Business Context and Reporting Period
Company: Intercorp Financial Services Inc. (IFS)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Fiscal year ended December 31, 2020
Filing Date: March 18, 2021
Auditor: Paredes Burga & Asociados (Ernst & Young member firm)
Business Overview: IFS is a holding company incorporated in Panama, primarily operating in Peru through its subsidiaries: Banco Internacional del Perú (Interbank), Interseguro (insurance), and Inteligo (asset management and brokerage). The group operates under International Financial Reporting Standards (IFRS).
Key Financial Metrics (Year Ended Dec 31, 2020)
| Metric | 2020 (S/ '000) | 2019 (S/ '000) | Change |
|---|---|---|---|
| Net Profit (Attributable to Shareholders) | 383,259 | 1,441,258 | (73.4%) |
| Net Interest Income | 3,472,683 | 3,423,253 | +1.4% |
| Impairment Loss on Loans | (2,393,944) | (750,811) | +218.8% (Increase in loss) |
| Total Assets | 88,236,029 | 71,562,293 | +23.3% |
| Total Liabilities | 79,282,080 | 62,658,845 | +26.5% |
| Total Equity | 8,953,949 | 8,903,448 | +0.6% |
| Cash & Cash Equivalents (End of Year) | 18,145,919 | 9,851,729 | +84.2% |
| Operating Cash Flow | 12,993,553 | 1,668,764 | +678.6% |
| Earnings Per Share (Basic/Diluted) | S/ 3.32 | S/ 12.78 | (74.0%) |
Material Changes vs. Prior Period
- Significant Profit Decline: Net profit attributable to shareholders dropped by 73.4% to S/383.3 million. This was primarily driven by a sharp increase in impairment losses on loans, which rose from S/750.8 million in 2019 to S/2.39 billion in 2020.
- Credit Quality Deterioration: Due to the economic impact of the COVID-19 pandemic, the Group applied expert judgment to migrate higher-risk clients to Stage 2 and Stage 3, resulting in significantly higher provisions for expected credit losses.
- Liquidity Expansion: Cash and cash equivalents increased by 84.2% to S/18.1 billion. This was fueled by a massive increase in deposits (up 23.8%) and active participation in the Central Reserve Bank of Peru's (BCRP) liquidity operations under the "Reactiva Peru" program.
- Loan Portfolio Growth: Total loans (net) increased by 9.1% to S/40.5 billion, including S/6.6 billion in disbursements under the government-backed "Reactiva Peru" program.
- Insurance Segment: Net premiums earned increased by 22.4% to S/515.0 million, while net claims incurred rose to S/794.1 million.
Guidance, Outlook, and Risks
- Covid-19 Impact: Management continues to monitor the pandemic closely. The Peruvian government extended the State of Sanitary Emergency through September 2021. The Group has implemented measures to ensure liquidity, solvency, and operational continuity, including remote work protocols and enhanced cybersecurity.
- Capital Management: To strengthen capital adequacy, Interbank reduced its dividend distribution percentage from 45% to 25% for the 2019 period and issued US$300 million in international subordinated bonds in June 2020. Interseguro also issued US$25 million in subordinated bonds.
- Regulatory Capital: As of December 31, 2020, Interbank's global capital ratio was 16.99%, well above the regulatory minimum of 10%. Interseguro maintained a surplus equity of S/538.8 million.
- Interest Rate Benchmark Reform: The Group is monitoring the transition from LIBOR to alternative risk-free rates (e.g., SOFR). Exposure to LIBOR is considered manageable, with fallback clauses in place for most instruments.
- Tax Contingencies: Significant ongoing tax litigation exists regarding "interest in suspense" (S/382 million potential liability) and other audits. Management believes no provision is necessary as they expect to prevail based on recent Supreme Court rulings.
Investor Verification Checklist
- Loan Impairment Adequacy: Verify the sufficiency of the S/2.98 billion loan impairment allowance against the backdrop of continued economic uncertainty in Peru.
- "Reactiva Peru" Exposure: Assess the risk profile of the S/6.6 billion loan portfolio guaranteed by the Peruvian government under the "Reactiva Peru" program.
- Dividend Policy: Confirm the sustainability of future dividends given the reduction in payout ratios and the significant drop in net income.
- Tax Litigation Outcome: Monitor the resolution of the "interest in suspense" tax dispute, which represents a material contingent liability.
- LIBOR Transition: Review the progress of migrating derivative and loan contracts from LIBOR to new benchmark rates to avoid valuation disruptions.