U.S. Markets open in 5 hrs 43 mins

Edited Transcript of IFS.LM earnings conference call or presentation 13-Aug-19 2:00pm GMT

Q2 2019 Intercorp Financial Services Inc Earnings Call

Lima Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Intercorp Financial Services Inc earnings conference call or presentation Tuesday, August 13, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Luis Felipe Castellanos López-Torres

Intercorp Financial Services Inc. - CEO & GM

* Michela Casassa Ramat

Intercorp Financial Services Inc. - CFO & Finance Manager

================================================================================

Conference Call Participants

================================================================================

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Piedad Alessandri;CrediCorp Capital, Research Division;Research Analyst

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Tiago Binsfeld

Itaú Corretora de Valores S.A., Research Division - Analyst

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning and welcome to Intercorp Financial Services Second Quarter 2019 Conference Call. (Operator Instructions)

It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, please begin.

--------------------------------------------------------------------------------

Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. On today's call Intercorp Financial Services will discuss its second quarter 2019 earnings. We are 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 Bank and Bruno Ferreccio Inteligo Bank and Inteligo SAB. They will be discussing the results that were distributed yesterday. There is also a presentation to accompany these results. If you didn't receive a copy of the presentation or the earnings report, it is 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 i-advize in New York, (212) 406-3693.

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 do not account for future economic circumstances, industry conditions, the company's future performance or financial results. As such, statements made are based on several assumptions or factors that could change, causing actual results to materially differ from the current expectations. For a complete note of forward-looking statements, please refer to the quarterly report issued yesterday.

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

--------------------------------------------------------------------------------

Luis Felipe Castellanos López-Torres, Intercorp Financial Services Inc. - CEO & GM [3]

--------------------------------------------------------------------------------

Okay. Good morning. We are very happy to welcome all the participants in this call, including our new investors. As you all know, during the month of July, we executed a very important and landmark transaction for IFS in Peru, which was a listing of our shares on the New York Stock Exchange. On July 19, our stock traded for the first time in New York. This listing reinforces our commitment to build a world-class financial services institution for the benefit of our customers, shareholders, employees and to continue providing high-quality financial services to Peruvians.

Moving on to this quarter results. We continue to execute our strategy designed to become the preferred financial services platform for Peruvian consumers and enterprises. Our strong focus on retail based on deep deployment of analytical and digital capabilities continues to deliver good results. The opportunity in Peru continues to be significant. Our financial penetration continues to be low, and growth has the potential to be accelerated through digital solutions.

It is true that overall growth for the economy has been impacted with expectations of GDP growth for 2019 now at between 2.5% and 3%. The reason for this are many, including global factors very well known by all of us, but also due to some internal factors, including local political uncertainty that is affecting consumer confidence and affecting the implementation of well-needed investments, both on the public and private front. However, so far, Peru's underlying macro fundamentals remain solid with inflation under control and relatively stable currency compared to our original peers. We still expect that on the economy front, growth for the second half of 2019 will be stronger than that of the first half and even stronger in 2020 and forward.

The financial system continues to grow on a sustainable way and remains profitable, well regulated, well provisioned and well capitalized. This quarter, the banking system outstanding loans grew approximately 7% year-on-year driven by close to 11% growth in retail loans and a 5% growth in commercial loans according to the SBS. Other consumer loans and credit cards grew the most in retail banking, while in commercial banking, corporate loans performed better year-over-year.

Insurance system saw approximately 11% year-on-year growth, internal assets in the second quarter of 2019 with net premiums earned growing close to 7% when compared to second quarter of 2018.

On this environment, IFS had a strong quarter. Interbank continues to outbid the market, resulting in increased market shares both in loans and deposits, especially in the retail segment where our core focus is targeted. We continue to be well provisioned and well capitalized. Our digital efforts continue to deliver good results, although there's still lots to do on this front.

Interseguro had a good quarter in terms of earnings and ROE with gross premiums plus collections increasing close to 10% year-on-year,

Inteligo showed strong results in the first half with net profits increasing 10% year-over-year despite the impact -- the negative impact of mark-to-market that affected second quarter results.

