Intercorp Financial Services Inc. — FY2019 Form 20-F
Business context and reporting period. This is an annual report filed April 22, 2020, covering the fiscal year ended December 31, 2019—not a quarterly filing. IFS is a Panama-incorporated holding company whose principal businesses are Peruvian banking (Interbank), insurance (Interseguro) and wealth management (Inteligo). Financial statements are audited and prepared under IFRS in Peruvian soles; amounts below are S/ millions unless stated otherwise.
Key financial results and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Interest and similar income | 4,847.2 | 4,321.3 | +12.2% |
| Net interest and similar income | 3,439.3 | 3,150.7 | +9.2% |
| Loan impairment expense, net | (750.8) | (660.1) | Expense up 13.7% |
| Fee income, net | 925.9 | 874.4 | +5.9% |
| Other income | 1,518.0 | 1,283.1 | +18.3% |
| Net profit | 1,450.1 | 1,091.4 | +32.9% |
| Net profit attributable to IFS shareholders | 1,441.3 | 1,084.3 | +32.9% |
| Net interest margin | 5.3% | 5.4% | Down 0.1 percentage point |
| Risk-adjusted NIM | 4.2% | 4.3% | Down 0.1 percentage point |
| Efficiency ratio | 34.3% | 35.6% | Improved 1.3 percentage points |
| ROA / ROE | 2.1% / 18.3% | 1.8% / 16.6% | Improved |
At year-end, total assets were 71,562.3, gross loans 38,257.1, net loans 37,136.9, deposits and obligations 38,093.2, total liabilities 62,658.8 and total equity 8,903.4. Total assets rose 12.3%, gross loans 12.3%, deposits 13.1% and equity 25.6% from 2018. Net loans equaled 97.5% of deposits.
Cash and cash equivalents were 9,851.7 at year-end, excluding restricted funds. Operating cash flow was 1,668.8, versus an operating cash outflow of 2,045.4 in 2018. Investing activities provided 4.1; financing activities provided 1,064.9, including proceeds from the share offering and debt issuance. Cash and cash equivalents increased 2,737.7 overall.
Interbank’s regulatory capital ratio was 15.2% and core equity tier 1 ratio 11.6%; Interseguro’s solvency ratio was 144.5%; Inteligo Bank’s capital ratio was 24.7%. Past-due loans were 2.5% of gross loans, unchanged from 2018; cost of risk was 2.1%, also unchanged. The filing reports a 176.5% past-due loan coverage ratio for Interbank under SBS measures; consolidated IFRS coverage measures are not directly comparable.
Material changes versus prior period
- IFS’s net profit rose 32.9%, driven by higher net interest income, fee income and other income, and a less negative insurance result. The insurance result returned to profit of 130.4 from a 61.5 loss in 2018; wealth-management profit was 200.3, up 1.4%.
- Net interest income grew, primarily on loan growth, while funding costs increased: interest expense rose 20.3%. Loan impairment expense increased by 90.7, reflecting portfolio growth and higher requirements for credit cards and mortgages, partly offset by provision reversals.
- Other income rose 234.9. The filing attributes this mainly to positive performance across subsidiaries, including foreign-exchange transaction gains at Interbank and securities-sale gains at Interseguro.
- IFS adopted IFRS 16 in 2019 without restating comparative figures. At year-end it reported right-of-use assets of about 335.0 and lease liabilities of 341.8; 2019 included lease interest expense of 16.6 and right-of-use depreciation of about 73.7.
- Digital use expanded: digital users reached 1.23 million, 63% of Interbank customers who interacted with the bank, versus 0.88 million and 53% in 2018. Digital sales and customer acquisition also increased, while financial stores and ATMs declined.
Outlook, commentary, risks and unusual items
- COVID-19: The filing describes the pandemic and Peru’s emergency measures as material uncertainties after year-end. At filing, 58 financial stores had temporarily closed. Management identified potential weaker loan and deposit growth, higher provisions, lower fee and investment income, and possible pressure on capital and financial targets. It said the impact could not yet be reasonably estimated. Pre-pandemic Central Reserve Bank forecasts of 3.8% GDP growth for 2020 and 2021 should not be read as current guidance.
- Liquidity and capital actions: After year-end, Interbank approved reducing the payout of 2019 earnings from 45% to 25% to strengthen capital and agreed to capitalize first-quarter 2020 earnings in advance. IFS’s 2020 dividend, based on 2019 results, was reported as US$202 million, subject to subsidiary distributions and regulatory constraints.
- Debt and liability management: Consolidated bonds, notes and other obligations were 6,890.3 at year-end. Interbank issued US$400 million of 3.25% senior notes due 2026 and S/312 million of 5.0% senior notes due 2026 in 2019, and redeemed its remaining 5.75% notes due 2020. The redemption generated a one-time after-tax expense of 29.0, excluded from management’s adjusted-profit measures. IFS also had US$300 million of 4.125% senior notes due 2027.
- Insurance and market risks: The 2018 adoption of new mortality tables reduced 2018 IFRS profit by S/144.8; this was not repeated in 2019. Interseguro’s earnings and reserves remain sensitive to mortality assumptions, discount rates, investment values and annuity demand. IFS also highlights credit, interest-rate, foreign-exchange, sovereign investment, liquidity, regulatory, competition, technology and cybersecurity risks.
- Legal matters: The filing says IFS has no legal proceedings expected to materially affect its financial position. Inteligo Bank is defending Fairfield and Bernard L. Madoff-related litigation seeking approximately US$11 million in redemption payments; the proceedings remained unresolved at filing.
- Accounting comparability: 2017 figures are not fully comparable with 2018 and 2019 because IFRS 9 was adopted in 2018 without restating 2017. IFRS 16 adoption also means 2019 lease expense presentation differs from prior periods. Adjusted net profit and adjusted returns are non-IFRS measures.
Most important facts for investors to verify
- Review the audited IFRS statements and notes for the drivers of profit growth, especially other income, loan impairment reversals and the 2018 insurance-reserve comparison.
- Track COVID-19 effects on loan performance, provisions, deposit funding, store operations, capital ratios and the planned 25% dividend payout.
- Reconcile net and adjusted earnings: reported 2019 net profit was 1,450.1; adjusted net profit was 1,479.1, excluding the 29.0 after-tax liability-management expense. Adjusted measures are non-IFRS.
- Assess funding and refinancing exposure, including the maturity profile of deposits and bonds, foreign-currency funding and the effects of derivatives and hedges.
- Verify the quality and concentration of credit exposures, the adequacy of allowances, and the sensitivity of insurance liabilities and investment valuations to assumptions and market movements.
- Confirm the timing and amount of dividends actually received by IFS: subsidiary payouts depend on SBS-GAAP earnings, regulatory capital and liquidity restrictions, while IFS is a holding company.