Intercorp Financial Services(IFS) - 2020 Q4 - Annual Report

PART I Key Information The section details primary risks related to the company's holding structure, extensive regulation, Peruvian macroeconomic shocks, and the significant impact of the COVID-19 pandemic Risk Factors The company faces significant business, Peru-specific, and common share risks, including its holding company structure, extensive regulation, and the material impact of the COVID-19 pandemic - The COVID-19 pandemic caused severe disruptions, leading to temporary office closures, increased market volatility, and a material adverse effect on profitability; Interbank strengthened capitalization by increasing 2019 earnings capitalization and issuing a U.S.$300 million subordinated bond[77][78][80] - As a holding company, IFS's ability to pay dividends and corporate expenses depends on receiving distributions from its subsidiaries (Interbank, Interseguro, Inteligo), which are subject to regulatory restrictions on capital and liquidity[69][70][71] - The company's subsidiaries are subject to extensive regulation by entities like the SBS in Peru and the Central Bank of The Bahamas; changes in regulations, such as capital requirements (Basel III), interest rate caps, or rules on pension fund withdrawals, could materially impact financial results[85][87][90] - Substantially all operations are in Peru, making the company's financial condition highly dependent on the country's economic, social, and political developments; recent political instability raises concerns about long-term policy consistency[179][180][182] - The controlling shareholder, Intercorp Peru, owned 70.64% of the capital stock as of year-end 2020, giving it the ability to elect a majority of the board and determine business strategies, which may create conflicts of interest with other shareholders[224][225] Information on the Company This section provides a comprehensive overview of Intercorp Financial Services, detailing its history, corporate structure, and primary business segments, along with strategic focus and market opportunities History and Development of the Company Intercorp Financial Services Inc. (IFS) is a Panamanian holding company for Interbank, Interseguro, and Inteligo, controlled by Intercorp Peru Ltd., which conducted an SEC-registered IPO in July 2019 - IFS is a holding company for three main subsidiaries: Interbank (banking, 99.30% owned), Interseguro (insurance), and Inteligo (wealth management), controlled by Intercorp Peru Ltd., which holds a 70.64% stake[252][253] - In July 2019, IFS, along with its parent and other shareholders, conducted an SEC-registered initial public offering, selling a combination of newly-issued and existing common shares[259] Dividend and Market Capitalization History | Year | Net Profit (IFRS, S/ million) | Dividends Declared (U.S.$ million) | Market Cap (U.S.$ billion) | | :--- | :--- | :--- | :--- | | 2019 | 1,450 | 202 | N/A | | 2020 | 384 | 88.9 | 3.7 | Business Overview IFS is a leading integrated financial services provider in Peru, focusing on digital excellence across its banking, insurance, and wealth management segments, leveraging market opportunities despite the COVID-19 impact - The company's key strategic priority is achieving digital excellence; in December 2020, over 1.7 million retail customers used its digital platform, and 44% of new retail clients were acquired digitally, up from 22% in December 2019[265] - The Peruvian government introduced the "Reactiva Peru" credit guarantee program in response to COVID-19, allowing banks to originate low-interest, government-guaranteed commercial loans, which significantly influenced loan growth in 2020[293] - As of December 31, 2020, loans rescheduled due to the COVID-19 pandemic represented S/10.5 billion, or 25.2% of Interbank's total loan portfolio[295] Consolidated Financial Highlights (2018-2020) | Metric (S/ in millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Profit | 383.5 | 1,450.1 | 1,091.4 | | Adjusted Net Profit | 513.9 | 1,479.1 | 1,236.2 | | ROE | 4.5% | 18.3% | 16.6% | | Adjusted ROE | 6.0% | 18.6% | 18.6% | Organizational Structure The report includes a chart illustrating the corporate structure of Intercorp Financial Services Inc., showing its principal subsidiaries and the respective ownership interests in each - A chart displays the corporate structure, indicating IFS's ownership of its principal subsidiaries: Interbank, Interseguro, and Inteligo[800] Property, Plants and Equipment The company's principal executive offices are located in the Interbank