We remain committed to execute our long-term strategy to topple the opportunity that Peru presents, while in the short term, as always, being cautious and closely monitoring factors that could affect economic performance, growth and the quality of our portfolio.

Now let me pass it on to Michela for a detailed review of our results.

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [4]

--------------------------------------------------------------------------------

Thank you, Luis Felipe, and good morning to everyone. Let me start the discussion with an overview of IFS quarterly performance. The main highlights are as Luis Felipe previously mentioned that we had a strong quarter for IFS with stable earnings and an 18.5% ROE despite the negative mark-to-market after a strong first quarter at Inteligo. The reported earnings for IFS increased 70% year-on-year due to the one-off impact in the second quarter of 2018 from the adoption of the new mortality tables at Interseguro.

We've had a strong results at IFS in the second half with profits increasing 10% year-on-year and with a close to 19% ROE. Total revenues increased 8.4% in the first half with a solid efficiency ratio at 34.3%, positive evolution also in all of our digital transformation indicators.

In the banking segment, solid quarter with a 21.7% return on adjusted equity. The adjusted net profit increased 12.3% on a quarterly basis and 5.1% year-on-year, 12.7% year-on-year loan growth with a 17.3% increase in retail loans and a slower growth in commercial loans. Retail deposits grew 14.5% year-on-year, gaining 80 basis points in market share in the year. NIM is up 30 basis points on the quarter and 20 basis points year-on-year.

In the insurance segment, solid quarter in earnings with return on adjusted equity at 13.6%. The adjusted net profit increased 13.4% on a quarterly basis and 5.5% on a yearly basis. Gross premiums plus collections grew 9.6% year-on-year. We continue to be the market leader in annuities with 32.2% market share year-to-date. And the results from investments increased 5.5% quarter-on-quarter and 22.3% year-on-year with return on the investment portfolio up and reaching 6.1%.

Wealth management segment, the quarterly results of PEN 33 million were impacted a PEN 14.9 million mark-to-market on investments. The net profit year-on-year for the semester is increasing 19.9% and with a 27.9% return on adjusted equity. We've registered also sustained assets under management growth of 4% in the quarter and 8.9% year-on-year.

On Slide #3 and 5, let's have a look at some of the additional key performance indicators of IFS. As mentioned before, IFS reached earnings of PEN 350 million in the quarter and PEN 703 million in the first half of the year. Total revenues continued to show a good trend with a 1.7% growth in the quarter and 7.5% when compared to the same quarter last year. The same is true for net interest and similar income with an even stronger growth of 3.4% in the quarter and 9.6% when compared to the same quarter last year. These trends are similar when looking at the first half figures with total revenues growing 8.4% and net interest income growing 8.8% year-on-year.

Efficiency ratio for IFS stayed strong at 34.8% with an increase of 110 basis points in the quarter mainly due to the impact on Inteligo's revenue. On the other side, Interbank's efficiency ratio improved 120 basis points in the quarter, down to 39.1%. When looking at the first half performance, IFS efficiency ratio was slightly lower at 34.3%.

Return on adjusted equity was 18.5% in the quarter and 19.2% when excluding the impact of mark-to-market on investment from Inteligo. During the first semester, IFS return on adjusted equity was 18.9% and 19.3% when excluding the impact previously mentioned.

As of June 2019, the cumulative unrealized gains of around PEN 400 million at IFS level are impacting ROE downwards around 100 basis points, which means that the return on the adjusted equity for the first half would have been around 20% excluding these effects.

NIM at Interbank increased 30 basis points in the quarter and is up 20 basis points in the year. The quarterly increase is mainly due to the improvement in NIM on loans, which increased 30 basis points in the quarter up to 8.9% mainly thanks to the portfolio mix with a higher growth coming from credit cards.

