Inter & Co - Q3 2023

Transcript

Operator (participant)

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

If you do not want to open your microphone live, please, 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's earnings release and earnings presentation appendix. Today's discussion might include forward-looking statements, which are not guarantees of future performance. Please refer to the forward-looking statements disclosure in the company's earnings release and earnings presentation. Now, I would like to yield the floor to Mr. João Vitor Menin.

Sir, the floor is yours.

João Vitor Menin (CEO)

Thank you, operator. Good afternoon, everyone. I'm pleased to announce another record-breaking quarter in our history. We believe that we have successfully entered a virtual cycle that leads us into a sustainable, growing, and profitable business model. Once again, we can affirm that our results are no longer a glimpse, as we said a few quarters ago, but a clear testament of our long-term profitability potential. When I reflect on the stages in our history, I see three clear phases. The first, which was until 2021, focused on growth, creating the full ecosystem of products and gaining market share while creating deep primary relationships with our customers. The second, which took place during 2022, when we had our platform in place and started to prioritize monetization, building the foundations for a business model that was built to last.

Now, in the third phase, with the foundations in place, we started 2023 with strong momentum. We continued improving our profitability while re-accelerating our growth profile. As I mentioned before, we have entered a virtual cycle, as we can see on this slide. Driven by our innovative DNA in the center, we built a best-in-class financial super app, delivering the broadest digital offering with a top-notch UX that continuously attracts new clients. As these clients engage more deeply with us, we are generating higher revenues that yields growing profits, making it a sustainable business model. This dynamic then restarts to the beginning by reinforcing our innovative DNA, and the cycle keeps moving on and on. To conclude, I believe that the importance of this quarter goes beyond the amazing numbers we are reporting. It represents something far more relevant.

We are in the right direction to meet our 5-year North Star, which we named the 60/30/30 Plan. The commitment to the 60/30/30 is already generating significant value to all our stakeholders, which we believe is the only way to build a company to last. Let me elaborate a little more on that. First, to our clients, by disrupting the industry, offering the best value banking services. Second, to our employees, with a great place that foster creativity and growth. Third, to regulators, developing technology and bringing efficiency into the financial system. Fourth, to our community, with an eco-efficient business model. And last but not least, we're generating value to our shareholders by delivering sustainable long-term profitability. Before passing the word to Xandre and Santi, I will highlight some of our record-breaking numbers of the quarter.

We delivered an impressive combination of record figures, which we believe proves we are on the path to sustained profitability. From a financial perspective... Our gross revenue had another record quarter, surpassing BRL 2.1 billion, 39% higher than last year. The combination of top-line growth and cost control enabled us to achieve another record efficiency ratio of 52.4%. On the bottom line, we had our highest ever profitability level, with a pre-tax income of BRL 145 million, and post-tax income of BRL 104 million. We also achieved a record-breaking ROE of 5.7%. When we look at the operation side, we also see a series of milestones. For the third quarter in a row, we attracted 1 million new active clients.

We also continued increasing our activation ratio, reaching 52.7%, the highest level since 4Q 2021. Our monthly ARPAC increased once again, reaching the record level of BRL 48. And finally, we had a great quarter in terms of transacted volumes, expanding our TPV to BRL 219 billion. Now, I'll pass it to Xandre and Santiago, who will deep dive on both fronts. Thank you.

Alexandre Riccio (SVP of Retail Banking)

Thank you, João, and good afternoon, everyone. I'll start talking about credit and our funding capabilities. Jumping to page 10, I'll pass through some important highlights regarding credit. This quarter, we were able to accelerate the growth in our loan portfolio, growing by 7% and remaining focused on high ROE products, such as our FGTS loans, which once again grew more than 20%, and home equity, which grew nearly 10% and reached a market share in originations of also 10%. The most interesting factor of this quarter was on credit cards, which reached a growth of 13%. This is the result of continuous improvement in the credit underwriting processes, active portfolio management, the success of Loop, among other factors.

When we look at pricing on the top part of the page, the all-in yield, excluding real estate loans, which is the dotted line, continued its quarter-over-quarter improvement. Now, moving to page 11, we'll talk about improvements in our asset quality metrics. What we see in this slide is the result of our ongoing efforts to enhance our credit underwriting processes and collection strategies, reaching a more precise, data-driven model. As a result, we're delivering flattish NPLs, both on a 15-90 days and above 90 days basis. When we look at the cohorts of NPLs of credit cards, we continue to see a sequential improvement, forecasting a positive trend for the upcoming quarters. Finally, the NPL and Stage Three formation also have shown stability. On page 12, we can see a very positive improvement on the cost of risk metric, which decreased by 30 basis points.

This improvement was driven by our active risk management mentioned in the previous slide. Despite the decrease in cost of risk, our coverage ratio increased 200 bps to 132%. Always worth mentioning that around 70% of our portfolio is collateralized, thus presenting a lower than average risk profile. Overall, these results give us confidence for the quarters to come. On page 13, we can see once again that we have one of the best-in-class funding franchises in the industry. Our deposit growth accelerated to 11% this quarter, almost twice the growth level of last quarter. In total, we reached a funding base of around BRL 40 billion. On page 14, we see that we continue delivering an impressive cost of funding, which is now 61.44% of CDI, including all interest-bearing liabilities.

