Inter & Co(INTR) - 2023 Q3 - Quarterly Report

Management Report This section summarizes the company's operational, financial, and equity performance, alongside its independent auditor relationship Operating Highlights As of June 30, 2023, the company surpassed 27.8 million customers with an activation rate of 52% The loan portfolio grew to R$25.1 billion, an 11% increase from December 2022, and total funding reached R$33.3 billion, up 11.6% from year-end 2022 - Surpassed 27.8 million customers as of June 30, 2023, with the activation rate increasing by 68 bps from the previous quarter to 52%[6] Key Operating Metrics as of June 30, 2023 | Metric | Value (R$ billion) | Change vs. Dec 31, 2022 | | :--- | :--- | :--- | | Loan Portfolio | 25.1 | +11.0% | | Total Funding | 33.3 | +11.6% | Economic and Financial Highlights For the six months ended June 30, 2023, the company recorded a profit of R$88.4 million, a significant turnaround from a R$13.3 million loss in the same period of 2022 Revenues for the first half of 2023 reached R$3.61 billion, an increase of R$1.03 billion year-over-year, while administrative and personnel expenses rose by R$49.1 million to R$1.09 billion Financial Performance for the Six Months Ended June 30 | Metric | 2023 (R$ million) | 2022 (R$ million) | Change | | :--- | :--- | :--- | :--- | | Profit / (Loss) | 88.4 | (13.3) | Turnaround to profit | | Revenues | 3,606.5 | 2,574.8 | +R$1,031.7 million | | Admin & Personnel Expenses | 1,092.1 | 1,043.0 | +R$49.1 million | Equity Highlights As of June 30, 2023, total assets grew to R$50.0 billion, a 7.9% increase from December 2022 Shareholders' equity also increased by 3.2% to R$7.3 billion over the same period Balance Sheet Highlights vs. Dec 31, 2022 | Metric | June 30, 2023 (R$ billion) | Change vs. Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 50.0 | +7.9% | | Shareholder's Equity | 7.3 | +3.2% | Relationship with the Independent Auditors The company maintains a policy to ensure the independence of its independent auditor, KPMG Auditores Independentes Ltda The Audit Committee evaluates the effectiveness of the audits and confirms that non-audit services performed during the quarter did not compromise the auditor's independence and objectivity - The company has a policy and an Audit Committee to ensure the independence and objectivity of its independent auditor, KPMG Auditores Independentes Ltda[14] - The performance of non-audit services by KPMG during the quarter ended June 30, 2023, did not affect their independence[15] Report of the Independent Auditors This section presents the independent auditors' conclusion on the condensed consolidated interim financial statements and the supplementary statement of value added Conclusion on the Consolidated Interim Financial Information KPMG Auditores Independentes Ltda. conducted a review of Inter & Co's condensed consolidated interim financial information for the period ended June 30, 2023 Based on their review, nothing came to their attention that would suggest the financial information was not prepared, in all material respects, in accordance with IAS 34 - The review was conducted in accordance with Brazilian and international review standards (NBC TR 2410 and ISRE 2410)[22] - The auditors concluded that they are not aware of any material modifications that should be made to the condensed consolidated interim financial information for it to be in conformity with IAS 34[23] Statement of Value Added The auditors also reviewed the supplementary consolidated statements of value added for the six-month period ended June 30, 2023 They concluded that this statement was prepared, in all material respects, according to the criteria of Technical Pronouncement CPC 09 and is consistent with the overall interim financial information - The consolidated statements of value added are presented as supplementary information for IAS 34 purposes[25] - The auditors found no reason to believe the statement of value added was not prepared in accordance with CPC 09 and consistent with the primary financial statements[25] Consolidated Financial Statements This section presents the company's consolidated balance sheets, income statements, comprehensive income, cash flows, changes in equity, and statements of added value Consolidated Balance Sheets As of June 30, 2023, Inter & Co's total assets stood at