First half NIM at Interbank improved 20 basis points from 5.5% to 5.7%. Risk-adjusted NIM decreased 10 basis points in the quarter and 20 basis points in the year mainly due to an increase in the adjusted cost of risk of 50 basis points in the quarter and 40 basis points in the year. The increasing cost of risk in the quarter is mainly due to an increase in the quarterly cost of risk of commercial banking and credit cards, which continues to be within our risk appetite and within our target risk profile. When looking at the first semester figures, risk-adjusted NIM remained stable at 3.9%.

Total capital ratio for Interbank stands at 16.1% with core equity tier 1 ratio up to 10.6% as of June 2019, recovering after the distribution of dividends registered in the first quarter and improving 30 basis points when compared to June last year despite the strong growth registered by the bank, especially in the retail portfolio with higher risk-weighted assets density.

At the insurance segment, gross premiums plus collections increased almost 10% year-over-year in the quarter thanks to growth in both mandatory annuities and private annuities. Cumulated figures for the first half show a 24.3% growth in gross premiums plus collections.

Return on investments improved 10 basis points in the quarter up to 6.1% and improved 70 basis points year-over-year, helping earnings and ROE to improve during the quarter. In the same way, return on investment improved 40 basis points in the first half from 5.6% in the first half of 2018 to 6% in the first half 2019.

At our wealth management segment, assets under management grew 4% in the quarter and almost 9% in the year. Fee income suffered a decrease on a quarterly and yearly basis mainly due to a lower brokerage activity amid higher volatility in global markets since December 2018 and lower structured products issuance during the quarter.

On Slide 6, IFS relevant net income, which is the base for dividend payments, reached PEN 945 million as of June 2019, a 10% increase when compared to the same period of last year, which included extraordinary gains at Interseguro after the completion of the merger with Sura. Interbank registered PEN 572 million; Interseguro, PEN 261 million due to very strong results in local GAAP; and Inteligo, PEN 112 million.

On slides 7 and 8, we continue to see a positive evolution of our digital indicators. Digital users, which includes customers that interact with the bank through our digital platform over the number of customers who have touched the bank in the last 3 months, have reached 60% in the second quarter from 46% in the second quarter of the previous year, representing a 52% increase year-over-year in the number of digital users. As of the end of June, digital users are 1.1 million clients. 100% digital customers, who are customers that do not use branches any longer, have also continued to increase, reaching 25% as of the second quarter this year from 19% 1 year before. The percentage of total transactions performed off branches has remained stable at 95% but with a higher participation of internet and mobile transactions at 78% from 75% 1 year ago.

Digital sales reached 43% as of the second Q from 30% 1 year before. This represents a year-over-year growth of 31% in the number of digital sales with internet and mobile-only sales increasing from 45% in the second quarter of 2018 to 72% in the second quarter 2019. 100% digital acquisition of retail customers have continued to grow from 4% of new retail customers in the second quarter of 2018 to 17% in the first quarter this year, and now to 20% in the second quarter.

On Slide 8, savings accounts opened digitally reached 29% in the second quarter from 3% 1 year before, while business accounts or Cuenta Negocios opened digitally reached 44% from 0% 1 year before. Extra cash loans reached 17%, and SOAT car insurance reached 60%. Moreover, during the second quarter of 2019, we have continued to launch new functionalities in our digital platform, such as the cardless withdrawals from ATMs, the digital opening of time deposits and our digital piggy bank also for dollar accounts.

Now let's take a look at each subsidiary's performance in detail. On Slide 10, you can see improvements in most of the key indicators at Interbank. As previously mentioned, NIM improved 30 basis points in the quarter and 20 basis points in the year, reaching 5.8%, with risk-adjusted NIM decreasing 10 basis points down to 3.9% due to the increase in the adjusted cost of risk to 2.8% in the quarter. Total other income grew strongly at 8.1% on a quarterly basis and 16.1% year-over-year with fee income growing nicely at 3.7% in the quarter and 7.2% year-over-year.

The increase in the yearly fee income is mainly due to the strong increase in credit card related fees, which is partially offset by other decreasing fees related to the migration to digital channel and to lower activity in contingent credits and corporate finance.