We're confident in the sustainability of this cost of funding profile for the quarters to come. Our deposit base is diversified in more than 14 million retail customers that trust us with their savings and transactional balances. Our average deposit per client grew by 4% to BRL 2,600, despite the accelerated growth in our activation rates. Now, let's move forward and talk about our transactional platform session. As mentioned in the beginning, we're reporting our third consecutive quarter, bringing 1 million new active customers, achieving 15.5 million. Our activation rate showed another quarter of strong progress, increasing by 49 basis points. This milestone, combined with the lowest CAC since the third quarter of 2020, is a direct outcome of our commitment to leveraging better port- client profile targeting, new customer journeys, and communication strategies.

We're constantly deepening our understanding and feeding this new knowledge into our algorithms to optimize the new cohorts. In terms of volumes, you can see that our TPV reached an impressive BRL 219 billion, mostly driven by credit and Pix. This is the highest credit TPV growth in a quarter since the second quarter of 2022, combined with a more balanced mix between credit and debit transactions. This contributed to a greater interchange revenue growth this quarter. On a cohort basis, as presented in the right chart, we can see that the newer cohorts are starting at higher levels and growing at a faster pace than the older ones. We're proud about this performance, which is a strong evidence of better quality in client adds and activation. Moving forward to our other verticals, we can see the power of our financial super app ecosystem.

On e-commerce, we reached 2.9 million clients who conducted over 10 million transactions in the quarter, another record. We also had BRL 870 million in GMV, leveraged by our Inter Day in July 7. Our net take rate in the quarter was 8.7%. Combining this, we reached a record-breaking gross revenue in this vertical of BRL 124 million. On insurance, we had a great quarter, reaching more than 322,000 sales and 1.6 million active clients. And finally, on investments, our simpler and accessible product offering resulted in an impressive 74% year-over-year client growth, reaching 4.2 million, along with a strong AUC that increased to BRL 83 billion. Talking about our global solutions, we experienced another quarter of strong success.

We achieved over $270 million in deposits and AUC. We continue replicating our Brazilian offering in the U.S. by taking advantage of our scalable technology to create a best-in-class global app. The strong adoption of these products is a result of the continuous UX improvement and our focus on Brazilians who travel, invest, and/or are immigrants in the U.S. The client base grew nearly 4 times year-over-year, reaching almost 2 million. Before passing to Santi, I would like to comment that in the U.S., we're replicating our number one competitive advantage that we have in Brazil, which is our unique cost of funding. Now, Santi, please go ahead. Thanks, everyone.

Santiago Stel (SVP of Finance and Risks)

Thank you, Xander. Good afternoon, everyone. Now I walk you through the financial section. Jumping into page 21, here we can see the revenues, which had another great quarter, reaching also record numbers. As mentioned at the beginning of the presentation, we achieved BRL 2.1 billion of gross and BRL 1.3 billion of net revenues this quarter. The growth was mainly driven by fee expansion, which resulted from the strong performance of interchange, e-commerce, insurance, and banking revenues. In terms of net interest income, the lower inflation in the quarter impacted NII, resulting in a growth of 2%, though we're seeing acceleration in the fourth quarter as inflation returns to normalized levels. Now moving to page 22. Here we can see the unit economic metrics. Our growth monthly ARPAC reached 48 reais, an all-time record.

This is impressive, in our opinion, as we continue adding a strong number of new clients every quarter. The strong ARPAC, combined with a stable cost to serve, has led us to improve our gross margin per active client for the fourth consecutive quarter, reaching another record of BRL 35. We expect that this trend will continue improving as a new approach of client acquisition, activation, and the app personalization continues to move forward. Jumping to the NIMs on page 23. Here we can see that our NIM 1.0, which considers the full portfolio, including cash receivables that do not accrue interest, known in Portuguese as à vista, reached 7.8%, our second-highest level ever. Regarding NIM 2.0, which considers only the interest-earning portfolio, it reached 9.2% this quarter.

As mentioned before, we observed lower inflation levels in the third quarter, which are now normalizing to the current one. Additionally, we had more renegotiations triggered by the Desenrola program, which, despite impacting NII, had a positive effect on cost of risk. Finally, our repricing strategy continues ongoing, and in addition to a shift in underwriting mix, we expect to continue improving the implied rates of our portfolios. Moving to the expense side on page 24, here we can see better trends in the last three as a result of our cost control initiatives. As our profitability increased, our personnel expense line reflected an increasing compensation associated with accrued bonuses and profit share agreements. The other expense lines remain roughly in line with the prior periods as a consequence of multiple initiatives to optimize our cost structure.

With this disciplined focus on expense management, we still see a strong opportunity to continue delivering economies of scale. Moving to page 25, to summarize the work that we are doing on the operational leverage front, these two charts provide good insights. On the left-hand side, we can easily see the remarkable increased gap between the growth levels in net revenues and expenses. On the right-hand side, I would like to highlight another great quarter of improvement in our efficiency ratio, which once again is a record low of 52.4%, meaning 100 basis points better than in the prior quarter. Unlike in the prior two quarters, on this third quarter, the improvement in efficiency was led entirely by revenue growth. On page 26, we are actively monitoring at Inter what the percentages of the SG&A base relative to the net fees.

