Intercorp Financial Services Inc. (NYSE:IFS) Q4 2022 Earnings Conference Call February 15, 2023 10:00 AM ET

Company Participants

Rafael Borja - InspIR Group
Luis Felipe Castellanos - Chief Executive Officer
Michela Casassa - Chief Financial Officer
Bruno Ferreccio - Chief Executive Officer, Inteligo
Gonzalo Basadre - Chief Executive Officer, Interseguro
Carlos Tori - Executive Vice President, Payments

Conference Call Participants

Ernesto Gabilondo - Bank of America
Yuri Fernandes - JPMorgan
Andres Soto - Santander
Juan Recalde - Scotiabank

Operator

Good morning and welcome to Intercorp Financial Services Fourth Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Rafael Borja of InspIR Group. Sir, you may begin.

Rafael Borja

Thank you, and good morning everyone. On today's call Intercorp Financial Services will discuss its fourth quarter 2022 earnings. We're very pleased to have with us Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services; Mrs. Michela Casassa, Chief Financial Officer of Intercorp Financial Services; Mr. Gonzalo Basadre, Chief Executive Officer of Interseguro; Mr. Bruno Ferreccio, Chief Executive Officer of Inteligo; and Mr. Carlos Tori, Executive Vice President of Payments at Intercorp Financial Services.

They will be discussing the results that were distributed by the company on Monday, February 13. There is also a webcast video presentations to accompany discussion during this call. If you didn't receive a copy of the presentation or the earnings report, they are now available on the company's website, ifs.com.pe, to download a copy. Otherwise for any reason if you need any assistance today, please call InspIR Group in New York at 212-710-9686.

I would like to remind you that today's call is for investors and analysts only. Therefore questions from the media will not be taken. Please be advised that forward-looking statements may be made during this conference call. These are not future economic circumstances, industry conditions, the company's future performance or financial results. As such, the statements made are based on several assumptions and factors that could change causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the earnings presentation and report issued on Monday, February 13.

It is now my pleasure to turn the call over to Mr. Luis Felipe Castellanos, Chief Executive Officer of Intercorp Financial Services for his opening remarks. Mr. Castellanos, please go ahead, sir.

Luis Felipe Castellanos

Thank you very much. Good morning and welcome to our fourth quarter and full-year 2022 earnings call. Thank to you all for attending today's call. I wanted to start by making a brief summary of our strategy, the [indiscernible] that we are deploying on IFS in order to reach [Technical Difficulty] we have shared with you before. Our purpose at IFS is to empower all Peruvians to achieve their financial well-being. We're committed to do so through our four operating business segments.

Our aspiration includes: to increase our customer base by leveraging data and analytics with sound rich management skills; to provide the best digital experience based on operational excellence, this while building a leading digital financial platform to provide profitable solutions in our key businesses that have a clear strategic focus on payments, consumer financing, wealth management, and life insurance.

To achieve all these goals, we continue to work on four main pillars. We are developing a simple, resilient, and scalable technology platform for current and future growth. We are becoming a data-driven organization with deep understanding of Peruvians and consumer preferences.

We are focused on attracting and developing the best talent within our remote-first framework that allows us to increase productivity and to reach the best talent regionally. And we want to become a leader in sustainability. We're adopting stronger and more widespread ESG practices to drive value creation for all of our stakeholders. This is our strategy and we continue to execute it with a long-term vision.

We know that we are operating in an environment of macro and political instability in our country. However, this should not distract us from reaching our objectives. We are being cautious with our operations given the scenario we're facing, but we remain committed to helping Peru and Peruvians to overcome these challenging times.

Regarding GDP growth in Peru, December's monthly figure is expected to be announced today. But looking at the past month's figures and considering that we have had disruption occurred at the end of last year, we would expect weakened full-year growth levels. [Forecast] [ph] for 2023 show most forecasts pointing to less than 2% growth this year. Nevertheless, we remain confident that Peru's fundamentals, as well as a low [Technical Difficulty] problems and the accelerated trend of digital payments provide plenty of opportunities for our businesses.

As you will see during this call, IFS continues to show resilience in its core operations. Our banking franchise delivered solid results in 2022 with growth in net interest income and fees offsetting the requirement of higher provisions, while delivering clear improvements in efficiency. Our insurance segments continues to recover its investment performance, and the Wealth Management segment posted positive numbers this quarter after two quarter of losses related to market conditions. Finally, our payments ecosystem continues to expand and it's in good shape to seek further growth.

With this, let me pass it on to Michela for a detailed update of our results. Once again, thanks very much for attending our call.

Michela Casassa

Thank you, Luis Felipe. Good morning everybody and welcome again everyone to Intercorp Financial Services fourth quarter and full-year 2022 earnings call. This time, we will review our financial highlights and key messages, but also our guidance for 2023. All the results you will see today are very much aligned with the strategy that we are deploying, as Luis Felipe has just mentioned, with a clear priority on digital growth with focus on profitability.

I will start with a brief summary of financial highlights on Slides 3 to 11 of the presentation. On Slides 3 and 5, IFS had another strong quarter in banking and payments, good results in insurance, and the first positive quarter for Wealth Management, showing a recovery in our investment portfolio. With this final quarter, the full-year shows very strong core results in banking, insurance, and payments, but still a negative year for Wealth Management.

Reported earnings in the quarter came at PEN403 million, which represents a 3% increase in recurring earnings quarter-on-quarter and shows an important growth in IFS earnings of more than 50% on a yearly basis. ROE for the quarter came at 16.5%, still impacted by a low ROE in Wealth Management of around 8%, insurance with 13.8%, and as previously mentioned, a strong quarter for banking and payments with 20.2% and 22.3% ROE, respectively.

When looking at the full-year figures, reported earnings reached PEN1,671 million or PEN1,448 million when excluding the one-off registered in the third quarter, due to the accounting revaluation from book value to the price paid of the previously owned 50% of Izipay at Interbank.

In the annual comparison, earnings showed a decrease of 7% in the reported figures or 20% in the normalized figures, which is mainly due to the very strong and above average results on the investment portfolio in insurance and Wealth Management during 2021, which turned negative in the case of Wealth Management for 2022. This specific trend on the return on investment portfolio is penalizing the overall yearly trends.

