Inter & Co - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good afternoon, and thank you for standing by. Welcome to Inter & Co's Fourth Quarter of 2024 earnings conference call. Today's speakers are João Vitor Menin, Inter's Global CEO; Alexandre Riccio, Brazil CEO; Santiago Stel, Senior Vice President and CFO. Please be advised that today's conference is being recorded, and a replay will be available at the company's IR website. At this time, all participants are in listen-only mode. After the prepared remarks, there will be a question-and-answer session.

For this session, we ask you to write down your question via the Q&A icon on your screen. Your name will then be announced, and you will be able to ask your question live. At that point, a request to activate your microphone will appear on your screen. If you do not want to open your microphone live, please type "no microphone" at the end of your question.

In this case, our operator will read your question out loud. Please note that there is an interpretation button on your screen where you can choose the language you want to hear: English or Portuguese. Throughout this conference call, we will be presenting non-IFRS financial information. These are important financial measures for the company but are not financial measures as defined by IFRS. Reconciliations 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. Thanks for joining our Fourth Quarter Earnings Call. This is a very special earnings call for me. At Inter, this year alone, we delivered more profits than in our entire history combined. I will repeat: 2024 net income was more than all prior years combined. I believe that this is proof of the success of our business model, which we designed back in 2016 when we launched the first digital bank in Brazil. It also gives me strong confidence that we are on the right path. Following my remarks, Alexandre and Santi will cover the operational and financial results for the quarter and year.

Our business model has the beauty of combining growth and profitability, resulting in positive network effects. Each new cycle reinforces the power of the platform, creating a virtuous cycle. This is how it works.

Our complete product offering, combined with a best-in-class UX, helps us attract and engage clients. The more clients we have, the more efficient we become. Our low-cost structure allows us to price our products competitively. Operating in a capital-efficient manner, together with a strong share in services, we increase profitability and ROE. And this growing profitability enables us to keep innovating. As this cycle repeats itself, the platform becomes stronger and stronger. Jumping into 2024, let me provide a few highlights of the year. On the credit front, we made significant progress with our 100% digital payroll offering, which now accounts for more than 50% of the new underwritings. We also continued scaling our Consumer Finance 2.0 portfolio and aim to increase the penetration rate within our current clients.

Regarding products, forum, launched in Q3 2024, now has millions and millions of users who share investment tips, news, and stay updated on Inter's products. Our commerce platform had an outstanding year, in which we were able to crack the code on combining commerce with finance. Loop, our loyalty program, is expanding its options for earning and redeeming points and has surpassed 11 million clients. Now, let me take a moment to discuss our global expansion. By the end of 2024, we reached 3.9 million clients using our global account.

This success comes from our attractive value proposition. Our global account makes it very easy to invest, travel, send money internationally, and more. We also expanded our offerings, with the highlight being the launch of our dollar credit cards last December. 2024 was also a year of welcoming new talents to our team, enhancing our skills and capabilities.

Juliano and Marcelo Dantas joined the finance team. Monica Saccarelli and Fernando Bachin came on board on the business side. Our newest hire, Marco Antônio Araújo, joined as our global head of legal. Alexandre Riccio was promoted to Brazil CEO in the middle of the year. And also, Rafa Vitória stepped in as the new IR officer. Guilherme Ximenes, who held the CTO role since the launch of our digital bank, became our CIO last December.

He's now our Chief Information Officer. Flávio Gueiros expanded his responsibilities and now manages the real estate portfolio, FGTS, and payroll loans. On the board side, we added Jim Allen, former Morgan Stanley senior banker. Additionally, on the advisory side, Nicola Calicchio, former McKinsey head of Brazil, is helping us as a senior advisor to the executive team, while Fernando Ferrari advised us on Treasury and ALM.

To conclude, we successfully executed the second year of our 60-30-30 Plan, which is key to continue growing and innovating our platform. Now, I'd like to hand it over to Xande, who will provide more details on the business side. Xande, please go ahead.

Alexandre Riccio (Brazil CEO)

Thank you, João. Hello, everyone, and thank you for joining us today. I'll go through an update of our seven business verticals, which together build our super app platform. As João said on the Virtuous Cycle, we have created a powerful network effect, with clients actively using our account, credit, investments, insurance, marketplace, and global services, all tied together by Loop, our loyalty program. This engagement across our financial super app enables us to effectively cross-sell our products and continuously increase our market share. Attracting customers is a key priority for us, and we're proud to finish one more year adding more than 4 million clients while boosting activation. We finished 2024 with over 36 million clients, achieving a 57% activation rate. Throughout the year, we successfully welcomed more than 1 million new active clients each quarter.

Our business clients grew by 21% year-over-year, reaching a total of 2.2 million. They show high engagement and increased our RPAC levels. Now, moving to the next slide, let's take a deeper look into our verticals. In banking, TPV has increased by 45% year-over-year, reaching BRL 1.5 trillion run rate in Q4 2024. Transactions made through Pix totaled BRL 1.1 trillion for the year. In the fourth quarter, Inter gained an additional 14 basis points in Pix market share, reaching 8.3%. Our mix between credit and debit volumes continues to improve, with credit card transaction growth surpassing debit card transaction growth, leading to higher interchange revenues.