As you can see in the chart, the ratio has been nicely evolving during the past few quarters and now stands at 73%, our all-time high. The continuous improvement in this ratio is a key component to meet our ROE goals. In terms of profitability, on page 27, we couldn't be more proud of what we achieved. We are able to deliver a record-breaking ROE of 5.7% by printing our best ever net income of BRL 104 million. On a pre-tax basis, we reached BRL 145 million, which is more than 80% higher than in the prior quarter. Concluding our financial section on page 28, we recorded a 23.7% CET1 ratio this quarter, our first ever organic capital creation.

As mentioned in prior calls, our capital is fully comprised on top-quality core equity with no hybrid instruments. Now I'll pass the mic back to João for his final remarks.

João Vitor Menin (CEO)

Thank you, Xandre and Santi, for highlighting all the important topics of our another record-breaking quarter. Before moving to Q&A, I would like to summarize this impressive results quarter in one phrase: We are building a business model to last by adding value to our stakeholders. Our core competitive advantage, which are cost of funding, cost to serve, and strong fee income, remain as strong as ever. We are delivering solid growth, leading to strong market share gains, disrupting the status quo. Our state-of-the-art technology is like no other and sets us apart from our competitors, offering the best UX and integrated banking experience in the market. I would like to close by thanking all of our Sangue Laranjas for the amazing work done this past quarter. We'll now start the Q&A. Thank you very-

Operator (participant)

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

Flavio Yoshida (VP and Equity Research of Latin America Financials)

Hi, everyone. Thank you for the opportunity to ask questions. I actually have two questions on my side. The first one is on the net interest margin. So, you guys already mentioned the impact of lower inflation that ended up impacting the NII, but I was wondering what happened here. I mean, you guys were doing a great job on the repricing process and also on shifting the loan portfolio mix towards a higher ROE product. So, we're not expecting a mean reduction in this quarter. So, what really happened here, and what should we expect going forward? And then, my second question is on expenses, specifically on personnel expenses, right? So, there was a strong increase compared to the previous quarter, even considering the headcount reduction, right?

So, according to our calculations, the cost per employee increased more than 40%, year-on-year. So, I would appreciate if you guys could share some color here. Thanks.

Santiago Stel (SVP of Finance and Risks)

... Thank you, Flavio. Santiago here. I'll take your question. Thank you for asking. So on the first one, regarding NIM, first, let me clarify that the NII did grow this quarter from BRL 802 million to BRL 818 million, and that is, after a very strong growth that we exhibited on this last quarter. So we're at a high base, we grew on top of that. That 818 that we reported this quarter is 50% higher than a year ago. Now, going to NIM specifically, there are several factors playing out here. On the negative side, we did experience lower inflation, which impacted our real estate loans that have revenues linked to the inflation index, IPCA, that had around BRL 20 million of NII delta, negative delta this quarter.

The second point is that we had greater volume of renegotiations of portfolio this quarter in the context of the Desenrola program and the awareness that that program created. That's close to BRL 30 million of impact. So those two pushed the NII down relative to what we were having on the prior quarter, and what we expect to have on the next one. And then on the positive side, we had a continuous optimization of the reserve requirement, playing the full three months. That's the Conta Com Pontos or Loop program that we announced on the last quarter. And we had a continuation of the improvement in our loan mix as the higher ROE products continued to grow faster than the lower ones, and they gained representation in the in our loan mix.

So all that together, on NII, the numerator grew less than the average earning assets, the denominator, though the fundamentals of our trend to expand net interest margin continue to be strong, leveraging on our funding franchise and the improving ROE-driven credit portfolio. So we don't see that we are deviating at all on the repricing strategy. We continue doing it actively. We're also seizing opportunities like the Conta Com Pontos before or the renegotiations now, and we stay true to our mission to deliver double-digit NIMs. Now, going to a second question on personal loans. Given the strong bottom line result this quarter, we did accrue bonuses and profit bonuses and profit sharing for employees and executive.

Excluding these factors, personal expenses grew only 5% this quarter, given our number of employees continue to reduce organically and now it stands close to 3,300 employees. The average salary of employees is growing as we're increasing the, the performance and, and talent level of employees across the organization, and we think that going forward, the expense on personal expenses will be highly correlated with the, with the bottom line. Final comment, worth noting that we don't do any adjustment on net income related to expenses of, of salaries, personnel, share base, they are all in. So the, the bottom line considers all these expenses in the metric. Thank you, Flavio.

Flavio Yoshida (VP and Equity Research of Latin America Financials)

Thanks a lot, Santi.

Operator (participant)

The next question comes from Rafael Frade from Citi. We are now opening the audio so you can ask your question live.

Rafael Frade (Latin America Director and Led Equity Research of Latin American Banks)

Hi, guys, good-

Operator (participant)

Please, go ahead, sir.

Rafael Frade (Latin America Director and Led Equity Research of Latin American Banks)

Sure. Hi, guys, good afternoon. Two questions here. One is a follow-up on Santi's comments about renegotiations. Just to be clear, how does BRL 30 million impact the NII? If it's related to discounts, I understand that the other banks maybe classify this as cost of risk. So just to understand a little bit this dynamic of renegotiations on the NII in the quarter. And second, if you could comment on fees. So you have a very strong performance quarter-over-quarter, so try to understand here if there is someone off here or if it's a base that we can use as a reference going forward. Thank you.