R$50.0 billion, an increase from R$46.3 billion at year-end 2022 This growth was driven by increases in cash and cash equivalents, securities, and loans to customers Total liabilities rose to R$42.7 billion from R$39.3 billion, primarily due to higher liabilities with customers and securities issued Total equity increased to R$7.3 billion Consolidated Balance Sheet Highlights (in thousands of BRL) | Account | 06/30/2023 | 12/31/2022 | | :--- | :--- | :--- | | Total Assets | 50,003,329 | 46,343,100 | | Cash and cash equivalents | 3,672,219 | 1,331,648 | | Securities | 14,169,684 | 12,448,565 | | Loans and advances to customers, net | 23,523,982 | 21,379,916 | | Total Liabilities | 42,685,671 | 39,253,996 | | Liabilities with customers | 26,299,326 | 23,642,804 | | Securities issued | 7,006,191 | 6,202,165 | | Total Equity | 7,317,658 | 7,089,104 | Consolidated Statements of Income For the six months ended June 30, 2023, the company reported a net profit of R$88.4 million, compared to a net loss of R$13.3 million in the prior-year period Net interest income grew to R$1.51 billion from R$1.10 billion Total revenues increased to R$2.17 billion, while impairment losses on financial assets also rose to R$749.2 million Consolidated Income Statement Highlights (Six Months Ended June 30, in thousands of BRL) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net interest income | 1,513,637 | 1,104,498 | | Revenues | 2,174,148 | 1,710,541 | | Impairment losses on financial assets | (749,241) | (555,410) | | Profit / (loss) for the period | 88,388 | (13,297) | | Basic earnings (loss) per share (BRL) | 0.1497 | (0.0318) | | Diluted earnings (loss) per share (BRL) | 0.1486 | (0.0318) | Consolidated Statements of Comprehensive Income For the six months ended June 30, 2023, total comprehensive income was R$231.5 million, a significant improvement from a total comprehensive loss of R$749.6 million in the same period of 2022 The positive result was driven by the net profit for the period and a R$151.5 million positive change in the fair value of financial assets at FVOCI Consolidated Comprehensive Income (Six Months Ended June 30, in thousands of BRL) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Profit (loss) for the period | 88,388 | (13,297) | | Financial assets at fair value through other comprehensive income | 151,492 | (111,911) | | Total comprehensive income for the period | 231,465 | (749,597) | Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash from operating activities was R$4.13 billion Net cash used in investing activities was R$1.80 billion, mainly due to the net acquisition of financial assets Financing activities used R$27.6 million This resulted in a net increase in cash and cash equivalents of R$2.30 billion, bringing the ending balance to R$3.67 billion Consolidated Cash Flow Summary (Six Months Ended June 30, in thousands of BRL) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | 4,127,654 | 2,597,174 | | Net cash used in investing activities | (1,800,550) | (392,534) | | Net cash from financing activities | (27,643) | (1,198,524) | | (Decrease)/ Increase in cash and cash equivalents | 2,299,461 | 1,006,116 | | Cash and cash equivalents at the beginning of the period | 1,331,648 | 500,446 | | Cash and cash equivalents at end of period | 3,672,219 | 1,549,158 | Consolidated Statements of Changes in Equity Total equity increased from R$7.09 billion at the start of 2023 to R$7.32 billion as of June 30, 2023 The increase was primarily driven by the R$88.4 million profit for the period and a R$151.5 million positive net change in the fair value of financial assets at FVOCI, partially offset by the repurchase of R$16.4 million in treasury shares Changes in Equity (Six Months Ended June 30, 2023, in thousands of BRL) | Description | Amount | | :--- | :--- | | Balance at January 1, 2023 | 7,089,104 | | Profit for the period | 88,388 | | Net change in fair value - financial assets at FVOCI | 151,492 | | Repurchase of treasury shares | (16,409) | | Other changes | 4,083 | | Balance at June 30, 2023 | 7,317,658 | Consolidated Statements of Added Value For the six months ended June 30, 2023, the total added value to distribute was R$610.5 million, up from R$368.6 million in the same period of 2022 The distribution was primarily allocated to personnel and taxes (R$313.5 million), taxes, contributions