TPV levels across cohorts are steadily increasing, with newer clients transacting more and faster than older clients. On the credit front, we want to highlight the Consumer Finance 2.0 portfolio, which includes Pix financing, Buy Now, Pay Later, and overdraft.

We started to scale this portfolio this year, and now it stands at almost BRL 700 million, a 38% growth quarter-over-quarter. We're seeing consistent performance from these products from a credit quality perspective, eliminating the need to slow down our underwriting. While we remain cautious in our risk appetite, we found opportunities to underwrite card limits as our credit models continue to evolve, allowing us to better understand our clients. Speaking of client behavior, another innovation this year was the launch of our credit hub, also called C-Lim, where clients can follow a step-by-step journey to earn their credit card limits with us. The steps involve actions like bringing their salary direct deposits to Inter, paying bills before the due date, and more.

We allocate small limits as clients complete these steps, and by the end of the journey, we have enough data to provide them with the appropriate credit card limit. Moving to investments, on the next slide, we see that AUC increased by 54% on a yearly basis, with active clients growing to over 6.8 million. For the second consecutive quarter, we had record growth in AUC. One highlight of this quarter is that we achieved 20% market share in the number of investors of Tesouro Direto, which is Brazil Treasury Direct. On the next page, I'll talk about insurance. The performance of this vertical was remarkable in 2024. The charts on the left-hand side show the significant growth and penetration we can achieve with the right targeting, quality products, hyper-personalization, and contextualized journeys.

We reached over five million active contracts, with more than five million units sold in 2024, achieving a 312% growth in the year. We raised the bar with the introduction of FGTS Life Insurance and Sortezinha, two low-ticket but recurrent products that we offered within existing product journeys. This strategy involves zero marginal cost to attract clients, taking full advantage of our integrated platform. Shifting to our marketplace, we had an exciting year with a 79% year-over-year growth in net revenues, 42% growth year-over-year in GMV that reached nearly BRL 5 billion, and all that done across more than six million active clients.

In the fourth quarter, 7% of our on-us GMV was generated through Buy Now, Pay Later, reinforcing our cross-selling opportunities. This unique combination enables us to leverage our fee revenues while also generating interest income from higher-margin unsecured credit operations.

In the next page, we highlight our global expansion continuous growth. We reached 3.9 million clients, which is 19% of our active base. The deposits balance increased by 52% in one year. Within this vertical, we typically serve higher-income Brazilians who typically travel and save money in the U.S. We continue evolving on the product offering by replicating the Brazilian products into the U.S. account. Recently, we launched our dollar-denominated credit card points for our U.S. dollar debit card purchases and new investment products.

On the next page, we talk about Loop, our seventh vertical. We finished 2024 with over 11 million clients and continue to evolve in ways for people to earn and burn points. Clients can now redeem points for extra cashback on purchases in our marketplace, transfer points among family and friends, redeem points for Pix insurance, and more.

Clients who engage consistently with Loop are among those that are most active within our platform. In the next slide, we talk about market share and show some of the evolution that we've been able to deliver in a few of our products. Pix market share, which reached 8.3%, continues to be a benchmark we use to set the ambition of market share potential for the other products. We are excited with the evolution both in banking and in non-banking products. Three highlights are FX transactions, the balance of our home equity portfolio, and our FGTS loans, products that are strategic for engagement and profitability. We are confident in our capacity to continue expanding share, and we'll see part of why on the next slide. I finished the business section showing how much room we have to grow.

We're operating in markets with enormous TAMs and having a large client base facilitates access to a good part of this market, and it explains why our share is moving so fast. Strategies like hyper-personalization for activating and retaining clients have optimized our sales efficiency. We're confident that our continuous product evolution, improved client service, and enhanced overall value proposition are key to sustain our positive trends. Now, I would like to pass the word to Santi, who will take us through the financial section.

Santiago Stel (CFO)

Thank you, Xande. And hello, everyone. Let's jump into our financial performance. Starting with the loans, this was another year focused on optimizing our capital allocation into our loan book. Our loans reached 41 billion BRL, a 33% year-over-year growth, with FGTS and home equity being the highlights by growing about 50% each. Both these products have the highest ROEs and have been crucial in improving our portfolio mix and expanding our NIM. In credit cards, we surpassed BRL 11.8 billion , with a 10% quarter-over-quarter and 25% year-on-year growth, showcasing our progress and appetite in the non-collateralized credit underwriting. Personal loans, mainly payroll, are starting to grow, with digital underwriting being the main driver. In terms of relative growth, we can see here that we outpaced the market growth in most of our products.

FGTS, home equity, and real estate grew approximately twice as fast as the market, gaining significant market share. Credit cards also grew nearly twice as the market, all while improving our asset quality metrics. Meanwhile, personal is reaccelerating despite the run-off of the acquired portfolio and thanks to the success of our digital payroll. In terms of asset quality, we continue improving for the third consecutive quarter, with NPLs from 15 to 90 days standing at 3.4% and NPLs greater than 90 days decreasing 30 bps to 4.2%. The credit card NPLs, when analyzed across cohorts, continue to show strong performance, validating the progress made in our underwriting models and collection processes. NPL formation reduced to 1.2% as the older, weaker portfolios are decreasing representation in the mix, while our stronger underwriting portfolios are gaining representation in the mix.