Santiago Stel (SVP of Finance and Risks)

Thank you, Frade, for your question. Starting with the one related to renegotiations. Renegotiations were done over interest income, so accrued interest income, so it does impact that line. This has been done this way for a long time because the discounts are done over accrued interest, so that impacts interest income. We do think we will continue having a bit of that in the fourth quarter. We're looking at the integral or the full economic impact in the P&L of this. So when we look at it together with the impact on asset quality, is clearly a net positive. To give a bit of broader context on this, Frade, as our written-off portfolio has grew significantly, we started to debate whether to continue with our written-off portfolio sales.

You know, the H8 portfolios that we have historically been doing, we typically give discounts on those that were plus plus 90%, but these ones that we're doing in the context of the program are close to 40%. So this has much better performance on the P&L, and we see great results from the clients anticipating payments as soon as the agreements are done. Then going on to fees. Increase in fees was BRL 100 million this quarter, the main driver of that was growth of interchange of credit cards. This is driven as a consequence of the increase in the loan portfolio of cards in particular, which had 13% growth, the second highest in our portfolio, followed by insurance revenues, close to BRL 10 million additional.

On Mastercard, we had extra performance of close to BRL 20 million as a consequence of beating the performance metrics that we have with them. Inter Shop performed very well and delivered growing GMV for the first time in several quarters, and that generated an additional BRL 10 million of revenue, so it's a combination of factors. We do see fee as a key component of our strategy. We always say that it's one of the three competitive advantages that we have, which are cost of funding, cost to serve, and a high percentage of fee income, which continues to be around a third of the total net fees. And this is the way it's playing out. We're happy with the performance and expect it to continue delivering that way.

Rafael Frade (Latin America Director and Led Equity Research of Latin American Banks)

Perfect. Thank you so much, Santiago.

João Vitor Menin (CEO)

Frade, here, João Vitor. Just to complement on Santiago's answer, I have been telling other shareholders and everybody for a while that the fee income is very important for our business. By delivering a growth on fee income and a sustainable fee income, a fee income that's here for—that's gonna be here for a while. We're not charging the BRL 10 on the Pix and these type of things. We will always have a big percentage of our fees on top of total revenues. And with that trend, we will always be able to improve our ROE going forward. So I, myself, I'm very, very dedicated to improve all types of fees, on Inter Shop, on insurance, on the expansion to U.S. through FX. So this is a very important revenue generation for Inter.

So I do believe that it will keep being important, and also I see room to keep improving on a percentage basis going forward. Okay, thank you.

Rafael Frade (Latin America Director and Led Equity Research of Latin American Banks)

Perfect. Thank you, João.

Operator (participant)

The next question comes from Neha Aggarwala from HSBC. We're now opening the audio so you can ask your question live. Please, go ahead.

Neha Agarwala (SVP)

Hi, thank you for taking my question. Can I just have a clarification on the NIM discussion that we've had earlier in the call? There was a negative impact on the real estate portfolio of about BRL 20 million, you mentioned, from lower inflation. Is this something that we should see in the coming quarters as well, or do you think the adjustment is largely done by now? And my second question is on asset quality. Asset quality so far is stable, but we noticed that you re-accelerated the growth in the credit card portfolio. So how do you think about the asset quality in the credit card portfolio now? Do you see improvements enough for you to be encouraged to expand your loan portfolio there?

How confident are you with the improvements in your origination that you made in the past quarters? Thank you so much.

João Vitor Menin (CEO)

Neha, João Vitor here. I'm gonna talk about the growth on the credit card. Alexandre is gonna cover later the limits. So first of all, we have always been very cautious on credit card underwriting. Everybody knows that at Inter we like to have a very well-collateralized credit portfolio. But I would say that for the past 12 months or so, we have been improving our underwriting process and also our collection process as well. In spite of the macro, we have been more excited about this product. You see that our TPV is growing. As Santiago also mentioned, we improved the credit limit from BRL 20 billion to BRL 25 billion, so it's a big incremental in a quarter or so.

And so we are more excited with the credit cards business going forward. And not only that, we believe that we have a lot of changes on the regulatory framework ahead, and combining what we learned, and what we're improving, and what we're doing on the credit card, together with Inter Shop, we do believe that we're going to have the best consumer finance product available in the market to run this business here at Inter. So I'm very excited with the improvements on the credit card and combining this with Inter Shop initiatives, and therefore having this state-of-the-art consumer finance portfolio. Regarding the NPLs, we have a gap between what we have underwritten before and now, and Alexandre will cover that. Okay? Thank you, Neha.

Alexandre Riccio (SVP of Retail Banking)

Thank you, Neha. So, on the non-performing loans and delinquency, as we expected, the asset quality metrics did perform well during this quarter. So cost of risk closed at 5.9%. That's 30 bips better than last quarter. NPL 15-90 and 90+ reported flat figures, which is... We see it as good news. And also, NPL formation was flat at 1.6%. In terms of what's driving delinquency, it continues to the bulk of it continues to come from the credit cards, about 90% of it. When we look at the credit cards more deeply, we see improving delinquency on a cohort basis. So, like, on page 11 of our presentation, we see that there is a consistent improvement across all of the cohorts that we have.