Other expenses grew 8.5% year-over-year but only 1.3% in the quarter with an improvement of 40 basis points in the efficiency ratio on a quarterly basis due to the operating leverage we continue to register at the bank, with total revenues growing faster than expenses at 14.5% year-over-year. The main items impacting the yearly increase in other expenses are: first, expenses related to the digital transformation, which include technology and depreciation, which increased PEN 9 million year-over-year or 15%; second, personnel expenses increasing 5.6%; and third, variable costs related to credit cards of around PEN 4 million.

On Slide 11, our year-over-year loan growth has slowed down this quarter from 17.3% as of the first quarter to 12.7% as of the second quarter mainly due to a slowdown in the commercial banking loan book in line with the market. Still, we continue to grow much faster than the market at 12.7% compared to the 7.1% of the banking system as a whole, with retail growing strongly at 17.3% year-over-year and 4.4% on a quarterly basis and commercial banking growing at 7.5% year-over-year but declining 1.4% in the quarter mainly due to the decrease in the corporate loan book. We continue to be #1 in retail credit cards as of June 2019.

Due to the strong growth in retail banking, we have continued to gain market share in retail loans by further 20 basis points on a quarterly basis and by a total of 100 basis points on a yearly basis, reaching 18.9% with a stable market share over total loans at 12.4%.

The yearly growth in credit cards continues strong at 24.6% with a stable risk profile of the portfolio and slightly higher cost of risk. An important contributor to this strength in credit card loan growth is the strong increase in credit card purchases and usage, which is more than 25% year-over-year, supported by more than a 50% increase in digital purchases. We believe this growth are the result of our revamped Interbank benefit loyalty program, new commercial and risk profiling models allowing us to increase share of wallet with existing customers and better target new ones and innovative digital solutions gaining preference in the market.

On Page 12, retail deposits continued to grow faster than the markets, reaching 14.5% year-over-year, allowing us to gain 30 basis points in market share in the quarter and 80 basis points in the last 12 months, reaching a record 13.5%. Total deposits grew 1.7% in the quarter as the result of increases of 1.7% in both commercial and retail deposits. During the quarter, the growth in commercial deposits allowed us to gain 10 basis points of market share when compared to the previous quarter, reaching 12.5% and 12.9% in total deposits.

Growth in due to banks was mainly explained by new soles funds from the central bank. Average cost of funds remains flat at 3% with loan-to-deposit ratio stable at 102.3% and well below the system average of 106.3%.

On Slide 13, cost of risk continues to be within our target. Reported cost of risk was 2.3% in the quarter and 2.8% when excluding the release of provisions in the payroll deductible portfolio for PEN 439 million due to an update in the credit parameters due to the improvement in the behavior of clients. The quarterly increase of 50 basis points from 2.3% to 2.8% was mainly due to 2 effects: first, a 20 basis point increase in the cost of risk of the retail portfolio from 4.2% to 4.4% mainly coming from credit cards, which continues to grow in volumes; and second, an 80 basis points increase in the commercial loan book, which was 0% in the fourth quarter and was 80 basis points this quarter mainly due to the increase in the loan portfolio.

The nonperforming exposure under IFRS criteria improved both during the quarter and when compared to the previous year. When looking at Stage 2 and 3 of our total exposure, the ratio improved 90 basis points this quarter and 170 basis points year-on-year, down to 10.4%.

When looking at Stage 3 and refinanced loans, this ratio was 2.9%, stable in the quarter but an improvement of 20 basis points when compared to the second quarter of the previous year. Total NPL coverage ratio, which measures the coverage of Stage 3 and refinanced loans, remains strong at 128%.

On Page 14, we are also showing the evolution of different stock of provisions over total exposure, or expected loss. This trend shows that the risk profile of the bank has remained relatively stable over the past 6 quarters since the implementation of IFRS 9 and despite some quarterly volatility in cost of risk. Moreover, it has improved 50 basis points year-over-year at total bank level with improvements in both the retail and commercial portfolios. Within retail, the year-over-year improvement is mainly due to an improvement in the risk profile of the credit cards portfolio as well as in the consumer loan book.