We can see the evolution of our cost of risk metric, which decreased to 5.0% and presented a very stable trend throughout the year. Furthermore, our coverage ratio increased from 130%-136%. This increase is due to the improvement in the NPLs as seen in the prior page. With this picture on the asset quality front, we are starting 2025 even stronger than what we started 2024 a year ago. On this page, we can see the evolution of our funding franchise, which is one of the key strengths of our business model. We concluded 2024 with over BRL 55 billion in funding, growing 10% quarter-over-quarter and 27% year-on-year. In terms of mix, we continue to have around one-third of our funding in transactional deposit, which is the main driver of our loan funding cost.

Our active clients had, on average, BRL 2,000 in deposits, a record level that highlights the primary relationship with us. The attractive funding mix shown on the prior page enables us to have the lowest cost of funding in the banking industry in Brazil. In the fourth quarter of this year, it stood at 64% of CDI, in line with the prior quarters. Here, we present our top line, which ended 2024 with over BRL 10 billion in total gross revenues and BRL 6.4 billion in total net revenues. This year, NII and net fees were significantly increasing 37% and 31%, respectively. On a quarterly basis, the performance was also very strong, with gross and net revenues growing 10%. Our distribution platform allows us to continue performing strong on the fee side, which accounts for 32% of our net revenues.

On the credit front, higher NII growth highlights our ongoing repricing strategies, as well as our focus on higher ROE products, as already mentioned. With higher engagement, we achieved a record monthly RPAC of BRL 33.6 this quarter, marking an 11% growth compared to last year. Hyper-personalization and targeted marketing are becoming a driving force behind the increasing monetization of our clients. We also reached a record margin per active client of BRL 20.6, as we continue to increase the gap between our CTS and our RPAC. We believe this demonstrates our ability to effectively monetize our customer base while capturing economies of scale in cost, as João mentioned while explaining on the Virtuous Cycle. Let's now deep dive into our net margins.

Both our NIM 1.0, which means including in the denominator the non-interest accruals of credit cards, and the NIM 2.0, which excludes these non-interest receivables, are showing an upward positive trend, increasing significantly when compared to a year ago. This is the validation, we think, of our marginal ROE strategy implemented since the beginning of last year. We have been successful in increasing revenue at a faster pace while maintaining expenses under control during the fourth quarter. As a result, our efficiency ratio improved and now stands at 50.1%. Worth mentioning that we continue working on the integration of Interpag, which will be an attractive driver of operating leverage by both improving the cost base while increasing revenue through cross-selling. To conclude, we can clearly see here our journey towards increasing profitability.

We have tripled our net income this year, reaching BRL 973 million and an 11.7% ROE on an annual basis. Quarterly, our consistency is impressive in our view, reaching nearly BRL 300 million of net income, closing the year with strong momentum that enables us to start 2025 in a position of strength. Now, João will step again to share his closing remarks. Thank you all.

João Vitor Menin (Global CEO)

Thank you very much, Santi. To conclude, 2024 is a year to celebrate our evolution, discipline, and consistency, not just the results. What a year. As you know, 2025 has already begun, and we are starting it with strong momentum. We are leveraging on technology and innovation, reaching new levels of market share in Brazil, also focused on operational leverage, reinforcing our strong asset quality metrics, and executing our global expansion plan. I would like to thank all our employees for the amazing 2024 we achieved together. Thank you all. Operator, you can open the Q&A session now. Thank you very much.

Operator (participant)

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

Mario Pierry (Managing Director)

Good morning, everybody. Congratulations on the results. We thought it was quite good. It shows right the benefits of all of your initiatives over the past year. So it's really a good job that you guys have been doing. Let me ask you, João, a question looking forward, right? We've been listening to the incumbent banks talking about a much more cautious outlook for 2025, given the high-rate environment in Brazil.

Everybody now is guiding for a loan growth of about 6%-8% at best. So I wanted to hear from you, your perspective on your ability to continue to grow your loan book near the 30% level. And also, how do you expect your net interest margin to behave in this rising rate environment? I know in the past it was negative for you, but I think you have been making changes to your asset liability management strategy.

If you can update us on what to expect on margins and what do you think about loan growth in 2025, that would be great. Thank you.

João Vitor Menin (Global CEO)

Hello, Mario. João speaking. Thank you for the compliments on the earnings, and going straight to the point, for those who have been listening to our earnings call for a while and that know the company for a longer period of time, you all know that we have been taking a very cautious approach about credit underwriting since the beginning of the bank. We have been doing that since 1994. We also designed Inter to be a very established, a very diversified credit portfolio platform or bank. We wanted to be everything but a monoliner. With that design in place and with this approach, we have always been able to navigate the ups and downs of the macro, mostly in Brazil.

That said, Mario, we never had a very spiky growth on credit underwriting when the market was booming, but we don't foresee a reduction on our growth when the market is not that strong. Also, just to remember, not only we are not a monoline, but most of our credit portfolio has a very good level of collateralization. And last, we have a very good cost of funding that can help us to price the products and to cherry-pick the best clients.