In terms of cost of risk, the reason for this 30 basis points improvements, improvement is mainly a result of the underwriting models and collection initiatives that we've been implemented. So we've implemented maintenance strategies in the card portfolio, and part of that is increasing limits for high-performing individuals, and part of that is to reduce the limits of clients that have deterioration in the credit profile. That tends to be favorable in the short and long term for reduction of cost of risk. In terms of mix, when we think about the overall portfolio, we continue to add FGTS and home equity loans that have better average delinquency levels. So these two segments, they represented 8% of the portfolio a year ago, and now they're at 13%.

Finally, but important to highlight, our coverage ratio increased two percentage points to 132%, even considering that the biggest part of the portfolio has a strong level of collateral. With that said, we're very comfortable with our underwriting machine and the speed that we are evolving. Thanks, Neha.

Neha Agarwala (SVP)

Hi, could I follow up-

Alexandre Riccio (SVP of Retail Banking)

Yeah

Neha Agarwala (SVP)

... on one of the topics? You mentioned about integrating the credit cards with the Inter Shop. Is this something that you've already started to pilot or test, or is this something in the works and maybe something we see in 2024?

João Vitor Menin (CEO)

Okay, Neha, João Vitor speaking here. As I mentioned, we do believe that the future of consumer finance is the integration of the payments, the installments, together with the commerce. And yes, we started that already. I would say that we started our buy now, pay later two months ago or so, and we don't have yet the right trends, the right number for the delinquents on that product. But the good news is the good news are, we get a very reduced take rate on that product, and we do get full payment for the products. So when you combine full payment plus a good take rate, the cushion that you have for delinquents is huge. So we're very confident that this product is going to be profitable going forward.

We expect to share more on that NPL ratios, maybe by the end of the year for Q maybe, okay? But again, I'm myself very excited with the way we are combining these two things, the commerce and the banking side. Thank you, Neha.

Neha Agarwala (SVP)

Perfect. Thank you so much. On the NIM, the impact on the real estate portfolio and lower inflation, is that something recurring for the coming quarters as well, or are we done with that?

Santiago Stel (SVP of Finance and Risks)

On inflation, Neha, we're seeing now for the fourth quarter similar levels that we saw in the first half. The impact on the third quarter, which actually is, has one month of lag, so that was the last month of the second quarter. June, July, and August had lower inflation levels. Now, we're seeing normalized levels into the following three months, so we are back to what we saw on the first half of the year.

Neha Agarwala (SVP)

Okay, perfect. Very helpful. Thank you so much.

Operator (participant)

The next question comes from Yuri Fernandes from JP Morgan. We're now opening the audio, so you can ask your question live. Please go ahead.

Yuri Fernandes (Executive Director and Equity research of LatAm Financials)

Hello, everybody. Thank you very much. I have a follow-up on the fees, on Frade's question on fees. We know the interchange growing a lot, like 15, 16% quarter-over-quarter, but your credit cards TPV, excluding peaks, was growing, like, 8%. So what drove this different behavior? Usually, TPV and interchange, they tend to follow each other. Why interchange is growing faster? Is this because of, I don't know, higher income clients or higher income cards? Just would like to have more details on the interchange versus TPV behavior. And I have a second question regarding other revenues. Other revenues was also part of the good quarter, right? Like, it's growing 60% quarter-over-quarter.

When we look to your financial statement, we see capital gains, other revenues, and performance fees. Performance fees, Santi already mentioned, that I think was Mastercard, here. But what role with the capital gains and the other revenues? My, my, my point about this line is, how recurring these other revenues should be for the coming quarters? Thank you.

Alexandre Riccio (SVP of Retail Banking)

Hi, Yuri. This is Alex. Thank you for our question. I'll take the first part and defer the second one for Santi. So in terms of the interchange revenues, what we had was a change in mix. So we started growing credit cards again and had a mix flip, with credit becoming more relevant than debit. That was the key change, so relatively simple, and drives a lot more interchange fees, which is a good move for us. We are preparing, as João Vitor mentioned earlier, to keep on growing on that front with several things, as he mentioned, including Loop. So our loyalty program is starting to kick in in terms of bringing more recurring spenders to Inter. So I'll pass the word to Santi. Thank you.

Santiago Stel (SVP of Finance and Risks)

Hi, Yuri. So on the other fee revenue question, 100% of these other fee revenues are correlated to business volumes, where we excelled in cards, insurance, and investments. Deep diving on each of these points, on TPV of cards, building upon what Alexandre just mentioned, it grew 12% this quarter, exclusively on credit cards, now to 10.3 billion BRL, in a quarter with no particular positive seasonality, just driven by acceleration in the credit card business, where loan portfolio, as you know, growth grew 13%. Another relevant number to mention, which I think João anticipated a bit, it's the increase in our credit card limits from BRL 20 billion to BRL 25 billion.

This is a 25% increase in our limits in just a quarter, focusing on clients with higher propensity to spend, no? Therefore, driving higher TPV. The second point is insurance. This has two parts. The first part is related to performance, where we've been over-delivering the business goals with our bank insurance partners, both Liberty and Sompo, and for that we accrued recurring revenue. The second one is related to our stake in Inter Seguros, where we have a profit-sharing agreement, and the more performance the company has, the more we benefit from it. Third and last is investments, where we have a volume-based agreement with B3, that we've been beating quarter after quarter, and for which we also receive a performance fee.