and fees (R$184.3 million), and retained earnings (R$60.2 million) Distribution of Added Value (Six Months Ended June 30, in thousands of BRL) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Total added value to distribute | 610,546 | 368,610 | | Personnel and tax | 313,509 | 274,446 | | Taxes, contributions and fees | 184,275 | 86,216 | | Rent | 24,374 | 21,245 | | Profit (losses) retained | 60,151 | (13,318) | | Non-controlling interest | 28,237 | 21 | Notes to the Condensed Consolidated Interim Financial Statements This section provides detailed notes on the company's activities, accounting policies, operating segments, financial risk management, fair values, specific asset and equity accounts, share-based payments, related party transactions, and subsequent events Note 1. Activity and Structure Inter & Co, Inc. is a Cayman Islands holding company and the parent of the Inter Group Its shares trade on Nasdaq (INTR) and its BDRs on Brazil's B3 (INBR32) The Group provides a digital ecosystem of financial and e-commerce services to over 27.7 million customers in Brazil and the US A key corporate reorganization was completed in June 2022, making Inter & Co the indirect owner of all shares of Banco Inter S.A - Inter & Co, Inc. is a holding company for the Inter Group, providing integrated financial and e-commerce services[42][44] - The company's shares trade on Nasdaq (INTR) and B3 (INBR32) following a corporate reorganization in June 2022[43][44] - In January 2022, the company acquired Inter&Co Payments, Inc. (formerly USEND) to accelerate its global expansion, particularly in the US[45] Note 4. Significant Accounting Policies The accounting policies are consistent with those from the 2022 annual report The statements are prepared on a consolidated basis, including all subsidiaries where Inter has control A significant event was the acquisition of Inter US Finance, LLC and Inter US Management, LLC in January 2023, accounted for as a business combination, to expand real estate-focused credit operations in the US Basis for Consolidation The Group consolidates all entities it controls The primary restriction on transferring assets within the group relates to compulsory reserves required by the Central Bank of Brazil In February 2023, Banco Inter acquired the remaining shares of its subsidiary Inter DTVM, making it a wholly-owned subsidiary - Subsidiaries are fully consolidated from the date control is gained The main restriction on asset transfers is the regulatory compulsory reserves held at the Central Bank of Brazil[58] - On February 15, 2023, Banco Inter S.A. acquired the remaining shares of its subsidiary 'Inter Distribuidora de Títulos e Valores Mobiliários Ltda', making it a 100% owned entity[61] Business Combination On January 24, 2023, the company acquired 100% of Inter US Finance, LLC and Inter US Management, LLC to expand its real estate-focused credit offerings in the US The total consideration was R$3.3 million, resulting in a preliminary goodwill of R$3.0 million The purchase price allocation (PPA) study is still in progress - Acquired 100% of Inter US Finance, LLC and Inter US Management, LLC on January 24, 2023, to expand real estate credit operations in Florida, Georgia, and Colorado[70][71] Acquisition Consideration and Preliminary Goodwill (in thousands of BRL) | Company | Consideration Transferred | Preliminary Goodwill | | :--- | :--- | :--- | | Inter US Finance, LLC | 1,990 | 1,918 | | Inter US Management, LLC | 1,327 | 1,114 | - The purchase price allocation (PPA) study for the acquisition was not yet complete as of the report date[73] Note 5. Operating Segments The Group's operations are divided into five segments: Banking & Spending, Investments, Insurance Brokerage, Inter Shop & Commerce Plus, and Others For the first half of 2023, the Banking & Spending segment generated the highest revenue (R$1.90 billion) and held the vast majority of assets (R$48.7 billion) The Insurance Brokerage and Inter Shop & Commerce Plus segments were the most profitable before tax, with profits of R$43.4 million and R$50.0 million, respectively - The Group is organized into five reportable segments: Banking & Spending, Investments, Insurance Brokerage, Inter Shop & Commerce Plus, and Others[77][78][79][80][81] Segment Performance for Six Months Ended June 30, 2023 (in thousands of BRL) | Segment | Revenues | Profit / (Loss) before Tax | Total Assets | | :--- | :--- | :--- | :--- | | Banking & Spending | 1,898,048 | (2,519) | 48,700,501 | | Investments | 76,178 | 6,565 | 605,303 | | Insurance Brokerage | 79,086 | 43,354 | 168,205 | | Inter Shop & Commerce Plus | 121,089 | 50,021 | 588,806 | | Consolidated Total | 2,174,148 | 86,196 | 50,003,329 | Note 6. Financial Risk Management The company actively manages credit, market, liquidity, and operational risks through independent structures and defined policies Credit risk is managed via careful evaluation of borrowers Liquidity risk is managed to ensure obligations can be met Market risk is monitored using models like Value at Risk (VaR), with the banking book showing a VaR of R$274.7 million and the trading book R$4.4 million as of June 30, 2023 Credit Risk Credit risk arises from the potential failure of a borrower to meet financial obligations The Group manages this by evaluating the borrower's financial capacity and reputation The loan portfolio includes credit cards, business loans, real estate loans, personal loans, and agribusiness loans For real estate loans, the majority have a loan-to-value ratio between 31% and 70% - Credit risk is managed through careful evaluation of the borrower's economic capacity, payment history, and reputation before contracting[88] Real Estate Loans by Loan-to-Value (LTV) Ratio (in thousands of BRL) | LTV Ratio | 06/30/2023 | 12/31/2022 | | :--- | :--- | :--- | | Lower than 30% | 719,923 | 693,322 | | 31 - 50% | 1,766,391 | 1,689,190 | | 51 - 70% | 2,542,254 | 2,308,020 | | 71 - 90% | 1,933,436 | 1,503,703 | | Higher than 90% | 58,429 | 57,577 | | Total | 7,020,433 | 6,251,812 | Liquidity Risk Liquidity risk is the possibility of not being able to meet financial obligations The company analyzes its financial instruments by contractual term As of June 30, 2023, financial liabilities maturing in up to 3 months totaled R$20.8 billion, primarily from liabilities with customers and financial institutions, while financial assets maturing in the same period were R$15.3 billion Financial Instruments by Remaining Contractual Term (Up to 3 months, as of 06/30/2023, in thousands of BRL) | Category | Amount | | :--- | :--- | | Financial Assets | 15,321,162 | | Cash and cash equivalents | 3,672,219 | | Loans and advances to customers | 6,767,656 | | Financial Liabilities | 20,813,801 | | Liabilities with financial and similar institutions | 8,023,953 | | Liabilities with customers | 12,428,677 | Market Risk Market risk is managed by classifying operations into a trading book and a banking book, with risk levels monitored using Value at Risk (VaR) As of June 30, 2023, the 21-day VaR for the trading book was R$4.4 million, and for the much larger banking book, it was R$274.7 million, a decrease from R$337.3 million at year-end 2022 Sensitivity analysis shows potential losses under various interest rate shock scenarios Value-at-Risk (VaR) 21 days (in thousands of BRL) | Book | 06/30/2023 | 12/31/2022 | | :--- | :--- | :--- | | Trading Book | 4,417 | 4,751 | | Banking Book | 274,722 | 337,254 | - Sensitivity analysis under a scenario of a 50% shock in coupon rates indicates potential losses of R$843.7 million for IPCA coupon risk and R$676.4 million for pre-fixed rate risk[105] Note 7. Fair Values of Financial Instruments The Group classifies its financial instruments measured at fair value into a three-level hierarchy As of June 30, 2023, of the R$13.06 billion in financial assets measured at fair value, R$10.96 billion were classified as Level 1 (quoted prices in active markets), R$2.01 billion as Level 2 (observable inputs), and R$93.2 million as Level 3 (unobservable inputs) The Level 3 assets relate to contingent consideration from the sale of Inter Seguros Fair Value Hierarchy of Financial Assets (as of 06/30/2023, in thousands of BRL) | Level | Fair Value | | :--- | :--- | | Level 1 | 10,955,333 | | Level 2 | 2,014,557 | | Level 3 | 93,199 | | Total | 13,063,089 | - Level 3 financial assets consist substantially of the variable portion receivable from the 2019 sale of 40% of the subsidiary Inter Digital Corretora e Consultoria de Seguros Ltda. ('Inter Seguros')[109] Note 10. Securities The Group's securities portfolio totaled R$14.17 billion as of June 30, 2023, up from R$12.45 billion at year-end 2022 The majority of securities, R$11.50 