Tower in Lima, Peru, which is owned by its subsidiary, Interbank - Interbank owns its headquarters, the Interbank Tower, and 49 financial store facilities as of December 31, 2020[802] - Interseguro owns its administrative office and main commercial office in Lima, Peru[804] - Inteligo Bank owns its branch in Panama and leases its other facilities, including its registered headquarters in The Bahamas[805] Operating and Financial Review and Prospects This section analyzes the company's financial performance and condition, detailing factors affecting results, including the Peruvian economy and COVID-19, and covers liquidity, capital resources, and key trends Operating Results Operating results were heavily influenced by Peru's 11.1% GDP contraction in 2020, leading to a 73.6% net profit decrease primarily due to increased impairment loss on loans - The 73.6% decrease in 2020 net profit was primarily driven by a S/1.64 billion increase in impairment loss on loans, mainly at Interbank, due to post-model adjustments to expected credit losses to address the impact of the COVID-19 pandemic on rescheduled loans[934][936] - The 32.9% increase in 2019 net profit was driven by higher net interest income (up 8.9%), a 44.9% increase in other income, and a 30.2% improvement in the net result from insurance premiums and claims[1021] Consolidated Results of Operations (2020 vs. 2019) | Line Item (S/ in millions) | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net interest and similar income | 3,472.7 | 3,423.3 | 1.4% | | Impairment loss on loans, net | (2,393.9) | (750.8) | 218.8% | | Fee income from financial services, net | 723.5 | 925.9 | (21.9)% | | Total other expenses | (1,910.7) | (1,978.3) | (3.4)% | | Net profit for the year | 383.5 | 1,450.1 | (73.6)% | Consolidated Balance Sheet (2020 vs. 2019) | Line Item (S/ in millions) | Dec 31, 2020 | Dec 31, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 88,236.0 | 71,562.3 | 23.3% | | Loans, net of unearned interest | 43,504.3 | 38,531.6 | 12.9% | | Impairment allowance for loans | (2,984.9) | (1,394.8) | 114.0% | | Deposits and obligations | 47,149.3 | 38,093.2 | 23.8% | | Total Liabilities | 79,282.1 | 62,658.8 | 26.5% | | Total Equity, net | 8,953.9 | 8,903.4 | 0.6% | Liquidity and Capital Resources The company's primary liquidity source is dividends from its subsidiaries, which are used for shareholder dividends and debt service, with all operating subsidiaries maintaining regulatory capital ratios well above required minimums - Interbank's capital expenditure budget for the next three years is approximately S/736 million, with 85.6% allocated to information technology, including digital platform development, analytical capabilities, and cybersecurity[1135] Interbank Regulatory Capital Ratio (SBS GAAP) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Regulatory Capital (S/ millions) | 8,742.1 | 7,679.3 | | Risk-weighted assets (S/ millions) | 51,451.8 | 50,673.8 | | Regulatory capital as a % of risk-weighted assets | 17.0% | 15.2% | Interseguro Solvency Ratio (SBS GAAP) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Regulatory capital (S/ millions) | 1,359.4 | 1,106.6 | | Required capital (S/ millions) | 820.6 | 765.9 | | Solvency Ratio | 165.7% | 144.5% | Inteligo Bank Capital Adequacy Ratio | Metric | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total eligible capital (U.S.$ millions) | 270.7 | 238.3 | | Total risk-weighted assets (U.S.$ millions) | 953.0 | 964.2 | | Capital ratio | 28.4% | 24.7% | Trend Information The company's performance is closely tied to Peru's economic trends, including the 11.1% GDP contraction in 2020, ongoing recovery, political changes, and the pandemic's impact on asset quality - Peru's economy contracted by 11.1% in 2020 due to COVID-19, but the Central Reserve Bank of Peru forecasts a recovery with 10.7% GDP growth in 2021[890][894] - Key uncertainties include potential political changes following the June 2021 presidential run-off election, which could alter the current market-oriented economic model[1143][1146] - The company continues to manage the pandemic's impact through specific actions at its subsidiaries, including loan rescheduling at Interbank, portfolio rebalancing at Interseguro, and enhanced digital client service at Inteligo[1144] Off-Balance Sheet Arrangements The company engages in various off-balance sheet arrangements, including contingent credits and derivative instruments, with total arrangements decreasing by 16.1% in 2020 primarily due to reduced derivative notional amounts Consolidated