To put numbers into these three components, we have on credit cards, close to BRL 20 million; on insurance, close to BRL 20 million; and the remaining is mainly investments with a bit of Inter Shop as well. So that explains the BRL 50 million delta in other revenues. It's 100% again related to business, and we think this is recurrent, though some of them are recurrent in every single quarter and some are recurrent in every single year, but not necessarily in every single quarter, which I understand that makes modeling a bit more complex, but they have occurred in each of the prior years, and they will continue occurring in the future.

Yuri Fernandes (Executive Director and Equity research of LatAm Financials)

It's super clear, Santi. Which one is reflecting capital gains of those?

Santiago Stel (SVP of Finance and Risks)

The insurance part, Yuri. The insurance is on capital gains.

Yuri Fernandes (Executive Director and Equity research of LatAm Financials)

Perfect. If I may, guys, a third one on capital. It was pretty good, your capital this quarter, your Tier 1 ratio was up almost 100 basis points, right? Like, 90 basis points. What drove this? It's basically the new central bank credit risk regulation, or are you optimizing capital somehow? Because in the past, you discuss about doing some things to improve your capital, so just checking if this is more regulation or if this is also Inter doing something on the capital side. Thank you.

João Vitor Menin (CEO)

Yuri, it's João Vitor speaking. We always like to get all the benefits from the context of the market, which are exactly what you mentioned, some change on the regulation. But we are also working at Inter to improve everything from operations and the way we use our capital. And I would say that one of the most recurrent words for the past, I'd say, 12 months or so here at Inter was ROE. So every underwriter and credit underwriter, "What was the ROE? What was the ROE? Is it delivering a good ROE for us? Yes. No, let's not underwrite." So we really changed our mindset on that. We need to remember that before we had, I don't know, 50% CET1 after all the follow-on offers we did.

We were not so, so concerned about the right use of our equity. I would say that, again, for the past 12 months, it's a whole different scenario, so we have been way more diligent on underwriting and get the best use of our equity. That's why I also mentioned in one of the previous question, we want to see these fee revenues, that you also ask, growing consistently quarter-over-quarter, year-over-year, because this is gonna help also our CET1. So using the equity on the right way with the for the credit portfolio expansion and bringing more revenue fees, we will always have, I would say, the best CET1 on the retail banking industry in Brazil. So that's what we're working hard to achieve.

Yuri Fernandes (Executive Director and Equity research of LatAm Financials)

Super clear, João, and thank you and congrats on the ROE improving in the past quarters. Thank you.

Operator (participant)

The next question comes from Eduardo Rosman from BTG. We're now opening the audio so you can ask your question live. Please, go ahead.

Eduardo Rosman (Senior Analyst of Financial Institutions)

Hi, I have one question here. In the CEO letter at the press release, you mentioned that Inter is currently ahead of schedule with respect to the 60/30/30 goals for 2027, right? So, do you believe it's just a matter of time of doing more of the same to get there, or do you still need to come up with new products, such as overdraft, you know, or expand in other geographies, like, such as U.S., right? So it would be great if you could share with us, you know, where do you think you are ahead of schedule and what needs to be done, you know, for you to get there. Thanks.

João Vitor Menin (CEO)

Hello, Rosman, João Vitor speaking. Thank you for the question. Yes, we are, I would say, ahead of the budget, but we are still trying to work harder, even harder, to try to anticipate as much as we can and to keep being ahead of it. So, I believe that on client engagement and client adoption, we're doing great, so adding, I would say, 1.5-1.6 million new clients every single quarter with a very good CAC, so they are doing a really, really good job. Also on efficiency, we're able to, I would say, get most of the fat that we had at the company, so we improved a lot. But also we've just gone after the vendors, the biggest vendors, to renegotiate most of our contracts.

So anyway, we're working hard to also improve our efficiency ratio. We still have room to improve that. We are close to 50, but we see this also ahead of the budget. And lastly, on ROE, which is the last 30 of the 60/30 project, we know that we are still far from the 30% mark, but again, we need to consider we have a big buffer off CET1. So we will keep growing our credit portfolio. We can grow our credit portfolio, Rosman. We do have only, I would say, 1.5-1.2% of the credit portfolio in Brazil, but we do have 8% of the Pix transactions. We do have a very good cost of funding, actually the best cost of funding on the street.

We do have seven different credit portfolios for us to grow, and we're adding more of, more credit portfolios, so such as FGTS, Pix Crédito. So we're very comfortable that we will leverage more our balance sheets, and then combined with the fee revenue, which is, are very good, we'll be able to achieve maybe, who knows, also ahead of the budget our 63030. So I'm very, I'm very convinced that it's achievable, more than when we launched it, when we unveiled it by the beginning of the year. But again, still a lot of work to be done, but I'm happy that we are improving in, in all the three fronts of the plan. So that's how I see, Inter performing on that, on that North Star project called the 63030.

Eduardo Rosman (Senior Analyst of Financial Institutions)

You know, great, great, João. If, if I may, just, just another topic here, another question, because we've been receiving a lot of questions on the payroll lending market. There's another digital bank that has, has set, you know, very aggressive goals for, for growing in that market, and, and indeed they're coming with, very low interest rates, right? So we know that, you, you were one of the first ones, you know, to offer the product, you know, 100% digitally. So, what, what steps, you know, can you, can you take here to, to further accelerate your market share gains? You know, what are the challenges and opportunities that you see in this segment going forward, right? Thank you very much.