On Page 15, as of June, Interbank's capital ratio of 16.1% is 450 basis points above its risk-adjusted minimum requirement established at 11.6% and above the system average of 14.8%. Core equity Tier 1 ratio was strengthened 40 basis points in the quarter and 30 basis points year-over-year, reaching 10.6% despite the strong growth registered in the past 12 months in loans of 12.7% and in risk-weighted assets of 11.5%. This ratio will further strengthen thanks to the proceedings coming from the IPO, giving us ample room to continue growing.

Please turn to the following pages to discuss our insurance segment results. On Slide 17, growth premiums plus collections in the second quarter remained relatively flat on a quarterly basis but grew 9.6% year-over-year, excluding gross premiums from disability and survivorship contract that expired in December 2018. The quarterly trend was mainly explained by a contraction in the regulated annuities market, while private annuities, individual life and retail insurance remained relatively stable. The year-over-year growth was mainly explained by increases in all product lines, with regulated annuities increasing 14.6%, private annuities 6.7%, individual life 4% and retail insurance almost 10%.

On Slide 18, net premiums reached PEN 164 million during the quarter, a 4% decrease in the quarter but a 2% increase year-over-year. The quarterly increase was in line with the trends previously explained.

Adjustment of technical reserves decreased 12% in the quarter mainly due to the decreasing annuities in the quarter, while net claims and benefits, which refer mainly to the benefits paid for the stock of annuities, increased 4.7% on a quarterly basis along with the increase in the size of the annuities portfolio.

As a result of the above, total premiums earned less claims and benefits were minus PEN 79 million in the second quarter, a decrease of PEN 5 million on a quarterly basis but an improvement of PEN 107 million when compared to the previous year due to the negative impact of the adoption of new mortality tables registered in the second quarter of last year.

On Slide 19, in the second quarter, Interseguro investment portfolio reached PEN 12.1 billion, which represents an increase of 3.6% in the quarter and 10% on a yearly basis. Results from investments were PEN 182 million, which represented a 6.1% return on Interseguro's investment portfolio, improving 10 basis points during the quarter and 70 basis points when compared to the previous year.

Please turn to the following pages to discuss our wealth management segment results on Slide 21. Inteligo's net profit in the second quarter was PEN 33 million, a decrease of PEN 45 million or 57% on a quarterly basis and of PEN 15 million or 32% on a yearly basis.

Net fee income from financial services was PEN 37 million in the second quarter, a decrease of 4.6% when compared to the previous quarter. On a year-over-year basis, net fee income from financial services decreased 12.9%. The quarterly and annual decreases were explained by lower brokerage and custody service fees amid higher price volatility in global market as well as lower product structuring activity during the quarter.

Inteligo's other income reached PEN 0.5 million in the second quarter, a decrease of PEN 36 million on a quarterly basis and PEN 3.7 million on a yearly basis attributable to negative mark-to-market valuation of Inteligo's proprietary portfolio during the second quarter.

Other expenses reached PEN 29 million in the second quarter, an increase of 6.6% on a quarterly basis, mainly due to noncore expenses for the business related to one-off expenses.

On Slide 22, assets under management reached PEN 18.5 billion in the quarter, up 4% increase on a quarterly basis and 8.9% year-over-year growth mostly due to new account openings generating an influx of funds as a result of a strengthened prospection and client conversion strategy at Inteligo. As a consequence of the increases in assets under management, Inteligo expects an incremental growth in brokerage and custody services fees in the forthcoming quarters.

Inteligo's loan portfolio reached PEN 1.5 billion in the second quarter, a 3.7% increase on a quarterly basis and 20% increase year-over-year. Revenue generated by Inteligo were PEN 62 million, a 0.1% decrease on a quarterly basis and 17.7% on a yearly basis. The results for the second Q are mainly explained by the lower mark-to-market valuations on Inteligo proprietary portfolio of investments.