Off-Balance Sheet Arrangements | Arrangement (S/ in millions) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Contingent credits—Indirect loans | 4,611.9 | 4,102.0 | | Derivatives—Notional amounts | 12,940.2 | 17,730.0 | | Responsibilities under credit lines agreements | 9,953.6 | 10,961.5 | | Total | 27,505.7 | 32,793.5 | Tabular Disclosure of Contractual Obligations The company's contractual obligations, primarily short-term deposits, significantly increased to S/66.8 billion in 2020, driven by deposit growth and Central Bank funding for the Reactiva Peru program Contractual Obligations by Maturity as of Dec 31, 2020 (S/ in millions) | Obligation Type | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Deposits and obligations | 46,337.1 | 486.4 | 53.2 | 272.6 | 47,149.3 | | Due to banks and correspondents | 1,769.4 | 6,779.6 | 235.2 | 876.7 | 9,660.9 | | Bonds, notes and other obligations | 104.1 | 2,309.1 | — | 5,365.5 | 7,778.8 | | Total | 50,183.3 | 9,653.6 | 324.7 | 6,618.8 | 66,780.3 | Directors, Senior Management and Employees This section details the company's governance and human capital, including Board of Directors and executive officer information, compensation, board practices, and employee statistics - The Board of Directors consists of seven members, with Carlos Tomás Rodríguez Pastor Persivale as Chairman, and Five of the seven directors are independent[1166][1167] - For fiscal year 2020, aggregate compensation for all board members of IFS and its subsidiaries was S/3.7 million, while aggregate compensation for all executive officers was S/21.9 million[1236] - The company has a fully independent Audit Committee comprising three directors, which complies with NYSE and SEC rules for foreign private issuers, overseeing financial reporting, internal controls, and external auditor relationship[1239] - As of December 31, 2020, Interbank had 6,408 employees, Interseguro had 678, and Inteligo had 321, with none of the employees at these subsidiaries being unionized[1255][1256][1258] Major Shareholders and Related Party Transactions This section details the company's ownership structure, with Intercorp Perú Ltd. as the controlling shareholder, and its arm's-length transactions with related parties subject to regulatory limits - The company engages in various related party transactions, regulated by Peruvian law and the SBS; loans to related parties cannot exceed 30% of a bank's regulatory capital and must be on arm's-length terms[1264][1265] - Significant related party transactions include various loan and lease agreements between Interbank and other Intercorp affiliates such as Supermercados Peruanos, Homecenters Peruanos, InRetail Pharma, and Universidad Tecnológica del Perú (UTP)[1279][1281][1284] Major Shareholders as of April 7, 2021 | Shareholder | Number of Shares | Percentage Owned | | :--- | :--- | :--- | | Intercorp Perú Ltd. | 81,532,547 | 70.6% | | Other Directors and Officers | 158,010 | 0.1% | | Float | 33,732,324 | 29.3% | | Total | 115,422,881 | 100.0% | Financial Information This section covers legal proceedings, including Madoff-related litigation involving Inteligo Bank, and the company's dividend policy, which targets at least 20% of annual profit - Inteligo Bank is a defendant in two lawsuits seeking the return of approximately U.S.$11 million in redemption payments related to investments in a feeder fund for Bernard L. Madoff Investment Securities (BLMIS); the litigation is ongoing[1302][1303][1304] - IFS's dividend policy is to distribute at least 20% of annual profit, subject to regulatory requirements and financial condition; dividends are declared and paid in U.S. dollars[1307] - For fiscal year 2020, Interbank's shareholders agreed to capitalize all distributable income and did not distribute dividends, a measure taken to strengthen its capital position amidst the COVID-19 pandemic[1309] IFS Dividend History (per share) | Fiscal Year | Dividend per Share (U.S.