Inter & Co, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• João Vitor Menin highlighted the 10-year anniversary of Brazil's first digital account, emphasizing the mission to create value through customer-centricity, innovation, operational excellence, and a winning mentality. Inter has 380 AI initiatives live, focuses on global expansion, and investing in talent.
• Santiago Stel discussed strong financial results: loan book growth, asset quality metrics (NPL ratio stable at 4.1%, 90-day past due improved), net revenue growth, NIM expansion (both NIM 1.0 and 2.0 achieving new records), and ROE at 14.2% with a record net income of BRL 336 million. The seven verticals work seamlessly to enhance client value and profitability.

Segment Performance:

• Loan portfolio: Grew 30% year on year, with private payroll loans leading collateralized loan growth. Private payroll loans reached a BRL 1.3 billion portfolio with over 300,000 clients in 6 months.
• Credit cards: Volume surpassed BRL 15 billion for the first time, a 20% yearly growth, with interest-earning portfolios (IEPs) now representing over 23% of the credit card portfolio.
• Home equity: Reached 8.9% market share in portfolio balance, being the second-largest underwriter in Brazil.
• FX transactions: Reached 8.4% of market transactions due to high engagement in the global account.
• Net revenue: Reached 2.1 billion reais, up 29% year on year and 8% sequentially, driven by growth in the credit book.
• Funding franchise: Grew 35% year on year to BRL 68 billion, led by tank deposits and transactional deposits, with active clients surpassing an average of 2,000 reais in deposits.
• Efficiency ratio: Improved to 45.2% from 47.1%, showing strong operating leverage.

Guidance:

• The six thirty thirty plan remains a key guideline, with progress seen in client addition (best quarter ever for client addition), efficiency ratio improvement, and ROE growth.
• Forward-looking to future growth drivers including private payroll loans, factoring clearing house launch by Central Bank early next year, and continued NIM expansion. However, the Selic rate in Brazil is identified as a potential headwind to achieving long-term ROE targets.

Risks:

• Impact of Selic rate on growth, as higher interest rates slow down certain segments like payroll lending.
• Asset quality concerns related to new products like private payroll loans, where cost of risk initially picks up due to upfront provisioning in the expected credit loss model, though NPLs remain under control and expected to stabilize.

Question and Answer: Q: Tito Labarta asked about longer-term guidance and drivers of ROE improvement, specifically regarding the impact of Selic rate and investment tapering.

A: João Vitor Menin stated that while the Selic rate is a headwind, Inter is well-positioned with a strong client base and products, and progress is being made towards the six thirty thirty plan.

Q: Gustavo Schroden inquired about the higher cost of risk in private payroll loans and profitability of the product.

A: Santiago Stel explained that cost of risk picks up initially with new portfolios but is expected to stabilize, and the private payroll loan is highly profitable with ROE well above 30%.

Q: Mario Pierry asked about net interest margin expansion and growth faster than the market.

A: Santiago Stel responded that NIM expansion has ample room to continue, driven by repricing, better mix, investment yield, and capital optimization, and Inter is well-positioned to grow with its 'Inter by design' approach.

Q: Pedro Leduc questioned credit card performance and growth strategy.

A: Shande and João Vitor Menin discussed the reshaping of the credit card portfolio to increase interest-earning portfolios, cautious growth in credit cards to maintain balance between secured and unsecured lending, and focus on 'Inter by design' principles.

Q: Yuri Fernandes asked about stage two and stage three balances.

A: Santiago Stel explained that the increase in stage two and three balances is driven by the private payroll loan, within expected loss models and converging to high single-digit delinquency levels.

Q: Marcelo Mizrahi inquired about fee business growth.

A: João Vitor Menin and Santiago Stel noted fee growth is impacted by one-offs but sees opportunities in five fee-focused verticals, aiming to maintain a 25% fee ratio long-term.

Q: Regarding competition in private payroll loans, João Vitor Menin and Santiago Stel stated Inter is in a strong position with a sweet spot between incumbents and fintechs, focusing on absorbing demand and expanding market share.