Reported ROE for the full year of IFS was 17.7% and was 15.5% when excluding the one-off. The low normalized annual ROE was mainly due to the negative impact from investments as ROE for banking, insurance and payments for the full-year are all high at 19.8%, 26.6%, and 26.7%, respectively. In banking, we had a positive quarter in core activity with some signs of moderation, due to the macro scenario. The shift in loan mix and repricing continue to positively impact NIM this quarter up to 5.4%.

As already anticipated in our previous conference calls and in-line with the change in portfolio mix, cost of risk has reached 2.5%, ending the year at 1.9%. This was a very good quarter for the operating leverage of the bank, which drove efficiency ratio down to 38%.

On insurance, earnings were shy due to a stronger discipline on pricing and rates paid for annuities, which slightly impacted market share, and ROE of 13.8% was below average levels, despite another strong quarter and investments with return on the investment portfolio at 7.4%. In Wealth Management, results recovered strongly than previous quarter, reaching a positive result with a 7.6% ROE, still in the path to recovery, however well below sustainable profitability.

Finally, on our payment business, on one side, Izipay continues with a solid growth in business with acquiring fees up 8% on the quarter and 32% year-over-year, strong growth in number of merchants and transactional volumes and gaining market share within our volumes in e-commerce this year. Additionally, Plin and Tunki continue with very strong growth of users and transactions as we will see in more detail further on in the presentation, which should help us to benefit from the near future interoperability and to advance with our payment ecosystem.

Among the key performance indicators for the quarter in the year on Slide 6 and 7, I would like to highlight the continuous improvement in the NIM of IFS. There has been a 20 basis points improvement in the quarter with NIM, driving it up to 5.4% and the full-year up to 5%. Another ratio to highlight is the quarterly efficiency ratio, which stood at 34.8%, going back to pre-pandemic levels.

On Slides 8 and 9, total recurring revenues for IFS grew 6% in the quarter, thanks to the growth registered in banking of 7%, payments of 15%, and the recovery in revenues from Wealth Management from PEN3 million to PEN56 million this quarter. On a full-year basis, IFS revenues increased 7%, thanks mainly to the increase in revenues of 15% in banking and 22% in payment.

On Slide 10, the efficiency ratio of IFS was 34.8% in the quarter. The full-year efficiency ratio was 36.1% and would be 37.4% when excluding the positive impact from the one-off in revenues. Also, it is important to note that there is an impact in the reported cost fee use of IFS of 2022, due to the consolidation of Izipay figures starting April, which reflects a higher increase in expenses as they are included this year and they are not considered in [the base] [ph] of 2021.

Normalizing Izipay effect in 2021, expenses at IFS grew 8% on a quarterly basis and only 3% year-over-year. This is a very material point, as it makes a strong difference with the reported figures and represents a key differentiating element of IFS profitability. We believe this will be the case as revenues continue to increase faster than cost, thus improving the operating leverage of the company further.

In fact, 2022 has been a good year in terms of recovery of the efficiency ratio and the positive operating leverage at the banking business, which is the main contributor to the overall cost base of IFS. In the fourth quarter, the efficiency ratio of the banks stood at 37.9%, down from 42.2% in the fourth quarter of 2021. The operating leverage of the bank for the fourth quarter of 2022 was very strong with revenues growing 20% year-over-year and costs growing only 2%.

When looking at the yearly figures, the bank cost base has increased 8%, mainly due to three reasons. The higher increase, 21%, is the increase in technology costs and new ventures, which include the technology expenses for our digital transformation, as well as new investments in payments. A 6% increase in personnel costs, which is mainly coming from the increase in mandatory employee profit sharing in-line with the improvement of the local GAAP earnings.

An 8% increase in variable costs related mainly to credit cards, which is below the percentage increase in credit and debit cards purchases we generate fees and financing volumes. Other expenses have grown single-digit, reflecting our continuous cost efficiency efforts. Moreover, we have continued with our branch optimization efforts, reaching a total reduction in number of branches of 43% or more than 120 branches from the peak in 2016.

On Slide 11, we have a solid capital position as evidenced by the ratios of Interbank, but also in Interseguro and Inteligo. Core Equity Tier 1 ratio at Interbank is at 12% as of December 2022 and the total capital ratio stands at 15.1%, well above the industry's average of 14.4%, despite the strong growth in loans registered this year.

Starting January 2023, we will implement some changes to the calculation of capital ratios in-line with new regulations published by the superintendency with limited impact for the banking segment and some changes in Wealth Management established by the Central Bank of Bahamas.

Now, I will focus on the six key messages we would like you to take home from this call on Slide number 13. First, the macro outlook continues to be challenging and impacted by the political uncertainty. Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, we continue to work on our two-tier digital strategy, showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability.

Fourth, milder quarterly recovery in Wealth Management and above average investment results in insurance. Fifth, we continue to see a positive evolution in our payments business; and finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62 points improving 9 points from last year and a figure that is 16 points above the world's industry average.

On Slide 14, we are showing the evolution of some of the key macro indicators. GDP growth continues to be low with an estimate of 1.8% for the yearly growth of the fourth quarter. Interest rates have continued to increase with the central bank's reference rate at 7.75% And the dollar rate at 4.25%. However, there has been a post of the new increases in the soles rates during the last week central bank meeting.

The exchange rate has registered the ups and downs in the past weeks and it's now down to 3.81 soles per dollar at the end of December. Inflation continues high at 8.5% as of December, reverting the first signs of change in trend due to the disruption that’s registered by the protests in different parts of the country, mainly in the south, and the blockage of highways.

On Slide 16, moving to the good news of banking, we have continued to see a good performance in activity in the quarter, despite continued slowing down in financing growth as discussed during the previous calls as we have just adjusted our credit underwriting standards in specific sub pockets of low income clients which start to see some impacts of the slowdown of the economy and sustained inflation and now on top of the disruption of December and also January.