$) | | :--- | :--- | | 2020 | 0.77 | | 2019 | 1.75 | | 2018 | 1.75 | The Offer and Listing This section details the trading of the company's common shares, which are listed on the Lima Stock Exchange and the New York Stock Exchange under the ticker symbol "IFS" - The company's common shares are listed on the Lima Stock Exchange and the New York Stock Exchange under the symbol "IFS"[1321] Lima Stock Exchange Trading Information | Metric (S/ in millions) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Market capitalization | 479,301 | 537,308 | 599,007 | | Volume | 20,208 | 18,127 | 19,938 | | Average daily trading volume | 81 | 72 | 79 | Additional Information This section covers supplementary details on share capital, articles of association, material contracts, exchange controls, and taxation, including an irrevocable proxy agreement and tax consequences for shareholders - As of December 31, 2020, the company's authorized capital was 150,000,000 common shares, with 115,447,705 shares issued and outstanding[1331] - An Irrevocable Proxy Agreement grants Carlos Tomás Rodriguez Pastor Persivale and two of his siblings control over the voting rights of the majority shareholder, International Financial Holdings Group Inc., effectively giving them control of Intercorp Peru and IFS[1334] - Peruvian regulations allow for the repatriation of dividends, and there are currently no significant exchange controls in Peru or Panama that would restrict payments to shareholders[1336] - For non-Peruvian shareholders, dividends from Peruvian subsidiaries are subject to a 5% withholding tax; capital gains on the sale of IFS shares could be subject to a 30% Peruvian income tax if the transaction is deemed an "indirect transfer" of shares in a Peruvian entity[1343][1346] Quantitative and Qualitative Disclosures About Market Risk This section details the company's risk management framework, focusing on credit, market, liquidity, and operational risks across its business segments to achieve sustainable long-term growth - The main risks inherent to the company's businesses are credit risk, market risk (exchange rate, interest rate, price), liquidity risk, and operational risk[1402] - Interbank's credit risk management involves a three-stage process of underwriting, monitoring, and recovery, with specific approval levels and statistical rating systems for commercial, small business, and retail banking[1408][1412][1427] - Interseguro's primary risks are insurance risk (mispricing policies) and market risk on its large investment portfolio; it mitigates these through regulatory compliance, careful investment analysis, and setting limits on concentration and asset types[1460][1461][1462] Value-at-Risk (VaR) by Segment (S/ in millions) | Segment | Dec 31, 2020 | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | :--- | | Interbank (Trading Book) | 3.4 | 1.4 | 6.2 | | Interseguro (Investment Portfolio) | 712.7 | 230.9 | 200.0 | | Inteligo (Investment Portfolio) | 211.5 | 21.3 | 42.0 | PART II Controls and Procedures This section addresses the company's internal controls, with management concluding disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[1514] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[1517] - The independent registered public accounting firm, EY Peru, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[1518] Corporate Governance and Other Matters This section covers corporate governance topics, including the audit committee financial expert, code of ethics, fees paid to EY Peru, and differences between the company's governance practices and NYSE standards - The Board of Directors has identified Felipe Federico Roy Morris Guerinoni as an "audit committee financial expert"[1519] - As a foreign private issuer, the company follows home country practices for corporate governance, which differ from NYSE standards, for example, not requiring a majority-independent board or specific nominating/compensation committees composed solely of independent directors[1538][1540][1546] Principal Accountant Fees (S/ in millions) | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit fees | 11.5 | 10.4 | | Audit-related fees | 0.1 | 0.2 | | Tax fees | 0.9 | 0.8 | | Other fees | 0.2 | 0.3 | | Total fees | 12.7 | 11.6 | PART III Financial Statements This section contains the company's audited consolidated financial statements prepared under IFRS, with EY Peru issuing an unqualified opinion and highlighting critical audit matters like Expected Credit Loss and insurance contract liabilities - The independent auditor, EY Peru, issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position of the company in conformity with IFRS[1563] - A critical audit matter was the Expected Credit Loss (ECL) on the loan portfolio, complex due to significant judgments, forward-looking assumptions, and management adjustments required to capture economic uncertainty surrounding the COVID-19 pandemic[1569][1570] - Another critical audit matter was the valuation of insurance contract liabilities (S/12.5 billion as of Dec 31, 2020), complex due to the highly judgmental nature of key actuarial assumptions, including mortality tables and discount rates[1574][1575]