Fee income divided by assets under management on both Inteligo Bank and Interfondos was relatively stable at 0.8%. As a consequence of these results, Inteligo return on adjusted equity was 16.8% in the second quarter. Excluding the impact from mark-to-market, risk-adjusted -- return on adjusted equity would have reached 24% in the quarter.

Cumulative net profit for the first half of the year stayed very strong at PEN 11 million and PEN 12 million, a 20% increase on a yearly basis, with returns on an adjusted equity at 27.8%, respectively.

Thank you very much. As you have seen from the numbers, our core business continues to be very strong. We are committed to securing our strategic plan with a strong emphasis in our digital transformation for the benefit of our customers.

Now we welcome any questions you may have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our first question from Tiago Binsfeld of Itaú BBA.

--------------------------------------------------------------------------------

Tiago Binsfeld, Itaú Corretora de Valores S.A., Research Division - Analyst [2]

--------------------------------------------------------------------------------

I have two questions from my side, first on your margin. The expectations for the monetary policy rate have been going down in Peru, just like in other markets. Can you discuss the impact of further rate cuts in your margins? Do you have any sensitivity of how a 50 basis point cut would impact your NII?

And my second question on your sustainable ROE. Can you break down what are your expectations for the long-term ROE at the stand-alone business, Inteligo, Interseguro and Interbank?

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [3]

--------------------------------------------------------------------------------

Tiago, thank you for your answers -- for your questions, sorry. In terms of the margin, I have to split my question in 2 -- my answer, sorry, in 2 portions. First, talking about soles and then talking about dollars, okay? The sensitivity we have related to cash in the soles rates and actually to the last one that we have registered is pretty neutral actually. Why? Because the regulatory rate that we have for soles was kind of already not reflecting the real marginal cost of funds that we have been obtaining for our funding. So basically the last cut in soles rate will have very limited impact on our numbers.

Normally, what would happen is that a cut in soles rate will benefit the bank in the short term. Why? Because the rate of the assets will not move materially, but the cost of funds will decrease, especially for the short-term funds, not that would be the answer if you want for further rates going forward. That is different when we talk about the rates in dollars, that impact directly only the portion of the portfolio that is financed in dollars, that is approximately 50% of the commercial loan book. There, our commercial loans, especially for large corporates and midsized corporates, are priced based on spreads. You will see both a decrease in the yields, but also in the cost of funds that will not completely compensate. The estimates we have run is that for every 10 basis points of cut in the dollar rate, we could have a negative impact of up -- I mean, between PEN 5 million and PEN 10 million in 1 year, but not as such in the soles portion of the portfolio.

And moving on to the ROE targets. We continue to give the same guidance as we have been giving over the past quarters and at the beginning of the year. For IFS, medium-term ROE should be between 18% and 20%, for the bank around 20%, Interseguro getting close to 15% and Inteligo above 20%.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) We'll move next to Jason Mollin of Scotiabank.

--------------------------------------------------------------------------------

Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [5]

--------------------------------------------------------------------------------

Looking at IFS' robust year-on-year growth in the consumer book, loan book, can you comment on where we are in the Peruvian consumer credit cycle? What metric or drivers are you focused on to assess the consumer -- this consumer credit cycle and how do you see that going forward?

--------------------------------------------------------------------------------

Luis Felipe Castellanos López-Torres, Intercorp Financial Services Inc. - CEO & GM [6]

--------------------------------------------------------------------------------

Jason, it's Luis Felipe. Thanks very much for your question. Well, actually we've seen an improvement coming back from '16, '17. We've seen an improvement in the profile of the Peruvian consumer in terms of what we've seen in the system. Remember that '16, '17 we not only had a deceleration of the economy, but we also had the impact of the El Niño phenomenon, no, that affected the quality and the profile of the portfolios overall of the system and, specifically Interbank. So we've been witnessing, during the last month, an improvement that has -- it was showing in our numbers.