João Vitor Menin (CEO)

Well, Rosman, thank you. Look, we have been underwriting payroll loan at Inter since 2001, okay? So this is not something new at Inter. And I know you covered the space for a while, and we know that the payroll loan is not a commodity. I also just mentioned a few questions ago that we're being very diligent at Inter to underwrite credit portfolio with the right ROE. And also I just mentioned we have the best funding in the market. And also, you know, that we are very digital oriented a player. Having said that, having said that, in a diligent way, I consider Inter the most capable player on the industry to reduce and to have the best cost for the payroll loan.

Also, we don't do that with the banking correspondents, which take a big toll on the profitability of the business, and also put a lot of pressure on the legal claims down the road. So I'm confident that we will be able to keep improving. Of course, we need to always improve the CRM initiative, so to get the clients that are willing to change and to migrate to Inter. We do know that when the interest rates are high, it's not easy for you to do the migration from one bank to the other, but we're very well positioned. We don't want to do a dumping, as we did before already, if you remember.

We were doing the best, the lowest rate in consignado in the past, and we don't think that's the right way to go. But we have the tools to be one of the cheapest on the market, and I would say that with time, we will conquer more and more and more clients. I would say a B2C strategy, okay? We will own that clients. They're gonna use our other product, and not a B2B2C approach. So I'm excited with this, that product as well.

Eduardo Rosman (Senior Analyst of Financial Institutions)

Oh, great. Thanks a lot, João.

Operator (participant)

The next question comes from Jorge Kuri from Morgan Stanley, and I will read it. I actually have two questions, please. First, can you help us understand how your NIM will look like if rates get to 9% as current consensus anticipates? What are the puts and takes here? The second question is, I also wanted to get some guidance on how your cost of risk should move going forward. Your provisions to loans are running at around 6% on a last twelve-month basis. What do you think the level should be in 2024 and 2025?

Santiago Stel (SVP of Finance and Risks)

Thank you, operator, and thank you, Jorge, for the question. I'll take the first one, and I'll let Alexandre take the second one. So, in terms of decreased impact from decreasing Selic, we do believe that our balance sheet is truly unique, given that we have a differentiated funding structure, where free transactional deposits are very high, representing roughly one-fourth of our funding. And as a consequence, we are liability sensitive, and we benefit from a reduction in Selic, at least in the short term. To put this into numbers, for every 100 basis points of Selic reduction, our NII grows around BRL 20 million per quarter. And what happened with the reduction of Selic is that it will start playing out, or being visible in our NIM in the fourth quarter.

Even though the first reduction occurred in August, it takes around one month to start being repricing on the liability side. Additionally, on NIM, we do see a very strong change in the credit mix as we are continually growing in the higher ROE lines. As I mentioned, FGTS, home equity, and credit cards with the lower-yielding mortgages we're using. So, this combined, it is a positive impact for us. We do need a few quarters to that, for that to be reflected, and it is a key component to our path to a double-digit NIM.

João Vitor Menin (CEO)

Thanks, Santiago. Hi, Jorge, thank you for your question. When we think about cost of risk, looking at the past, we came from, like, about around 3% in 2020, 4.6 in 2021, and now last year is when delinquency really spiked, as in, in the macro perspective. We got to 5.4, and this year saw what we call the peak at 6.2 in the second quarter. This quarter, we improved. We came down to 5.9, and have a lot of actions, as we have discussed here before, to keep pushing it down. So, Desenrola has played a factor. A lot of modeling-based collection, working, a lot of the renegotiation discounts that Santiago mentioned before are also helping improvements in the cost of risk, and the idea is to push it towards the neighborhoods of 5% in 2024 and 2025.

The indications that we have as we look to the newest... the newer cohorts, is that this is definitely a possibility. So, we'll keep working hard on the collection, implementing all the strategies that we can to move it and to achieve this 5% level, which should be, is very aligned with the 60-30-30 plan. Thank you.

Operator (participant)

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

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

Thanks a lot, guys, for taking the question on the call. I feel the prepared ones have been answered already, but I would like to dig in a little bit into what you've mentioned in the prepared remarks with Santiago on the renegotiated portfolio, that it's partially explaining the NIMs, at least visually. Can you remind us how large it is, how much it grew this quarter, and which product line is the renegotiation concentrated in? Thank you.

Santiago Stel (SVP of Finance and Risks)

So thank you, LeDuc. The impact was mainly on renegotiation of delinquent credit card portfolios, and that impacted in the NIM I mentioned, around BRL 25 million of difference versus what we had the prior quarter, taking the compression on the NII. And that's the impact that we had. And then on the positive side, it impacted the asset quality metric, the cost of risk, with a net positive impact on the bottom line.

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

Can you remind us, Santiago, how large it is nowadays within either your total portfolio or within credit cards, the renegotiated portion?

Santiago Stel (SVP of Finance and Risks)

So we disclosed the renegotiation in the notes to our financial statements, and it went up from 1.6%-1.9%, the amount renegotiated this quarter.

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

Okay, thank you. And a second question, probably to—

Santiago Stel (SVP of Finance and Risks)

Sorry, Luke, just correcting here, I apologize. I missed the number. It went up from 0.6%-0.9%, the renegotiated amount, and that's on the notes on the Bacen financials.

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

Thank you. That's, that's very clear. Small number indeed.

Santiago Stel (SVP of Finance and Risks)

Mm-hmm.