We need to remember that, unfortunately or fortunately, we don't have 15%-20% market share in most of the credit portfolios that we operate. We have close to 1%-1.5%. We have a big addressable market. It's still to grow in a 25%-30%-ish throughout the years, even with some challenge on the macro. Okay? And Santi, we'll cover now the impact on the NIMs.

Santiago Stel (CFO)

Hi, Mario. Thank you for the question. So on the NIM environment, or in the context of an environment of rising rates, as you know, we have been working on being very disciplined on deploying capital in a strong ROE or marginal ROE level. And in addition to that, we have been working to take away volatility in our financials by hedging the originations of the loans that we originated with more than one year of duration since the beginning of 2023.

As a consequence of doing that, mainly on the fixed rate loan and on the inflation, we have now marginally positive two CDI movements in the context of increasing interest rates. We have a slightly positive result in terms of NII. So basically, what we have been trying to do is to not be volatile or not have additional volatility as a consequence of that.

So if we isolate the movement of interest rates that is playing out, what we have is the ROE of the new loans are coming in stronger than the bankbook. We have an impact of loan mix that is positive as a consequence of having the higher ROE products gaining representation. If you see now in our loan book, FGTS plus home equity is nearly 20% of the loan book. And then in addition to that, we have the newer unsecured credit lines, Pix Financing and Buy Now Pay Later, which are slowly but steadily growing.

And those also add an improvement into the overall NII. So all of that together, we expect to continue to have the trend that we had last year of around 20 bps on average of growth in the NIM per quarter. It's not linear. It doesn't happen every quarter.

But if you see the NIMs that we had last year from the beginning of 2023 to the end of 2024, that was the average growth per quarter. If we on top of that consider the cost of risk, what we have called the risk-adjusted NIM, which is what we care the most about, it is an even stronger impact as a consequence of having been able to do a good job in maintaining asset quality very strong. So all of that to say, we don't expect a change in the trend of the increasing NIMs that we had in 2024 coming into 2025, independently of the macro or rate environment that we're seeing.

Mario Pierry (Managing Director)

Very clear. So to summarize, you're comfortable with loan growth 25%-30% and further NIM expansion in 2025, right?

Santiago Stel (CFO)

That's correct. We are.

Mario Pierry (Managing Director)

Thank you very much.

Santiago Stel (CFO)

Thanks, Mario.

Operator (participant)

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

Tito Labarta (VP)

Hi, good morning. Thanks for the call and taking my question as well. A couple of questions, if I can. I guess first on just expenses and efficiency. We did see a slight improvement in efficiency in the quarter, but expense growth is still a little bit elevated. If you look at efficiency, I know you had Interpag this year, so it throws off the numbers a little bit. But how should we think about expense growth in 2025 and continued improvements in efficiency to get to that 30% longer-term target?

Just how much could we potentially see in 2025, or what's the incremental improvement we could see from here? And then just a question on your capital base. I mean, you paid a small dividend. Tier 1 ratio is down to 15.2. I know you have excess capital at the holding, so maybe that compensates it.

Just to understand, how are you thinking about capital? What's the right capital ratio in Brazil? And how do you think about the excess capital at the holding? Or how should we think about that? Thank you.

Alexandre Riccio (Brazil CEO)

Hi, Tito. This is Xande speaking. Thank you for your question. I'll start with a 30,000-foot view, and then Santi will deep dive on the expenses. The first point I'd like to highlight is that we're super committed to bringing our efficiency ratio to the 30% ballpark as per the 60-30-30 Plan. So we are on pace. We improved in 2024 if we compare to the end of 2023, and we'll keep improving. We did see this spike in the third quarter, followed by an inflection in terms of cost-to-income in the fourth quarter. What we're going to keep doing is working disciplined on the cost reduction initiatives. We have all that institutionalized now. We're deploying in 2025 new strategies to have company-wide engagement in bringing these numbers towards the 2027 targets.

For example, we're deploying a cost-to-income in each one of the areas, whether it's a P&L area or whether it's a cost center, so that we keep things in the right direction as we navigate through the quarters.

Santiago Stel (CFO)

Hi, Tito. Santiago here complementing Alexandre, so on the fourth quarter, what we had also was a higher-than-average volume being processed in the app, which is typical in the fourth quarters, and that increased the expenses of data processing and third-party services. We were able to keep a very tight leash on the advertising and marketing, which performed very well, and then on personnel expenses, as we had the different teams meeting their goals, we had more provisioning of variable expenses that hit that quarter, but we do think that we have the expenses under control. As Alexandre said, we are measuring absolutely everything on a high-frequency basis, and going to 2025, the overall expense growth will be a function of the revenue growth, so what we're solving for is an increase in the ROE.

We have variability or flexibility to adjust the expense base depending on the overall level of revenue in order to be able to deliver the bottom line that we expect to deliver. Finally, on the 60-30-30, the metric where we are ahead the most is this metric of the efficiency ratio. We were able to keep expense fully flat in year one. We actually ran ahead of that in year one. Year two, which was 2024, the most significant improvement was on the NIM. For 2025, we expect it to be a combination of both to deliver the growing profitability.

Tito Labarta (VP)

Okay, thanks. And just on the capital with the how do you think about the capital ratio in Brazil and the excess capital at the holding?