And now we're very closely monitoring what the impact of this new deceleration of the economy could be. During the first half, even though GDP growth has not been that strong, we've seen internal consumption to be actually north of 3%, and that continues to be the same way. So it's something that we're looking very closely. So far consumer confidence has shown not very good numbers recently, but the impact in consumer demand have not jumped into the numbers yet, but it seems continued to be this way. Obviously, we will have to make some adjustments in order to act accordingly.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our next question from Ernesto Gabilondo of Bank of America.

--------------------------------------------------------------------------------

Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [8]

--------------------------------------------------------------------------------

Three questions from my side. The first question is a follow-up in your loan growth expectations. As you have mentioned before, there have been some factors impacting the economy. However, despite the economy has bottomed, we continued to see strong dynamics in the retail portfolio, while wholesale loans is still the only one lagging. So what should we expect in terms of loan growth per segment? And do you have any concerns in terms of asset quality, that's my first question.

And my second question, when do you expect to accelerate the growth in the SME segment and the on bank sector? And what would be the next step to leverage on the infrastructure of your homing Intercorp? For example, are you exploring to attend Intercorp's pharmacies? And my last question is on digital opportunities. Can you share with us what are you doing with fintechs, biometrics and QRs?

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [9]

--------------------------------------------------------------------------------

Thank you, Ernesto, for your questions. Let me go over the first one in terms of loan growth expectations. At the beginning of the year, we provided our guidance for the banking system as a whole of a growth between 8% to 10%, okay, and with Interbank growing in the low double digits level. What we are seeing now is that due to the deceleration of the commercial loan book, we expect the system as a whole to grow a little bit below that 8% to 10%. So most likely between 6% to 8%. But for the numbers we are seeing so far for the bank, we are still reassuring the low double-digit growth for the bank with retail growing faster and commercial banking growing less than that.

Just with one question mark, which would be the large corporate portfolio, which normally is very volatile, and as you know, we are very much focused on profitability there. So if the large corporate book, which is big for the financial system, decelerates even faster, that could have an impact. And still we are seeing double -- a strong double-digit growth for the retail portfolio, that's what we have shown also this quarter and what we have continued to see even after that. And in terms of asset quality, we continued to see the asset quality of the retail portfolio very strong. There has been some minor deteriorations in the commercial loan book in the midsized and small businesses, which have to do with also this slower growth, I guess, at the system level.

Now let me pass it on to Luis Felipe for the other two questions.

--------------------------------------------------------------------------------

Luis Felipe Castellanos López-Torres, Intercorp Financial Services Inc. - CEO & GM [10]

--------------------------------------------------------------------------------

Thanks very much for your questions. I guess for SMEs for Interbank continues to be a very big opportunity. We only have like around 3% market share, but we are very cautious in that segment because we don't just need to grow for the sake of growth. So what I see is a feature where digital will have a stronger role in terms of the way we approach that opportunity in that market. We currently have a couple of projects that are being tested. We're already serving that customer segment. However, again, we're taking it very cautiously, however, like normal operation continues to grow.

So we've been coming from 2% to 2.5% to 3% market share. But still small compared to the overall size of portfolio. But we realized that, that is a very volatile part of the portfolio. So we need to be very careful in terms of what we do there. And that leads into the specific third part of your question, which is, first, the Intercorp platform, we continued to do synergies with the Intercorp platform, obviously, everything on an arm's length basis, really, building commercial value propositions to our customers, not much on specifically leveraging, let's say, on the pharmacies and being able to do something in terms of reaching new customers through that.

But also we do like discounts in such and such, as we do with other types of commercial entity. Then in terms of fintechs, biometrics and QRs, yes, we have many projects, as you know, in terms of fintechs. We are doing collaboration, we are doing some small investments with the aims of learning more than anything, and some fintechs outside of Peru, where we think more interesting things are happening in terms of the ability for us to learn on the operation. We have projects on biometrics, we are able to acquire customers, and we are doing some biometric testing for those ways of acquisition, and we also have a project, as you know, that is related to a payments' solution that includes the ability for our customers to pay through QR codes.