Moreover, due to the disruption in payments from clients caused by the protests, especially in the south of the country, but some extent also in other regions, we have given additional payment facilities to clients by rescheduling some payments in consumer finance, and to a minor extent, also in SMEs. Despite these, credit cards and debit cards purchases continue to increase 7% on a quarterly basis and 28% on a yearly basis. In the same way, balances have increased 8% in the quarter and 29% on a yearly basis in line with the industry.

We continue to see important growth in purchases as both credit and debit cards continue in their path of increased penetration in the country, which is still low. This growth has allowed us to increase market share around 100 basis points in the past 12 months for the combined purchases, thanks mainly to our Interbank benefit loyalty program, our increased focus on e-commerce and high growth product categories. And finally, also thanks to our upselling strategy.

New disbursement of personal loans have seen a recovery when compared to the previous quarter, has registered lower year-over-year growth of 8%. On the SME front, disbursement continue to be strong in the fourth quarter and are 17% above third quarter and twice the level of last year and are helping this portfolio to grow nicely during 2022 starting from a very low base of less than 3% market share in the segment.

On Slide 17, we continue to see solid double-digit growth in banking revenues, thanks to double-digit growth in net interest income and fee income. Net interest income grew 23%, with a strong contribution of net interest income coming from credit cards and personal loans, but also from the repricing of commercial banking loans. Fee income grew 12%, thanks to the strong growth of credit cards fee income, due to the evolution of credit and debit cards purchases, but also to the sustained strong growth in fee income coming from cash management services in commercial banking.

Other income at the bank recovered and was up 9% year-over-year. All-in-all, total core revenues grew 20% in the fourth quarter when compared to the fourth quarter of 2021, a very strong recovery in banking revenues, which continues with a positive operating leverage, as previously mentioned.

On Slide 18, we continue to see a strong portfolio shift to higher yielding loans. Retail loans reached 54% of the total portfolio versus 49% one year ago. And moreover, credit cards and personal loans reached 22% of the total loan book versus 18% one year ago. Reactiva loans as of December represent only 5% of the total loan book, down from 9%, 1 year ago.

These effects, together with the increase in the SME loan book, still small, and the increase in rates is pushing yield of loans upwards 70 basis points in this quarter and 220 basis points in the year reaching 10.5%, and NIM, 40 basis points in the quarter and 100 basis points in the year reaching 5.4%. Risk-adjusted NIM has remained stable in the quarter due to the increase in the cost of risk.

We have also seen rising cost of funds as we start to see both the effect of the rise in the rates of dollars, funds, and the continuous raises in soles rates as shown on Slide 19. Cost of funds reached 3.2% in the quarter, up 40 basis points in the quarter and 160 basis points in the year. We have the best loan-to-deposit ratio among peers at 101% as of December versus a system average of 107%.

On Slide 20, as anticipated, we see increasing levels of cost of risk in-line with the shift in the loan mix, but also from the impact of the sustained high inflation and the latest disruption in the economy, due to the process. Cost of risk in the quarter was up to 2.5%, already above pre-COVID levels of around 2%, mainly due to the impact from the retail portfolio, which has reached a cost of risk of 4.7%, again above pre-COVID level.

During this quarter, we have made some adjustments to the calculation of the expected loss, which includes an update of the forward-looking variables, but also apply a more conservative view on the consumer portfolio, shifting expert criteria from commercial banking to retail banking, which resulted in an extraordinary negative impact in retail and a positive one in commercial.

This is the main reason why the reported cost of risk figures show a 6.1% for retail and a reversion of 1.6% in commercial banking. For this reason, the NPL coverage ratio continues to be very high in retail banking at 244%, which is much higher than the 179% that we had recalled.

Now, let's move to the third key message on Slide 23. Our digital indicators show nice trends when compared to the previous year. Still, there is a way to go in moving these indicators further. As of December, digital customers reached 71% of customers who interact with the bank during the last 30 days, up 6 points in the past year. Digital acquisition reached 57%, up 19 points from last year, and digital sales reached 64%, increasing 6 points in the last year, all indicators focused on retail.

We see an important number of new digital accounts being opened, both for individuals and businesses. As of the end of December, 58% of new retail saving accounts were opened digitally, while 94% of new business accounts were opened digitally. NPS for digital customers continues its path to become a top NPS in the next years, reaching 49 points this quarter, improving 3 points versus the previous year. Insurance digital indicators show positive developments as well with SOAT insurance already at 80% and Vida cash life premiums, a digital product, reaching 39% of total life premiums.

On Slide 25, in-line with our digital strategy, we continue to see an important growth in our customer base of 18% in retail, 29% in digital retail customers, and 20% in commercial banking customers reaching more than 5 million customers as of the end of December.

On Slide 27 and 28, we are showing improvement in the Wealth Management portfolio and another strong quarter in the insurance portfolio. Wealth Management, on Slide 27, had a positive yet small return on the investment portfolio, almost entirely reverting losses from other income and strongly improving revenues, up to 56 million in the quarter. This has helped improve bottom line results for the quarter, but remain in negative territory in the year in figures. Good news for the insurance segment with another quarter of strong returns on the investment portfolio with ROIC at 7.4% in the quarter, still above average historical levels.

Now, moving on to payments on Slide 30. We are showing strong growth in number of merchants and transactional volumes. Merchants increased 14% in the quarter and 73% year-over-year, reaching more than 1 million. Transactional volumes grew 10% in the quarter and 33% year-over-year. Moreover, e-commerce transactions are gaining share within our total transactional volumes, reaching 17% as of the end of December and in line with our strategy. Revenues continued to grow nicely, 15% in the quarter and 8% year-over-year, supported by the increase in transactional volumes and merchants.

We are also including info related to EBITDA this quarter to show the improvement registered this quarter, which reached 26% and 24% year-over-year. We have been working to accelerate the growth of our payment ecosystem by having all our assets work towards a common strategy. We are focusing on increasing transactional volumes, offering merchants additional services, continue to pilot low-risk loans to merchants, and use Izipay as a distribution network for Interbank products, as well as a source of float.