João Vitor Menin (Global CEO)

Okay, Tito. João speaking here regarding capital in Brazil, abroad, and also I think you mentioned dividends. First of all, this has been a top priority for me for a while, how we allocate the best possible way our equity, not only at the HoldCo level, but also in Brazil. We have designed the HoldCo structure to optimize that. That's the reason why we are paying JCP IOC every month to have most of our equity at the HoldCo level.

Regarding Brazil, the CET1 at 15% should be would have been 170 bps higher if we deduct the mark-to-market on our NTN-B position. That said, we would be pretty much flat quarter-over-quarter. At the end of the day, Tito, we want to leverage more our bank corporation Brazil as much as we can with discipline, bringing the best return for our shareholders.

We want to keep deploying our capital, not only liquidity, not buying Treasury bonds. We want to put on the FGTS, on the payroll loans. So that's what we have been doing recently. So I'm very, very optimistic about the returns that this deploy of capital will bring us, such as the 15%-20% ROE, most likely at the end of 2025. On dividends, we do pay dividends. As you mentioned, we paid dividends actually today. We announced 1.5%-1.8% dividend yield, which for the shareholder is still not a good one. But we're working to get our dividend yield as big as possible. This is the most relevant thing for our shareholder. But on the other hand, we are a growth company. We're still deploying most of our earnings to keep innovating and growing the portfolio and expanding our operations.

So this is how we see the capital allocation at Inter today. And it's a thing that we are always evaluating what's the best allocation for our shareholders.

Tito Labarta (VP)

Great. Thanks, João. Appreciate that.

Operator (participant)

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

Gustavo Schroden (Equity Research Director)

Yes. Good afternoon and thanks for the call and congrats on the results. My first question is regarding still a follow-up on NIM. I'd like to understand you showed that your loan-to-deposit ratio is at 75%. So if we compare with the average of the, especially the incumbent banks or large banks, you still have room to increase this leverage. So what should we think about this loan-to-deposit ratio in 2025 and 2026? Should we believe that there is some increase in this loan-to-deposit ratio to the same level of incumbent banks? And my second question is regarding asset quality, another good quarter in terms of NPLs and asset quality indicators, cost of risk around the 5%, 5.1%. What should we expect for 2025 in terms of cost of risk? Thank you.

Santiago Stel (CFO)

Hi, Gustavo. Santiago here. Thank you for the question. So on NIM, it's hard to predict the loan-to-deposit ratio, but what we have been able to see is that on the deposit side, we continue to surprise ourselves on the upside, both in terms of the growth rate as well as in terms of the mix. Now, we've been challenged at how long we could keep the mix. And as a consequence of the mix, the low-cost funding as percentage of CDI, and as the years go by, we are able to keep it.

So what we see is that the clients continue to choose Inter primarily because of the transactional essence of the super app, which is reflected on them having their core deposits at Inter. And another proxy of that that we mention a lot to investors is the market share of Pix, which is high and increasing.

This quarter increased to 8.3%. So all this to say that we would imagine the loan-to-deposit ratio to stay roughly at this level, potentially going to something closer to 80%. We did like to see the growth in the deposits per active client reaching the BRL 2,000 this quarter. And as that continues to happen together with the ROE-driven marginal allocation of capital, we would expect the NIM to continue trending in the same trend that it had in 2024, as I mentioned in a prior question. In terms of asset quality, we have a few pieces playing out. On the one hand, we continue to allocate in certain products that tend to take the delinquency levels to better levels, like, for example, FGTS, home equity, and real estate.

But we are taking marginal risk on the unsecured lines, which are risk-aggregated NIM accretive, but they do increase the cost of risk. So we will see which of those two impacts prevails. But overall, we don't see a major change in neither direction, up or down, in the cost of risk of 5%-5.2% that we've seen in 2024.

Gustavo Schroden (Equity Research Director)

Okay, great. Thank you very much.

Operator (participant)

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

Yuri Fernandes (Executive Director)

Thank you for the opportunity of asking questions. Hi, João, Alexandre, Santi. I have one more detail here on tax on revenues. It was a little bit higher this quarter on this. For sure, you had higher revenues, but the ratio was higher. When we look, it's the other items in the tax on revenue. So if you can explain what drove this, if this is sustainable or not, just for us and the shareholders to understand the line of tax on revenues. If I may ask a second question here, it's on fees. It has been a good quarter for fees. Interchange and commissions, they are doing fine, banking and credit commissions. So if you can provide some color on what to expect for fees in 2025, I would also appreciate. Finally, just a follow-up on Tito's on dividends.

João, do you really think paying dividends is that important for investors? Because the way I see it, at least, is a growth company. Your ROE is moving up, and that's good. But shouldn't it be better to keep the dividends inside of Inter, given the growth you have. Thank you.

Santiago Stel (CFO)

On taxes, Yuri, thank you for the question there. What led to the increase in the PIS/COFINS this quarter were two factors. One, the natural growth in revenues. And in addition to that, we paid IOC or JCP, like they say in Portuguese, in this quarter in a number close to BRL 160 million , which creates PIS/COFINS, which is approximately 70% of what we paid in the entire year. We had a bigger payment in that quarter that, as a consequence, led to higher PIS/COFINS, which we think will normalize to prior quarters starting this first quarter of 2025.