We have deployment of our QR codes in many merchants, but also we have integrated the possibility of using Visa's QR that are being deployed throughout the Peruvian system. So we aim to be at the edge of any financial solution that will benefit our customers and be able to give them the possibility of using all the modern ways to do financial services.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) We'll move next to Sebastián Gallego of CrediCorp Capital.

--------------------------------------------------------------------------------

Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [12]

--------------------------------------------------------------------------------

I have three questions. The first one is just a follow-up on asset quality. Cost of risk guidance you've given of the year was very conservative. We have seen some better performance. Can you provide what's the expectation on cost of risk for the remainder of the year?

Second question is related to Interseguro. I just want to understand if you consider the quarter for Interseguro as a regular quarter as we saw several kind of one-offs, some valuation gains, some net gains on financials embedded. So I just want to understand better that on whether you see this trend going forward.

And the final question is regarding the OpEx, on the OpEx line, the IT investments line. Can you provide a figure on what's your investment plan for the upcoming years in terms of amounts?

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [13]

--------------------------------------------------------------------------------

Okay. Thanks for your questions, Sebastian. The third one related to asset quality guidance, the number we provided was an ample range, if you want, between 2.5% and 3%. We continue to give that number because if you see the numbers we are presenting this quarter despite the fact that the reported figure is 2.3%, the adjusted figure is 2.8%. So we are moving quarter-over-quarter between that 2.5% and that 3%. So we reiterate that number.

In terms of Interseguro, we're looking at the IFRS figures. I think it is a regular quarter with the, if you want, the target that we have set to continue to improve profitability to be able to get closer to a 15% return on equity.

And related to the IT investment plan, actually, one of the reasons of the increase in the OpEx is related to depreciation. That increasing depreciation is the result of the increased level of investment that we have already registered since 2015 and 2018. We have tripled level of investments since those 3 years, and that, of course, is reflected in the depreciation of those investments. The yearly figure of investments that we have at the bank level is around PEN 180 million, which should be stable number going forward, which limits the further impact, if you want, on the OpEx of those investments.

--------------------------------------------------------------------------------

Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [14]

--------------------------------------------------------------------------------

All right. Just a follow-up on the Interseguro question. I know you guys are talking about a 15% ROE. What's the time line to reach that type of profitability, please?

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [15]

--------------------------------------------------------------------------------

I mean what we are aiming at is to reach that target by the end of the year and not so for the last quarter of the year, but not the average number for the full year.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) We'll move next to Piedad Alessandri of CrediCorp.

--------------------------------------------------------------------------------

Piedad Alessandri;CrediCorp Capital, Research Division;Research Analyst, [17]

--------------------------------------------------------------------------------

I just wanted to ask if you could confirm the guidance for those loans, asset quality and OpEx as a whole IFS Group for the year.

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [18]

--------------------------------------------------------------------------------

I mean the guidance we've provided in terms of loan growth and credit quality are for the bank, but actually, that represents, I mean, more than 90% of the full number. So it's the numbers that I have already previously mentioned, so it's low double digits growth for the overall loan portfolio and between 2.5% and 3% cost of risk.

--------------------------------------------------------------------------------

Piedad Alessandri;CrediCorp Capital, Research Division;Research Analyst, [19]

--------------------------------------------------------------------------------

And as an OpEx as a whole for the group?

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [20]

--------------------------------------------------------------------------------

We have not provided that guidance. What we have done is to talk about the efficiency ratio of IFS, which should be at similar levels that we are today and around 40% for the bank.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

(Operator Instructions) And it appears that we have no further questions at this time. I'd be happy to return the call to management for any concluding remarks.

--------------------------------------------------------------------------------

Michela Casassa Ramat, Intercorp Financial Services Inc. - CFO & Finance Manager [22]

--------------------------------------------------------------------------------

Okay. Thank you very much, and thank you to everybody for attending this call. We'll see -- or we'll hear each other again in the third quarter results. Thanks. Bye.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Thank you. This does conclude today's conference. You may now disconnect your lines, and everyone, have a great day.