On Slide 31 and 32, Plin and Tunki continue with their accelerated growth. Plin reached almost 10 million users as of the end of December with Interbank participation as main bank account still above 40%, and Tunki users reached 2.5 million. Number of merchants continue to increase as well or 91% year-over-year for Plin and 65% for Tunki.

The number of transactions has seen a strong acceleration in the past three quarters. This quarter, the strong growth of the previous quarter has continued, reaching a 33% quarter-over-quarter for Plin and 45% quarter-over-quarter for Tunki. We are currently working on getting ready for Plin and Yape interoperability. This is an important development for financial inclusion in the country, which the Central Bank has encouraged and which should help to bring more people into the financial system, reducing use of cash, which continues to be high in the country. Technical tests start next week, and we expect full deployment to be ready in April.

On Slide 34, moving on to our sustainability strategy, we have continued to build upon our focus areas. Our efforts in the last 12 months have allowed us to improve our Corporate Sustainability Assessment score this year, reaching 62 points, an improvement of 9 points as we announced during our last conference call. But now we are also able to compare this result with the world's industry average for 2022, which was 46 points. Thus, we are 16 points above that average, which reflects improvements in the environmental, social and governance and economic areas.

Our latest developments in ESG include, on the social front, being all four companies in the top 10 positions of Great Place to Work Peru 2023, further contents and learnings through Aprendemas, our financial services education platform with almost 700,000 users, and in the governance front, we have received the Number 1 position by Merco on top companies, both in the reputation category and in the ESG category as Interbank [Corporate] [ph].

Now, let me move to the new guidance for 2023 on Page 37. And let me mention that insurance figures included in the guidance includes preliminary IFRS 17 figures, which are currently under review and which may lead to some adjustments. The guidance reflects a full alignment with our strategy, which has three clear priorities. One, grow client base and top line in a sustainable and profitable way; two, provide a top experience to clients digitally; three, focus on key businesses, including consumer finance, payments, efficient funding, insurance and Wealth Management.

2023 guidance goes as follows. First, we are maintaining the same guidance for the capital ratio, which implies capital ratios to remain at sound levels, with total capital ratio at around 15% and core equity Tier-1 ratio at around 11%. Second, a continued path to recovery in core profitability with 2023 IFS ROE at around 18%. In terms of loan growth for 2023, we expect again high single-digit growth in total loans when excluding last repayments of Reactiva led by low double-digit growth in consumer loans.

For 2023, we are focusing the NIM guidance on Interbank. We expect Interbank NIM to be between 5.5% and 6% after closing 2022 at an average 4.9%. Cost of risk for banking is expected to increase in 2023 and to be above pre-COVID levels and reach a number between 2.6% and 3%. Finally, we will focus on efficiency, especially on positive operating leverage.

At this time, we are not ready to include the guidance for the efficiency ratio at IFS level, which we will do during the next quarter once IFRS 17 is fully reflected in the figures. But we are also adding, as guidance, the efficiency ratio of the bank as it is one of the main drivers of efficiency for IFS. We expect Interbank efficiency ratio to be below 39% for 2023 as we expect revenues to continue growing double-digit while expenses don't.

On Slide 38, let me recap the six key messages of this presentation. First, the macro outlook continues to be challenging and is impacted by the political uncertainty. Second, we had a strong year in core banking business with some moderation in growth in the second half of the year. Third, we continue to work on our 2-tier digital strategy, showing positive developments in our digital indicators to foster growth at IFS with sustainable profitability.

Fourth, there has been a mild recovery in Wealth Management in the quarter and above average investment results in insurance. Fifth, we continue to see a positive evolution in our payment business. And finally, we continue to make progress in our sustainability efforts as evidenced by our new 2022 CSA score at 62, 16 points above the world's industry average.

Thank you very much. Now, we welcome any questions you might have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo

Hi. Good morning, Luis Felipe. Michela, thank you for your presentation and for the opportunity to take questions. My first question is related to the monetization of the digital initiatives. We have seen in the region that the digital transformation has shifted to profitability versus client growth. And also, we have detected that the monetization is really coming from having digital deposits and digital loans, while the other products like payments, digital insurance, digital wealth management, the electronic marketplace are key to build the ecosystem and the relationship with the client, but are not necessarily the key elements that will monetize the client.

On the other hand, we have seen that Peru is not really a country that is facing the competition from fintechs that we're seeing in Brazil, Mexico or Colombia. So, can you elaborate on how your digital initiatives would translate into better efficiencies and a higher ROE at a consolidated level? And what would be the time line to achieve that?

And then my second question is a follow-up on your 2023 guidance. Just how should we think about the OpEx growth at a consolidated level? Would it be at the same pace of growth that we saw last year that's most at double digit or do you think will be above inflation plus certain digital investments? Any color on that will be very helpful. Thank you.

Luis Felipe Castellanos

Okay. Hi, Ernesto, thanks for your question. It's really a very profound question that probably will require many minutes of hours of conversation. But let me take a crack at it to see if at least I can go to start with some of your points. I completely agree with you in terms of a change in the way some companies or firms are looking at their digital efforts, obviously, we've seen what happened in the market and now the search for growth is switching to profitability or to more specific income-generating activities.

Luckily, I think that's the view that we've had since the beginning. As we've mentioned before, we had a 2-tier digital strategy. And the first part of the digital strategy, what we call the first tier, essentially to digitize what we do. Okay. So basically, there's no magic there. What we are doing is to be able to provide consumers the ability to do in a digital way, everything they do with the Interbank or Interseguro physically today, but digitally.

That has been the premise around what we've been doing. So, now like 90% plus of the things that a customer can do with the bank, for instance, can be done digitally. And the focus there has been laser sharp on making sure that that new proposition has lower customer acquisition costs or lower customer serving costs, while providing what you can call traditional banking products, let's say, but in a digital way.

And we've made lots of progress there. As you know, 71% – 70% plus of our customers do not touch a branch in the interaction with Interbank for the last 30 days, for instance. So that's moving ahead. And then we have the other part, while we've got the second part, tier 2 part of our strategy, which is deploying different things to create the ecosystem, like payments, like what we did with Tunki, like what we've been doing with open banking, connecting with other players that are not financial related so we can complement and provide our services.