Alexandre Riccio (Brazil CEO)

And we'll take the second one. Yuri, thank you for the question. So on fee income, we saw nice results in 2024 as per all the work we've been doing, hyper-personalization and launching products that are in the context of our clients' needs. And we see 2025 as a year to keep this trend. So we're diving more into all these hyper-personalized experiences, getting better and better on the choices that we make on products and where to sell each product in the journeys that we already have in the app. We saw that through the results of the marketplace, which grew a lot in GMV and revenue. And we had also impressive results in the insurance fronts. So we see similar trends in 2025.

And we'll keep working to push the limits that we can there.

João Vitor Menin (Global CEO)

Yuri, João speaking here. So going back to the dividends topic, it's fun because I have two hats here: controlling shareholder and CEO of the company. So on one side, I would like to say that the essence of a company is to reward all the shareholders for the capital that they have invested in that company. So we tend to pay. I would love to pay the highest dividend yield on the market. We know that, as you mentioned, we are still a growth story. And therefore, myself, with the hat of the CEO of the company, we try to bring the payout ratio down.

As long as you can keep continuing building organic capital, so above the threshold that we believe is the cost of the capital in Brazil or whatever, so let's put this 13%, 15% ratio, we will be able to increase that payout throughout the time.

I like to say that we are designed at Inter to be, in a sense, an asset-like platform. We do have our credit portfolio that's grown, as we mentioned, 25%-ish. But connecting to your questions regarding fees, we're very proud of having 30% of the revenues on the fee side. So as long as we can generate fresh equity, new capital, we can have the fee income kicking in, we'll be able to keep paying dividends on this 20%, 25%-ish pattern without sacrificing the growth and the innovation at Inter.

So that's how I try to balance and to do the right arbitrage, generating long-term value for all the shareholders of Inter, and not only short-term value for any type of shareholder.

Yuri Fernandes (Executive Director)

No, thank you, João. It is clear. I ask this because I think you mentioned yield was super important, and the 20%, 25% payout you historically pay.

I don't think it sacrifices growth, right, being blunt and honest with you. But when you said dividend yield is something super important, I was a little bit concerned that you could do a higher payout or something like this. And it seems not to be the case. So just confirm this. And as you said, I guess your ROE will move up over time, and that's fine. And you can pay more dividends in the future. But just trying to make sure the 20%, 25% is somewhat the soft guidance you see for the payout. And thank you for the clarity here.

Santiago Stel (CFO)

Okay. Thank you, Yuri.

Operator (participant)

The next question comes from Mr. Eric Ito from Bradesco BBI. Mr. Eric Ito, we're now opening the audio so you can ask your question live.

Eric Ito (Equity Research Associate)

Hi, João. Santi, Alexandre, thanks for the opportunity of asking questions. I have two on my side as well. My first one is a follow-up on your NIM expansion of 20 bps per quarter, as you mentioned, for 2025. I just want to see your expectations maybe on the breakdown of this mix. First, what you see for how much would be for funding, if you see any pressure for your cost of funding as a percentage of CDI potentially increasing because of competition. Then the second, still on this topic, how much your treasury results could grow in 2025. If you see on the fourth quarter, it already increased around BRL 300 million. So if we just analyze this fourth quarter, it will be around 30%-40% growth.

I just want you to understand if that would be one of the main drivers for a NIM expansion as well. Then my second question is specifically on credit cards. There was a strong growth in this quarter, around 25% year-on-year. I just want to explore a bit on your breakdown between transactor and non-transactor portfolio. I think it was the third quarter that we saw maybe a slight decrease in the share of the earning yield portfolio in the mix. I guess there's a bit of seasonality here in the fourth quarter, maybe because of more debts. Just want to get your sense. As you're growing in consumer finance portfolio, I thought maybe this mix would be increasing in the total share of your credit cards.

So I just want you to get your sense on this trend and how we can expect this line to evolve going forward. Thank you.

Santiago Stel (CFO)

Thank you, Eric. I will take the first one, Santiago here, and Alexandre will take the second one on credit cards, so what we're assuming on the NIM evolution or the continuation, let's say, of the trend that we've experienced in 2024, it's the combination of three factors, as I mentioned. One is the mix will continue to get richer. If you see rural or agribusiness and SMEs, which are thinner margin products, grew significantly less. And in the case of FGTS, home equity, and real estate associated with inflation, grew significantly more, so the mix is playing out a very strong role. On the other hand, we continue to scale up with the consumer finance products, and those are starting on a lower base but are beginning to yield nice returns.

The average rate, both in the Buy Now, Pay Later, and on the Pix financing, is around 6% per month. It's a very attractive level, very attractive to pay the cost of risk that comes associated with it. In terms of the funding cost, we are modeling that we will continue in the mid-60s. We will see how the mix affects this, but we don't expect to deviate too much to something around the mid-60s as percentage of CDI. The factor that we didn't talk before that I'd add here is that we already have around BRL 4 billion of the treasury liquidity invested in what we call the structured notes that are tax-exempt. These yield around 85% of CDI. In the NIM, it appears penalized in a way because the benefit of those notes aren't affected tax rate below.

