2023-08-21 23:03:17 ET
Summary
- Inter & Co reported its highest net profit since its IPO, driven by improvements in operating cost metrics and revenue indicators.
- The bank's active customer base grew by 35.3% compared to the previous year, while customer acquisition costs decreased.
- Inter & Co's profitability and financial results have shown improvement, although the bank still has room for growth to reach its long-term targets.
Inter & Co ( INTR ) has reported robust results for the second quarter, revealing that the pace of enhancement in operating cost metrics outpaced revenue indicators, particularly ARPAC. As a result, the bank announced its highest net profit since its IPO.
Although Inter & Co's strong recovery throughout this year has driven its shares to increase by more than 80%, even though it no longer possesses the alluring multiples seen at the beginning of the year, I am highly optimistic about the bank's prospects to attain the robust metrics projected by its management for the next five years. This achievement could potentially amplify its market capitalization by approximately ten times.
With a long-term perspective in mind, given the current valuation, I still perceive substantial opportunities to consider investing in Inter & Co, particularly after a Q2 marked by gradual improvements across nearly all of its metrics.
More active customers and improving costs
At the close of the second quarter , Inter reached 14.5 million active clients, constituting 52.2% of its customer base. This marked a noteworthy 35.3% surge in the active customer count compared to the parallel period in 2022. However, despite this robust client growth, the bank has slightly decelerated quarter over quarter.
Inter & Co's IR
A slight deceleration in client growth isn't a significant concern, especially with a reduction in customer acquisition costs. An essential metric for digital banks, the average revenue per active customer (ARPAC), concluded the second quarter at R$46.1, experiencing a 2.5% decline over the past year. The second quarter's customer acquisition cost ((CAC)) closed at R$27.1 compared to R$32.1 from the previous year, representing the lowest figure in the past two years.
Inter's strategic focus on introducing novel products and features has resulted in the acquisition of new clients displaying heightened engagement levels, all while achieving cost efficiencies in customer acquisition compared to previous practices. This bodes well for the bank's competitive standing within the digital banking sector.
The emphasis on providing an exceptional app, appropriate pricing, and relevant products is central to this achievement, as Inter & Co's management attributes the success of its low customer acquisition cost ((CAC)) and robust engagement rates since the middle of the preceding year to these endeavors. This optimistic trend is expected to persist moving forward.
Other financial results
Profitability records were also shattered during this period.
Inter & Co announced its highest net profit since its IPO, reaching R$64 million in the second quarter of 2023. This starkly contrasts the R$15.5 million profit reported last year, marking an impressive surge of 312.9% from the corresponding figure of the prior year.
Net revenue for the second quarter of this year totaled R$1.150 billion, demonstrating a robust 31.1% increase compared to the same period in 2022. This growth was primarily driven by net interest income ((NII)) from the bank's successful repricing efforts. This pricing strategy is anticipated to further fortify the bank's margins ((NIM)), with a gradual year-on-year increase of 1.1 percentage points projected for 2023.
Inter & Co's IR
Operating expenses experienced a more modest increase compared to revenues, rising by 3.1% QoQ and 21.6% YoY, primarily due to the provision for bad debts ((PDD)). Earnings Before Tax (EBT) for the second quarter of 2023 reached R$80 million, significantly improving from the R$11.9 million reported in the corresponding period of 2022.
Despite achieving a record profit, the profitability ((ROE)) level remains relatively low, at 3.6%. This is an improvement from the previous quarter's 1.4%, although it remains considerably below the 30% ROE target set for 2027. Nonetheless, this outcome is viewed positively, signifying a potential turning point for future developments in the forthcoming quarters.
The Gross Merchandise Volume (GMV) at Inter Shop totaled R$197 billion in Q2 2023, marking a 47% increase compared to the previous year. Funding also saw substantial growth, surpassing the R$33.3 billion milestone in Q2 2023, reflecting a 29% rise from the prior year.
The gross credit portfolio, which includes credit card receivables anticipation, displayed a robust 33% YoY growth, amounting to approximately R$26.5 billion in Q2 2023. According to Inter & Co's management, the focus of growth remains directed towards more lucrative products, notably FGTS and Home Equity, which were the portfolios experiencing the highest growth during this quarter.