And that part has also kind of two-ways to look at it. Some are completely new ventures that we are very ready to kill if we don't see that traction. Kill or pivot, if we don't see that traction is coming where we were expecting. We are not in the game of just thinking someday, we will see how this gets monetized. We are very disciplined in targeting short-term and medium goals and analyzing exactly how we do.

An example of that is what we did with Rappi, for instance. We launched Rappi Bank, and there are certain assumptions. And we've been pivoting that effort. We have not scaled it because one alternative is to continue pouring money into the effort, but another is to maintain the scale, small, trying to find its market, its destiny, its segment. So far, we have not been very successful there. That's why we keep it as a very small initiative. We don't even talk about that anymore because we still have not been able to shake that initiative. But we have that discipline. That's what we do.

And then we have other types like payments where we are investing heavily in the ecosystem because, as you mentioned, it will be both an enabler of developing better, more strong relationship with customers and merchants, creating new avenues and new sources for growth for us, but also it will allow us to tap in new segments that we have not been tapping before, like merchants, for instance. So that's the way we are looking at this. We are not based on the fintech thought of scale will bring everything and sometime in the future, money will come in.

So, we do have short and medium-term goals in order to see how these ventures are rendering the results. And you're right that the Peruvian market has not seen lots of disruption from new fintechs or digital players. I think it's the incumbents that are cannibalizing themselves in terms of the business, some with more positive results than others. But we are getting ready, as we've discussed before, to receive potential competition from local fintechs, international fintechs or digital banks.

They will come to this market. We're very conscious of that. It's just a matter of time. And what we're doing is [indiscernible] as quickly possible to receive them, therefore, when they come to our Peruvian market. Okay. So I hope that this kind of addressed your question. By monetization of what we do is very present, what we are deploying our Tier 1 transformation or the new initiative of Tier 2 transformation.

On number 2, in terms of the OpEx, I'm going to pass it on to Michela, who will have obviously our numbers to 2023. She will be able to give you a little more detail. However, I anticipate, as she mentioned, that there might be some changes because of some reclassifications coming from IFRS 17. But she can provide you a snapshot of how we're approaching discipline in OpEx for next year.

Michela Casassa

Hi Ernesto, thank you for the question. I tried to be clear on this effect during the script, maybe I was not able to, but we have not had a double-digit cost-based growth at IFS during 2022, okay? In the reported figures, there is an important effect that is that we are including the cost of the payment of Izipay during 2022, but not in the base of 2021 because of the entrance in April.

So the comparison that you see there of the reported figures, we show double-digit, it's not comparable. Okay. So what we have tried to do in the slide that we show in the presentation, the Slide number 10 is normalize the bases. So what you see there at IFS level is that expenses are growing. The fourth quarter is growing only 3% year-over-year. And with this new base, the efficiency ratio of the fourth quarter is 34.8%.

And we're also showing that the bank, which at the end, is the main contributor, the full year cost of the bank have only grown 8%. And I'm providing the breakdown there. That 8% is coming from a 20% growth in everything related to digital transformation, payments, et cetera, and all the other numbers are single-digit growth. Okay. And this is the reason why we expect the operating leverage for Interbank to continue to be positive next year with revenues that will continue to grow double-digit because of rates and everything that we are seeing and expenses growing only single-digit at Interbank.

Now, having said so, the reason why we are not, at this point, ready to show you or to give you a guidance with the efficiency ratio of IFS as we have always done, last year, the guidance was between 35% and 37%, is that as we are finalizing the implementation of IFRS 17, there are some – I mean, the definitions in where exactly revenues, negative revenues and cost go within the P&L.

So, once we will solve that out, we will be able to provide that figure, but I think the important message here is operating leverage will continue to be positive for the bank and for IFS. And maybe if I can just add on the philosophical discussion about monetization on everything that we are doing. Sometimes, Ernesto I mean, what we're trying to do here is also try to link it to the P&L lines because at the end of the day, this is going to have an impact on ROE, either it has an impact of revenues or risk-adjusted revenues or costs.

So, basically, I would say that a strong part of the impact of everything we're doing in digital and analytics is coming from an impact on the top line, which comes from not only more clients, but more cross-sell and more revenues per client, both on loans and deposits. And I can just give you one small example. We have been very active with the digital opening of SMEs accounts. Those accounts have increased substantially in the last 2, 3 years. And the balances that we used to have there, as I think we showed you on the Investor Day, I mean, we went from almost nothing to PLN1,500 million deposits.

So that is flow. So that is, if you want, a concrete impact of the opening of digital accounts for SMEs. But also, we are expecting improvement in the risk-adjusted figures because everything we're doing with digital and analytics should also have an impact in better understanding the risk profile of clients. And the last thing I would say is that on the efficiency front, the marginal cost of everything we are doing are for sure, higher. And this is why we have been able to double the client base of the bank from 2-point something million 3-4 years ago to more than 5 million this year with costs that have been growing single-digit.

So, I think those three components are the ones that on everything we do with digital and analytics are pointing out to that, which, at the end, should lead to a positive operating leverage and an improvement in the numbers and sustainable ROE. Hope that helps.

Ernesto Gabilondo

So, this is super helpful, Felipe and Michela. Thank you very much.

Luis Felipe Castellanos

Okay, great Ernesto. Thank you.

Operator

Your next question comes from the line of Yuri Fernandes with JPMorgan. Please go ahead.

Yuri Fernandes

Thank you Luis Felipe, thank you Michela. I have a question regarding your cost of risk. It should increase, right, as per your guidance? So, if you can share like your expectations, maybe you should use a lower GDP and this is basically expected loss model being a little bit more punitive, or if you are seeing like more concerning, as you mentioned, like consumer segment having a slightly higher cost of risk. I just wanted to understand a little bit where this cost of risk will come from? And I totally understand your margin expansion, right?

So, even with this cost of risk moving up, I guess your risk adjusted mean should still be fine this year. So, like not super concerned, but just would like to understand why cost of risk is running above the historical level? And if I may, a second question somewhat related to the cost and revenue side. We are seeing a very strong margin expansion, right? Your guidance implying 50 to 100 bps margin expansion.