But we did add in the press release, and you can probably see that on page 14, we have around 30 bps of additional NIM that comes from the tax adjustment of those notes. So the impact on NIM is further there. And into 2025, we expect to continue growing that portfolio of structured notes as the balance sheet grows or proportionate to the growth of the balance sheet. And that's another thing that we are playing a key role in the evolution of the NIM. I'll pass it to Alexandre to cover the credit cards point.

Alexandre Riccio (Brazil CEO)

Hi, Eric. So I'll start maybe complementing a little bit on the cost of funding. So one thing that we developed that's super nice is like we have a good mix of transactional deposits and then the CDs and the LCIs. And within these transaction deposits, we're talking about 20 million people with very small balances. And when they want to invest, when they want the yields, we have the most complete platform to serve them with low-cost products, high-cost products as per their decision. And this has been like a secret to keep our cost of funding down. And we went through a few cycles of high interest rates and different competitive landscapes.

And we've been able to keep this cost of funding low in the 60% a little bit more level. Moving to the credit cards, the shape of the portfolio didn't change.

We finished 2024 with 80% being transactors, about close to 5% in Pix financing, and the remaining in the mix between revolving and installments, more skewed towards revolving, which is where a lot of the opportunity sits. Right between this mix in Pix financing, revolving and installments, we are focused on minimizing the revolving, which includes the delinquent, and moving customers towards the installments. We've been implementing different solutions. So for example, in September, end of September, we implemented an interest rate differential. So that's more favorable to customers to go into installments instead of going to revolving. And we have to remember that typically from revolving to delinquent is faster than from installments to delinquent. So that's kind of what we're doing. We want to change this shape of the portfolio a little bit, increasing the interest earning part.

So that would reduce a little bit from the 80 in transactors to, say, 78, maybe 75 throughout 2025. Thanks, Eric.

Eric Ito (Equity Research Associate)

Thank you. Just one quick follow-up, if I may, on Santi's answer. So maybe for going forward, as you guys expand the portfolio, as you mentioned, Santi, that maybe we could still see some addition of structured notes at 85% of CDI, which benefits you with the taxation later. Can we say that the percentage of yield as a percentage of CDI could decrease on the securities for 2025 because of this effect? Maybe you're going to capture on better taxes, but on the securities portfolio, we could see maybe a slight decrease as a percentage of CDI.

Santiago Stel (CFO)

No, because the growth in the structured notes should be proportional to the growth of the balance sheet. So we expect the yield on the loan portfolio, on the investment portfolio, to remain relatively stable. We did have some catch-up on some investments that we could use to increase the yield. We have the weight of the NTN-Bs that are approximately BRL 3.8 billion that is decreasing because the investment portfolio size is increasing. So when you put all that together, we expect it to remain roughly at the same level that we had in this fourth quarter, Eric.

Tito Labarta (VP)

Perfect. Very clear. Thank you, guys.

Operator (participant)

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

Pedro Leduc (Equity Research Analyst)

Thank you, everyone. First question on credit cards, still a bit. We saw interest income on them falling this quarter despite what you mentioned is a stable mix of transactors or not. If you can elaborate a little bit on that, if it's a strategy of lowering rates, and if you're seeing a sensitivity of volumes picking up in regards to that. And that's the first question. And then second, just a quick technical one. It was gains on capital or others of BRL 39 million this quarter, just making sure that what it was was related to Interpag and if it was cash or not. Thank you.

Alexandre Riccio (Brazil CEO)

Hi, Leduc. This is Xande speaking. Thank you for your question. So I'll kind of complete the answer of Eric. So as I mentioned, 80% of the portfolio is on transactors. The 20% is mixed, is like 25% Pix financing, and 50% revolving and delinquent, and 25% in installments. And so what we need to do, which is our main mission and opportunity to improve the P&L of the credit cards, is to increase this interest earning portfolio, reducing the amount of clients that are delinquent and moving more of them to installments.

As I mentioned, in the end of September, I believe, we implemented an interest rate differential, which was mainly driven to reduce the interest rate on the installment piece of the portfolio. What's the short-term effect that we expected to have by doing this change? We push people into a lower yield product, still super high rate.

We're talking like we move it from 14.9%-11.9%, but a lower rate. So it was expected to have a period where we would see smaller revenues. This was by design. But we expect that as we have more customers that are not in delinquency, we're going to increase these revenues through time. That's the strategy. And then there is a super large list of things like collection products, collection policies, and different things that we're doing. In the end of the day, it will help customers get out of the hardships that they may be going through in terms of their financial lives. Thank you.

Santiago Stel (CFO)

Leduc, on the capital gains question, yes, it is related to the Interpag acquisition. We performed a purchase price allocation study which was finalized in the fourth quarter. As a consequence of that, we booked BRL 30 million of recognition in the fourth quarter. That is the one you're mentioning.

Pedro Leduc (Equity Research Analyst)

Thank you.

Operator (participant)

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

Neha Agarwala (SVP)

Hi. Thank you so much for taking my question. Sorry if I'm making you repeat any of the things, but two quick questions. First, on the consumer finance portfolio, how is the asset quality evolving versus your expectations, and what kind of growth should we expect for 2025 for this particular portfolio? And my second question is on private payroll. We're seeing some changes in this particular domain. Is this an area of interest for Inter, and could we see growth coming as it becomes easier to operate in the private payroll market? Thank you so much.