Inter & Co's IR
Also, the Basel ratio, serving as a measure of banks' capitalization, decreased to 22.8% from 32.9% in the second quarter of 2022. However, it remains comfortably above the minimum requirement stipulated by the Central Bank, which stands at 11%.
NPLs should not worry much
Inter & Co's primary metrics in Q2 have shown improvement across the board, except for NPLs, which represent indicated defaults.
During the reporting season, many Brazilian banks and retailers encountered challenges associated with NPLs, particularly in riskier individual lending segments. Inter & Co's NPL rate over 90 days increased by 30 basis points, reaching 4.7%. This trend mirrors the pattern observed in the previous quarter, indicating a continuity of older credit card vintages affecting the results.
Inter & Co's IR
However, during the earnings call , the bank's executives expressed optimism regarding the enhancement of asset quality, highlighting that comprehensive efforts have been consistently underway for several quarters.
The focus encompasses both non-card and card segments. For non-card loans, the cost of risk has remained consistent at around 1%, providing coverage for approximately 70% of the loan portfolio and maintaining stability. The bank has employed strategies such as raising limits for clients with solid performance records while reducing limits for those whose credit profiles have worsened.
Inter & Co's IR
This strategic approach, coupled with improved origination practices and effective risk management initiatives, is expected to yield positive outcomes in the year's second half compared to the first half. Preliminary data from June indicate improvement compared to the early part of the second quarter. The coverage ratio reached 130%, and the lower level of coverage is notably due to portfolio collateralization.
Inter & Co's plans for 2027
The audacious "60-30-30" plan set forth by Inter & Co at the beginning of this year aims to achieve 60 million clients by 2027, attain a 30% cost-to-income ratio (efficiency), and secure a 30% return on equity ((ROE)), remains distant. Nevertheless, the progress observed in Q1 and Q2 across most metrics keeps hopes high.
Inter & Co does not necessarily need to hit the exact "60-30-30" targets; achieving something close would already be incredibly positive. However, if the goal is reached, it would be a remarkable accomplishment, signifying the potential for the bank to realize profits of around R$5 billion over the upcoming five years. This achievement would position the Brazilian fintech to attain a market capitalization of nearly R$75 billion by 2027, equivalent to approximately $15 billion converted to USD, considering a conversion rate of 1 USD = 0.20 BRL.
The projected outlook for 2025 anticipates Inter & Co's EPS to surge from a negative 0.02 to 0.52, aligning the company's trading with a P/E multiple similar to that of leading Brazilian private banks. Forecasts indicate that Inter & Co's revenues will grow by an average of 30% by 2025, projecting the bank to generate R$1.54 billion and trade with a forward P/S multiple of 1.14x.
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The bottom line
Inter & Co reported an overall positive second quarter, with notable highlights including the expansion of its active client base, growth in its loan portfolio, and enhancements in its efficiency and NIM indicators. Despite a still relatively low ROE, there has been a quarterly improvement. It's essential, however, to underline the gradual and consistent progression in the bank's profitability.
While the valuation is no longer as heavily discounted as earlier this year, Inter & Co's current trading at a forward P/S multiple of 1.8x remains appealing. Considering the bank's substantial growth potential and ambitious plans, this is especially noteworthy. Even if these plans don't fully materialize, a trajectory approaching 60-30-30 should effectively offset the current stretched forward P/E ratio of nearly 30x for 2023.
When comparing it to Nubank ( NU ), Brazil's foremost digital bank with the most rapid customer growth, despite Nubank's more significant scale, both banks share a similar business model. However, there exists a considerable valuation disparity between them. This may suggest that Nubank is rather vastly overvalued or Inter & Co is undervalued. For now, I am inclined to lean toward the latter option.
Yet, investors must align their expectations. Inter & Co trades at elevated valuation multiples as a growth case, rendering its stock highly responsive to general headwinds.
I maintain my belief in Inter & Co's potential and continue to emphasize my optimistic outlook after reviewing the Q2 earnings report. The company continues to be an outstanding growth stock with substantial long-term potential.
For further details see:
Inter & Co Q2 Earnings: A Gradual Evolution, Reinforcing Buy Opportunity