So, your NII this year, assuming your guidance for loan growth should easily increase [20-plus percent] [ph]. And as you said, you are very cautious on your G&A. So why not, like – again, you are discussing the cost to income guidance, I totally understand this. But shouldn't we not expect a much lower efficiency for you this year on the holding level, given your NII should be so strong? Thank you.

Luis Felipe Castellanos

Okay. Yuri, thank you very much for your question. I'm actually going to pass it on to Michela. Yes, overall, I think she's going to go into details, but it's basically a mix change that we're seeing. Also, we are seeing low growth impacting all last year and will continue during the next year. It is expected to be around 2% or less for Peru this year. And inflation continues to be high.

We are not seeing lots of investments coming from corporates or companies. So we do think it's going to be a slow year and that will have a toll in the Peruvian consumer and in Peruvian companies overall. So it's going to be a matter of both mix, consumer continue growing, but also deteriorating macro variables that will have an impact in the payment capacity of Peruvians.

You're taking off a very, very low – lots of liquidity into the system in the last year because of what happened with the pension funds, the help from the government post-COVID and all that. That is also being taken out of the equation. So, that will have a toll in Peruvian consumers and obviously, in the cost of risk. If you add to that, the political turmoil that we've witnessed recently, the closures of certain regions, the impact in the south of Peru where we have close to 12% to 14% of our portfolio.

Then we have what is happening in the tourism industry, in the restaurant industry, in the transportation industry. It's a little bit tough to actually make right predictions, but everything obviously points to higher cost of risk, given everything that I've mentioned. And so, maybe now I'm going to stop and pass it on to Michela to make a couple of precision of this if required and then to talk about the margin expansion and the impact of operator leverage that you asked. Michela?

Michela Casassa

Hi, Yuri. How are you? Maybe just a couple of additions to what Luis Felipe mentioned in the comparison to 2019, okay, specifically why we are expecting a higher cost of risk in 2023 versus 2019? I mean first, already the mix when you compare it to 2019, putting together credit cards and personal loans, now it's already a little bit – it's getting close a little bit higher than what it was 2019, but the other important component is that the riskiness within those two portfolios is higher than it was in 2019. Why? Not because at the very beginning, we wanted not to build it that way, but because of the sustained inflation, that is a big variable that we didn't have present in 2019. Actually, it was not even present in our expected loss models. We incorporated it. I think it was in the first quarter of 2022.

So, I would say this is a big impact because the sustaining inflation has been there almost the full 2022, and this has started to have an impact. We anticipated it already. We saw something in the second quarter, in the third quarter, now it's even bigger. And on top of that, we have the disruption of the protest. So, we have been doing in December and in January, some rescheduling trying to help clients to overcome this moment.

And of course, everything we are doing now, we have some estimates of how that should improve over time in the next month, but I think that the impact is going to be felt and strong, especially in the first quarter. And how it evolves in the next quarters of the year, of course, will depend on what happens with the process and with the outcome.

Now, everything that we are envisioning is on, I mean, on the light that the situation kind of normalize. Normalize meaning, let's say, controlled uncertainty, but this is what we have more or less in mind.

Now moving on to efficiency. I mean, just to make it clear, what I am showing in the guidance now is only at the bank level. Okay. So, the bank is the one that will have an efficiency ratio below 39%. That efficiency ratio for the full-year for the bank was a little bit above 40%. Okay. And that is the result of this positive operating leverage. But what we are not able to show you yet, Yuri, is what will happen with IFS.

So basically, I mean, conceptually, I agree if there is a recovery of the revenues of Wealth Management, the bank grows nicely, Interseguro grows nicely, and payments continue to grow nicely. Revenues and the cost do not grow that much, there should be a positive impact. We just need to make sure that with IFRS 17, things do not move, not so the level and that the comparison, of course, is one that makes sense. So I mean, conceptually, I agree with you. We will have to check the numbers with the full impact of IFRS 17.

Yuri Fernandes

Perfect Michela and Luis. Thank you very much.

Luis Felipe Castellanos

Thank you, Yuri.

Operator

[Operator Instructions] Our next question comes from Andres Soto with Santander. Please go ahead.

Andres Soto

Thank you. Good morning to all. Thank you for the presentation. My question is regarding the guidance that you are providing in terms of ROE. If you could help us break that down in terms of your different banking units. What are you expecting for – sorry, I mean the general segment. What are you expecting for banking, insurance from management and payments?

Luis Felipe Castellanos

Okay. Thank you, Andres. That I'm going to pass on to Michela straight.

Michela Casassa

Okay, Andres. Here, I'm going to tell you in the medium-term that we are expecting that some of them has slightly changed versus the past, but what we are expecting is, I mean, the bank to be between 18%-19%, we are expecting Interseguro to be around or a little bit above 20%. This, though, has a very big question mark because of IFRS 17, okay, because IFRS 17 has a strong impact also on the network of the insurance business. So that ROE might be higher, especially for 2023.Okay. So that one we will need to review during this conference call.

Inteligo should be above 20%, the same as payments. Okay. So 18%-19%, the bank, Wealth Management and payments above 20%, and we need to fine tune insurance. Having in mind that then when you put all those numbers together, there is a minus, let's say, on the total number of IFS, which is the holding, that has there some expenses, which include mainly the expenses, the [taxes] [ph] [indiscernible] for the dividends and some minor, let's say, operating expenses coupon of the $300 million bond that we issued for the acquisition of Sura. So, a combination of the 4 subsidiaries plus the holding, it's what leads you to the around 18%.

Andres Soto

Perfect. That's very clear, Michela. And I assume that the recovery in Wealth Management is driven by improved market performance. Can you please tell us a little bit about that portfolio, both for the insurance and Wealth Management? What is the duration? And what makes you – what are the risk factors for this assumption for improvement of Wealth Management not to happen?

Michela Casassa

And maybe I will pass it first to Bruno for Wealth Management and then to Goncalo for insurance.

