However, as a percentage of market rates, it has gone up to 64%. If we look at the first quarter of 2022, you were, like, 55%. So I'm wondering, are you seeing any pressure on raising deposits, and that's why we're seeing, like, a higher cost of funding versus Selic rates? So that's question number one. Second question is related to your marketing expenses, right? We saw a big increase in marketing expenses.

So I'm just trying to understand, is this the level that we should continue to see, and are these marketing expenses targeted at an increasing client base or increasing engagement? My third question is related to your sales of insurance, right? You showed the number of policies rose, like, 2-2.5 times, roughly, quarter-over-quarter, but revenues only grew 10%. So does it mean that these policies that you are growing, they have a much lower ticket? How should we think about that? Why such a big disconnect in number of policies versus revenues? Thank you.

Santiago Stel (SVP of Finance and Risks)

Hi, Mario. I'll take that, those three. So, on the funding, this is connected, the right-hand side of the balance sheet with the left-hand side of the balance sheet. So on the liability side, we're fortunate to have the quarter with the highest growth in deposits, excluding the fourth quarter, that has positive seasonality, and we raised BRL 4 billion of the deposit this quarter. BRL 1.3 billion were the transactional ones, which don't have a cost, but then we had BRL 1.9 billion on-time deposits and another BRL 0.8 billion in what are LCIs, LCAs, Letras Financeiras, et cetera. The success funding, as I mentioned before, is mostly allocated into liquid assets that yield close to 100% of CDI, and tend to...

Until we deploy this into a loan portfolio, they tend to compress a bit the NIM, but they are accretive, and they also tend to push slightly up the cost of funding. But we feel that the more we capture the principality of their clients, the more we bring their savings and their transactional life into a platform, the better it is for us, independently of the cost of funding level. We do think that the cost of funding as a percentage of CDI is a competitive advantage that we have and that we will continue having, but we will have some movements depending on the speed at which we get these deposits and the mix that we get them at. On branding, we do recognize that we have investment to do. It's not a spending.

We do see that this is in line with what we mentioned in some questions before. We want to build a stronger brand. We think that the products is excellent, and with a good branding along with it, we will be able to benefit from the product offering that we have in place. It's difficult to say how it will evolve through time, but we are testing higher levels of branding, spending, or investing, and we'll see, depending on the results, how we continue to invest or not. The upsell, cross-sells metrics are the main ones that we track to see the performance of that investment. And then insurance, yes, you kind of anticipated the answer.

FGTS is a very small-ticket insurance that was the main driver in that business line, and the policies were greater, no, and the average size, so the average ticket of those policies reduced this quarter. But again, we welcome that growth. We have more than two million clients with FGTS credit.

... And that's an opportunity that we try to seize with the fully digital platform, both on the loan part and also on the insurance side. Very happy with the results that we had so far.

Mario Pierry (Latin American and U.S. Financial Institutions Equity Analyst)

That's clear. Santi, let me just go back then to the deposit question. How are you seeing the competitive environment to raise deposits? Again, you have a very healthy deposit base already. Your loan-to-deposit ratio is very low. So I'm just wondering then, you know, you have excess liquidity, what is the need here to really be focusing on growing deposits if you are seeing a more competitive scenario?

João Vitor Menin (Global CEO)

Mario, João Vitor speaking. Let me tell you I love to look on our deposit franchise. I started at Inter as internship on the, on the commercial side, raising deposits for, for our, for our bank back in 2004. So I have been following that for, for a while, and I'm always with our treasury, Léo Paixão, discussing about that. So as Santi anticipated, we have a good problem. People are choosing our platform to transact, but also to save. And we have, in the past, distributed a lot of third-party CDs, other companies, the debentures, bonds and everything.

But at the end of the day, they like our brand, and they say, "No, I want a CD from Inter." And what we see that we could start reducing the percentage of CDI that we pay, but it's not going to move the needle in terms of profitability, but we could lose the client to our competitor, so we're keeping them at 100% of the CDI. But the good news, one thing that you should look at, is how fast our demand deposits grow. And when you compare the loan portfolio growth with the demand deposits growth, they are pretty much steady, so they are on the same pace.

So therefore, every deposit, every time deposit that come, even at 100% of Selic, and you can deploy that 1.2, 1.3, 1.5% of Selic in securities in our cash position, is accretive to NII. So that's what we're doing. I would say the opposite. Our deposit franchise are getting more and more efficient as we speak. So I'm very proud of that, and I'm sure that it will keep being a thing that will differentiate Inter among our competitors. That's how we manage these things of cost of funding at Inter.

Mario Pierry (Latin American and U.S. Financial Institutions Equity Analyst)

No, that's very clear, João, and I completely agree with you. I think your deposit franchise is fantastic, and it's one of your main differentiators from your peers. Thank you.

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 (Global CEO)

So, another very good earnings result call. I'd like to thank for our team, our employees that are working hard every single day to raise the bar at Inter. I'd also like to thank for our shareholders that are supporting our business, our franchise. And I'd also like to thank as well all the analysts on the sell side industry. Very good questions. A lot of good quality questions for us. We love that, to interact with you. We're very happy with the business, and hope to see you soon. Another good quarter in a few months. Thank you very much. Have a good day. Bye-bye.

Operator (participant)

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