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

A second question, perhaps more for, for João Vitor on the U.S. expansion. I know there's a nice chart where you have the product rollout schedule, the 2 million global accounts, almost. Can you tell us if these are clients in Brazil that you're bringing to global accounts, or are you already onboarding U.S. clients itself? I know you're-

Santiago Stel (SVP of Finance and Risks)

Mm-hmm

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

... you're also sponsoring a soccer team there. I imagine it's part of the marketing rollout as well. Thank you.

João Vitor Menin (CEO)

Well, LeDuc, João Vitor here. Look, as I mentioned before, when we started back in 2016, we had a very good product to offer to the market, so the word of the mouth helped us a lot to grow on the Brazilian market. Also, we saw that, by bringing this client who had the best cost of funding, that helped us to underwrite credit in different, portfolios. This is the same thing, the same pattern we see in U.S. in our expansion. We have a very good product so far. Just to be clear, we're not there yet, okay? So we still need to fine-tune the product to have some, some of the verticals in Brazil that are not there yet, but we believe that maybe another one or two quarters, we'll have the product almost ready.

Of course, we are always improving our product also in Brazil, but we're gonna have everything almost ready. And I would say that next year will be more like a go-to-market phase for the U.S. market with a better product in place. So with more word-of-the-mouth client adoption instead of just burning cash on CAC. Of course, we want to start on the easiest way, so we started by bringing the Brazilians, taking the Brazilians to U.S. for them to transact with our debit cards, to use our Inter Shop, to invest in our Inter Securities. But we believe that with time, we'll be able to bring also Americans and also Latin Americans individuals that live there in U.S. to use our products.

And we're very confident that by having our product as a component, so we can replicate that quite easy for our global app, because we have, as I mentioned before, a state-of-the-art IT framework, we'll be able to have, I would say, maybe one of the best financial super apps in the U.S. as we do have in Brazil today, Eduardo. So very excited with the outcome there. Already surpassed $300 million in deposits, so again, I do believe that we have a bright future for the U.S. on the digital banking space.

Pedro Leduc (Lead Equity Research of Brazilian banks and Financial Services)

Thank you, and successful.

Operator (participant)

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

Thiago Batista (Executive Director and Head of Br Research)

Yes. Hi, guys. I have two questions. The first one about the Pix Finance. I understand that Inter includes the Pix Finance inside of the credit card, but I want to double-check to confirm if this is the case. And more important, if you can comment on the asset quality trends or the asset quality profile that you believe this product, product will have, if this is better or worse than the average credit card loans. And also, if the behavior of the users of this is more to make money transfer or to buy things, even in the shop.

The second question, you mentioned already a couple of times that the numbers is ahead of your budget or ahead of what you guys are expecting to achieve the 2027 goals. It's possible to say already that the bank ROE should achieve the double digits in the next year?

Alexandre Riccio (SVP of Retail Banking)

Hi, Thiago, this is Alex. Thank you for your question. I'll start addressing the first, the first part. So when we think about Pix Crédito with credit, we, we launched this product about 40 days ago. Along with it, we also launched boletos, with paying boletos with the credit card. So the approach we're taking to the product is to start from the lowest risk clients and expand through the highest risk clients with different pricing according to the risk profile. We're in the early stages of the product, so we don't have yet the behavior of delinquency, but our expectation is to have something very similar to what we have in the credit card, the regular credit cards.

João Vitor Menin (CEO)

Thiago, João Vitor here. Just to complement on Alexandre's response to that question. What's interesting about the Pix Crédito and Pix Boleto is that we're getting the best use of this very, very innovative platform in Brazil called Pix. What do I mean? The risk profile of the client is the same. So if Thiago is doing a credit card transaction on a shopping mall or doing a Pix transaction, your credit profile is pretty much the same, but the economics are better. Because we don't need to use the whole payment scheme to make that transaction go through. That's exactly what we're doing at Inter Shop. We have the same credit profile, but with a better economics.

So every time that you embed a consumer finance, such as Pix Crédito, Boleto Crédito, in your own ecosystem, you tend to have a better monetization, a better ROE on that front. So we're very excited with Pix Crédito, with Pix Boleto, and also with our buy now, pay later at Inter Shop. But as Alexandre just mentioned, we are on the early days of that portfolio. As always, as you know, Inter, we're always taking a conservative approach, but I'm sure that we'll be able to perform very well on this space, going forward. And now Santi will cover the question on the ROE for 2024.

Santiago Stel (SVP of Finance and Risks)

So thank you, Thiago, for the question. So on ROE, we gave two numbers in the Investor Day back in January. We mentioned that the north star is 30% by 2027, and we mentioned that in 2023, which is year one of that five-year business plan, we expected to have a mid-single-digit ROE. We are fully focused on closing this year. Until we close this year, we're not gonna give any numbers or share any guidance at all in terms of what we expect in 2024. We do think that the fourth quarter will be meaningfully more profitable than the third quarter, which is basically a continuation of the trend that we're seeing from the first quarter, 1% ROE, 3.5% on the second one, almost 6% on this one.

This despite the high excess capital that pushes the ROE metric down, and we see the continuation to the fourth quarter. We'll have time to talk about 2024 later once we close this year.

Thiago Batista (Executive Director and Head of Br Research)

Very clear. Thank you, João, Alexandre, and Santiago.

Operator (participant)

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