Bruno Ferreccio

Yes. So at Inteligo, fixed income is about 65% of the portfolio. Duration of the portfolio today is between 4.5 and 5. What to expect? We think we're getting towards the latter end of the cycle with regards to rates. So that should be beneficial for the portfolio. We've already seen in late last year, December and beginning of this year, fixed income portfolios recovering nicely. And then so that should be positive. And again, well hopefully, volatility will come down on the equity side as well. So, it should be a much better year we hope for the investment in the portfolio on the Wealth Management side.

Gonzalo Basadre

Okay. So, with regards to Intersegula, around 80% of our portfolio is fixed income. The rest is divided evenly between equity and real estate. And with regards to the fixed income portfolio, we are actually hedged both in terms of duration and currency with our liabilities. Remember, we sell long-term liabilities in the form of annuities. And they have a duration of around 13-14, which more or less matches the duration of our portfolio, our fixed income portfolio.

Andres Soto

Okay, thank you.

Luis Felipe Castellanos

Thank you, Andres.

Operator

Your next question is a follow-up from Yuri Fernandes with JPMorgan. Please go ahead.

Yuri Fernandes

Thank you guys for the follow-up. Just regarding refinancing loans, I guess, Michela mentioned, being more active and we heard this from other banks. How the provision works for refinanced loans? Like you use to migrate to Stage 2, Stage 3? Like if you had to move some loans to that, like how should we think about provisions for refinanced loans? Thank you.

Luis Felipe Castellanos

Michela?

Michela Casassa

Yes, let me take that. Yuri, I mean actually, under IFRS, these clients, some of them already had a significant increase in their risk profile. So, they were already on Stage 2. Okay. So, the fact that we have rescheduled them on some sense is not impacting now provisions, of course, if they, at the end, pay. So, what we need to see is the behavior of the refinance clients because the portion of them that then may not pay, of course, they will go to Stage 3 and require more provisions. Okay. And I would say that a big portion of them were already on Stage 2.

And then we also have the impact of forward-looking and the expert criteria that we have in the consumer portfolio. Specifically, that is, kind of a buffer not to cover some of those clients who might not pay those reschedules. Now, I mean, the volumes that we have rescheduled during December and January, of course, are bigger compared to what we were doing in the monthly figures of 2022. That are very far away from what we did in COVID.

We're talking different dimensions now because this is kind of more, I mean, localized north, south of the country and some other clients. So, there is an impact, but it shouldn't be as big if things go back to normal, let's say.

Yuri Fernandes

Thank you, Michela.

Operator

Our next question comes from Juan Recalde with Scotiabank. Please go ahead.

Juan Recalde

Hi, good morning and thank you for taking my question. My question is related to the loans to SMEs. So, we saw a very strong growth in terms of SME loans divestments growing more than 100% year-on-year. So, the question there is related to, so what part of this growth is related to Izipay? And the second question related to this would be looking forward, should we expect acceleration? And what, kind of growth should we expect for SME loans in 2023? Thank you.

Luis Felipe Castellanos

Thanks, Juan, for your question. Yes, we've grown very nicely in SMEs during the last year. Remember that we are coming from a very, very small market share of around 2.5%, 3%. So plenty of room there. As you recall, we participated very actively in Reactiva for this type of customers. So, we were able to get connections and get to know them better, enhance our models and the whole freedom around participating in Reactiva for SMEs way beyond our natural market share.

Those loans have been going through their course, guaranteed by the government, but we've been able to capture some customers, clients there. And that's the result of what you've seen last year, and we expect that to continue in the coming months as well. Although we have been a little bit shy in the last couple of months, given the current situation in Peru.

None of them come from Izipay. That's still a small project that we have there. We have a couple of pilots, but basically not significant yet. In terms of what we would expect for next year is something similar to what we did last year in terms of overall disbursements.

Juan Recalde

That’s helpful. Thank you for the comments.

Luis Felipe Castellanos

Thank you.

Operator

At this time, we will take the webcast questions. I will now turn the call over to InspIR Group.

Rafael Borja

Thank you, operator. We have some questions from the webcast. The first question is coming from Greg Mitchell from ABP Ventures. There are two questions here. Can you please discuss how the efficiencies of less retail branches has led to efficiencies in headcount? And the second question is, can you share how the structure of your organizational chart will evolve as you move towards the 2-tier digital strategy and incorporate new types of employees?

Luis Felipe Castellanos

Okay. Thanks very much. Hi, Greg. Thanks for your question. It's a great question, actually. Let's see – roughly, let's go through numbers. In Interbank, we got to a point where we had close to 7,300 or 7,400 employees. Today, we're operating with around 6,000 employees. Okay. So, that's the direct impact in there of efficiency. However, it's not that every branch that we’ve closed gets away people. We are hiring new people like for our call centers.

Again, the digital model brings in places where you need to reinforce your relationship with customers, but that's all in all the numbers, around [1,200] [ph] less employees than what we had when we had the whole branch network. Okay. And then the organizational chart, that's a fascinating question. We are currently operating under like, let's say, two types of organizational charts. The normal, the one that everybody knows, the ones that we still need to see because it [Technical Difficulty].

We've been deploying an agile methodology of working throughout the organization. So, we have that type of organization inside our organization. We are deploying more this into other areas. We started by technology. We expanded from technology to digital then to retail, and we continue to expand that. Now, we're connecting with risk management and others.

Actually, we have a project called Agility at Scale that we are starting to deploy for this year. And then there we are operating based on agile sales, agile teams, tribes and all that. You take a look, hopefully, we will resemble more Spotify in terms of the way they operate than [Technical Difficulty]. That comes with giving the new talent more empowerment, more responsibilities, the ability to take away high vertical structures and all that to become a much more lean organization.

Luckily, the culture that Interbank had was very flexible, not very bureaucratic. So, this is helping us go through the transformation. It is a challenge because, again, [Technical Difficulty] but we're moving towards agility and scale if you want throughout our operations. So, I hope this answered your question, but if you want like send me an e-mail, we can get a coffee and discuss this and I know it's probably one of your passions as well.

Rafael Borja

We have another question from [indiscernible] from Prima AFP. When will the interoperability Plin-Yape take place? What kind of services are allowed to offer through the interoperability?