João Vitor Menin (Global CEO)

Hi, Neha. João speaking here. Thanks for the question. I'm going to do the first, and Xande will do the second one. Consumer finance, I have been sharing with the market, with our shareholders, and with most of the market how excited we are here at Inter to, I would say, reinvent the consumer finance in Brazil. We have this Consumer Finance 2.0 approach, as we say. We coined this term, actually, and it's working well. It's working really well here, Neha. We have the Buy Now, Pay Later. We combine the success of the GMV in our shopping, in our commerce platform, with our capabilities of offering credit to our consumers. As of today, the delinquency for this portfolio is lower than the delinquency of the credit card, the guys that are using our credit card on the streets.

For that product, we have a very good take rate from the merchants that reward us for being the one giving credit to their clients. We have also a very good down payment upfront, around 20%-25% of the price of the product or the service. So this is something that we're doing under the radar, but we're very excited with this product. And I believe that we are the one ahead because we have this combination of commerce and finance here at Inter. So we have very positive trends for 2025 as well. But again, always underwriting and checking the collection, checking the delinquency to make sure that we're not doing anything wrong. On Pix finance, also, we have been seeing good prints in terms of delinquency, also better than the credit cards.

As we evolve, Neha, we see that more and more we're trying to bring the credit underwriting for Consumer Finance 2.0 inside our ecosystem, getting all the data that we capture from our shopping, from our Pix, and bringing them to our ecosystem in order to improve, so we have a positive view for this type of credit underwriting. At the end of the day, having the best risk-reward equation, that's what we look at at the end of the day, the best risk-reward equation for our portfolio, so we were very positive on this two products and very excited with the Consumer Finance 2.0 approach, and Xande now will cover the other question. Thank you very much.

Neha Agarwala (SVP)

João, just quickly on that, any targets that you can share with us that you might have in mind?

João Vitor Menin (Global CEO)

Yeah, Neha, actually, 4Q, 7% of our GMV was purchased through our Buy Now, Pay Later. We don't know if it's going to go up to 10%, 15%, 20%, 25%. Actually, we have a working group at Inter really, really focused on that to make sure that the delinquency that we see today will persist, that we're not too optimistic about that. But we really think that we are cracking the code on this consumer finance. So hard to give guidance. But again, so far, good delinquency and good reward, very good reward, good take rates from the industry. The industry needs to reward us, the bank, for our ability to provide credit. So this combination has been performing very well. This is a concept that we envisioned, I'd say, maybe three or four years ago.

Again, Inter's approach is always step by step, step by step, underwriting, collecting, and learning. But I'm very optimistic about this product.

Santiago Stel (CFO)

Hi, Neha. Thank you for your question. Quickly filling in on João's point on the Consumer Finance 2.0, we're excited about what we did in 2024. One of the things that we've been focusing both on credit cards and on the Consumer Finance 2.0 is on driving the outcome of delinquency. If we can drive the outcome, we feel more comfortable in growing. We're seeing that. Every time we see early-stage delinquency, we've been able to adjust policies, adjust models, and drive the outcome on the next reading. That makes us comfortable to keep with a steady growth in the portfolio. Moving to the private payroll loans, we see that a super promising new addressable market.

We're estimating a market between BRL 100 billion and BRL 200 billion to begin with. The precedent that we set on the FGTS loans, being able to do like more than 500,000 contracts a month without a single human intervention, is strong to believe that we can be a very competitive player. We're going to be ready on day one, so whenever this product is there, we're going to be there on the very first day. Something that we didn't do on the FGTS, by the way, so we're going to start on day one, and finally, there is still a lot of information missing so that we can give more color.

As time progresses and the government unveils the details, I'm sure we're going to be talking more and be able to better estimate what's the impact of that in our business. Thank you.

Neha Agarwala (SVP)

Very clear. Thank you so much, Alexandre. Just quickly on the GMV for the marketplace, despite strong seasonality in the fourth quarter, we did not see a big pickup in the GMV. Any reason for that?

Alexandre Riccio (Brazil CEO)

So sorry, Neha. Could you repeat because you were breaking a little bit?

Neha Agarwala (SVP)

So on the marketplace business, typically fourth quarter has strong seasonality. We did not see a big pickup in the GMV for the marketplace in fourth quarter sequentially. Is there any specific reason for that?

Alexandre Riccio (Brazil CEO)

Neha, actually we had a big spike on 4Q, which I agree is a very good seasonality for it. And when you look year-over-year, we grew almost 40% on the GMV for the marketplace. And also, more and more, we're starting to develop new service offerings, not only goods offerings there. So we believe that combining goods and service, we can keep growing the GMV on this 40%-ish, 50%-ish year-over-year. So very excited with the success of the Inter Shop initiative that started five years ago.

Neha Agarwala (SVP)

Perfect. Thank you so much, João and team. Very helpful.

Santiago Stel (CFO)

Thank you very much, Neha.

Operator (participant)

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

João Vitor Menin (Global CEO)

Again, everyone, thanks for taking the time to listen for our earnings call. We're beginning 2025. On our end, everyone excited, energized, focused on delivering. I would say a very strong year for Inter as we did in 2024. Thank you very much. See you soon. Bye-bye.

Operator (participant)

This conference is now concluded.