Luis Felipe Castellanos

Great. Well, thanks very much. That's widely known in the news. But I'm going to pass it to Carlos so he can answer that.

Carlos Tori

The interoperability will be starting in April. And initially, it will be just P2P transfers. There will be a second phase later in the year, were – and the April interoperability will be between Plin and Yape. And then in June, July, every bank should be able to interoperate through a cell phone. But most – well, most clients are already here in Yape or Plin, so it shouldn't be a big change. And then the next phase is QR codes. You will be able to read QR codes from each other, that should be starting July. So, that's kind of the – that's the interoperability. There's no other services – talk about interoperability.

Rafael Borja

The next question comes from Daniel Merida from Diviso Bolsa. Could you consider some extraordinary dividends or maybe a buyback program during 2023?

Luis Felipe Castellanos

Hi, Daniel. I'll answer your question and talk also about guidance and ROE for next year and where our stock is trading now. We're always looking at ways to enhance shareholder value. The first [chart] [ph] is executing our strategy and making sure [IFS grows] [ph] based on core strategic pillars, that's what we're doing. Then in terms of extraordinary dividend or buyback, we're always analyzing that. We have – we're not – we have not taken any decision. It's obviously under [indiscernible] when we see where the stock trades and the opportunities that that brings. Obviously, you have to go by the book things, but not so far, that's not under discussion or review, although we usually take a look at different alternatives.

Rafael Borja

The next question is coming from Fabrizio Enrique Lavalle from Profuturo AFP. Given the Central Bank recently stopped hiking rates, how much time do you expect NIM to still be increasing? And how much lag is there between rate hikes and NIM expansion?

Luis Felipe Castellanos

Okay. Let me take a crack and then maybe Michela can complement. Remember that one of the reasons NIM is expanding is because of the switch in the mix. Again, COVID hit us very hard in terms of the evolution of our consumer book, and that's growing nicely, and we expect that to continue. That will have a toll in our NIM composition. And then the other part will be the increase in rates.

We really don't know if this post that Michela mentioned where it will take the Central Bank. It might really pause or it could regain in terms of traction for further rates. All depends on how inflation happens or not. But let me pass it on to Michela to see if she has a little bit more color in terms of the timing.

Michela Casassa

Fabrizio, I mean, first of all, have in mind that what we're expecting for 2023 is that rates will continue to be high at least in the first half of the year. And at some point, they will start to decrease, depending on which estimates you see. It can be the third quarter or it can be in the fourth quarter. What we have seen in the past – and you can see it in the evolution of NIM. NIM has improved, I mean, substantially during last year, but it is just a fraction of the increase in rates that you've seen. We've had during 2022, more than 500 basis points increase in soles and also a very big number in dollars. And the increase in NIM is just a fraction of that.

Why is that? It's because, of course, you can reprice a portion of the portfolio with the new disbursement, but not the stock. And the same happens with the liability side, where the repricing actually it's a little bit faster. So, for 2023, we are expecting still NIM to improve because the full-year effect of what has taken place in the increasing rates in 2022 will become or will materialize in the numbers during 2023. And that is a very big number.

And then if we have the decreases in rates in the second half of the year, we will start to see some impacts, first, in the cost of funds because of the portion of institutional deposits, and then just after that in the asset side. Maybe a little bit faster on the commercial banking side, but it will take some more time for the rates on the retail banking to go down with the reference rate. I hope that helps.

Rafael Borja

The last question comes from Daniel Mora from Credicorp Capital. What would be the strategy of loan growth in 2023 considering the uncertainty and economic deceleration? Do you expect to continue growing strongly in credit cards despite the risk of higher NPLs? What is the guidance of credit card loan growth in 2023 and expectations of NPLs in this year? And the next question is, can you provide further details regarding the contraction in annuities during the quarter? And what could be the outlook for the different insurance products in 2023?

Luis Felipe Castellanos

Let's see. Do we expect to continue growing credit cards? Yes, we do expect to continue growing both in our consumer book. Obviously, at a more moderate pace that we've witnessed during the last year because part of the growth of last year was a re-composition of our whole book customers that because of the situation during COVID, just decrease their outstanding balances, and we've been recouping that.

Actually, as you are aware, we've been more disciplined in terms of cutting, underwriting or improving underwriting standards. And that has a toll in growth, especially for the second half of the year, and we expect that to continue. So probably, we'll continue growing as a guidance provided by Michela, low double digits in terms of that. And the guidance on cost of risk is there. We do expect, given the situation, cost of risk improvement bit and also NPLs following that path as well. For the second part of your question, let me pass it on to Gonzalo so he can talk about annuities.

Gonzalo Basadre

Sure, thanks. Okay. Regarding annuities, first of all, let's remember that right now, since – in the last five years, most of annuities are related to the disability and survival benefits, kind of annuities. Retirement annuities are practically nonexistent after the 95.5 low, which allow people to withdraw their funds from the AFP when they reach retirement. So right now, it's mostly disability or survival benefits.

What happened in 2020 and 2021 was that that market increased significantly because of the increase in death rates in the country due to COVID. So, what we're seeing this year is that the annuities market is going down back to normal to what we had in 2019. So, we expect a level similar to what we had in that year.

Now right now, it's been discussed the further retirements from the AFPs. We are not sure yet how this might impact or if it's going to impact the disability or survivor benefits insurance. But again, because we already have no annuities sold for retirement, that part of the business is not impacted.

Now, with our other products, life insurance, bank assurance and digital products, they are – we expect to continue very high growth that we have seen last year. We're talking about our digit growth, and we expect that to continue. We haven't found any de-acceleration in any of those products.

Luis Felipe Castellanos

Great. Thank you, Gonzalo.

Rafael Borja

At this time, I'm showing no further questions. So, I would like to turn the call over to the operator.

Operator

There appears to be no further questions at this time. I would like to turn the floor back over to Mrs. Casassa for any closing remarks.

Michela Casassa

Okay. Just to thank you again, everybody, for participating to this call, and we will see each other again on our first quarter 2023 conference call. Bye. Stay well.

Operator

This concludes today's conference call. You may now disconnect.