billion, are classified as Fair Value Through Other Comprehensive Income (FVOCI), consisting mainly of government treasury bills (LFT and NTN) Securities by Classification (as of 06/30/2023, in thousands of BRL) | Classification | Amount | | :--- | :--- | | Fair value through other comprehensive income (FVOCI) | 11,497,605 | | Fair value through profit or loss (FVTPL) | 1,472,285 | | Amortized cost | 1,199,794 | | Total | 14,169,684 | Note 12. Loans and Advances to Customers The total loan portfolio reached R$25.14 billion as of June 30, 2023, an increase from R$22.70 billion at year-end 2022 The portfolio is diversified, with credit cards (30.5%), real estate loans (27.8%), and personal loans (25.5%) being the largest components The provision for expected losses increased to R$1.62 billion from R$1.32 billion Loan Portfolio Breakdown (in thousands of BRL) | Loan Type | 06/30/2023 | % of Total | | :--- | :--- | :--- | | Credit card | 7,681,011 | 30.52% | | Real estate loans | 7,020,433 | 27.76% | | Personal loans | 6,500,480 | 25.45% | | Business loans | 3,215,316 | 13.12% | | Agribusiness loans | 724,143 | 3.15% | | Total | 25,141,383 | 100.00% | | Provision for expected loss | (1,617,401) | - | - The loan portfolio shows low concentration, with the 100 largest debtors accounting for 12.78% of the total portfolio, down from 16.56% at year-end 2022[131] Changes in Provision for Expected Losses (in thousands of BRL) | Stage | Balance at 12/31/2022 | Constitution/(Reversal) | Write-off | Balance at 06/30/2023 | | :--- | :--- | :--- | :--- | :--- | | Stage 1 | 485,614 | 172,637 | - | 489,235 | | Stage 2 | 282,392 | 410,573 | - | 344,562 | | Stage 3 | 550,406 | 196,609 | (480,830) | 783,604 | | Total | 1,318,412 | 779,819 | (480,830) | 1,617,401 | Note 16. Intangible Assets Intangible assets totaled R$1.30 billion as of June 30, 2023, up from R$1.24 billion at year-end 2022 The main components are goodwill (R$635.6 million), intangible assets in progress (R$246.7 million), and development costs (R$215.4 million) The increase in goodwill is related to the acquisition of US entities Intangible Assets Breakdown (as of 06/30/2023, in thousands of BRL) | Asset Type | Carrying Amount | | :--- | :--- | | Goodwill | 635,625 | | Intangible assets in progress | 246,742 | | Development costs | 215,395 | | Right of use | 161,197 | | Others | 44,223 | | Total | 1,303,182 | - Goodwill increased by R$2.8 million during the period due to the business combination involving the acquisition of Inter US Finance and Inter US Management[148] Note 25. Equity As of June 30, 2023, Inter & Co's share capital consisted of 284.8 million Class A shares and 117.0 million Class B shares The company did not pay dividends during the period, but a subsidiary paid R$16.0 million in interest on equity to non-controlling interests Basic earnings per share for the first half of 2023 was R$0.1497 The company also repurchased 104,876 Class A shares, now held in treasury - At an April 2023 meeting, a stock split by a factor of 3 was approved, to be effective on a future date set by the Board[174][175][176] Earnings Per Share (Semester ended 06/30/2023) | Metric | Value (BRL) | | :--- | :--- | | Basic earnings per share | 0.1497 | | Diluted earnings per share | 0.1486 | - As of June 30, 2023, the company holds R$16,409 thousand in treasury shares, consisting of 104,876 Class A shares[183] Note 34. Share-Based Payment The company manages several share-based payment plans In January 2023, Banco Inter's plans were migrated to Inter & Co, and a repricing of 2022 options resulted in an incremental expense of R$16.0 million A new Omnibus Incentive Plan was created, under which 2.14 million Restricted Share Units (RSUs) were granted to executives and employees on June 1, 2023, with a four-year vesting period - In January 2023, share-based payment plans from Banco Inter S.A. were migrated to Inter&Co, Inc A repricing of 2022 options resulted in an additional incremental expense of R$15,990 thousand[201] - On June 1, 2023, 2,140,500 restricted share units (RSUs) were granted under the new Omnibus Incentive Plan with a 4-year vesting schedule[210] - Total share-based payment costs recognized in H1 2023 were R$15,802 thousand for the legacy plan, R$16,765 thousand for the Inter & Co Payments plan, and R$2,430 thousand for the new RSU plan[204][207][210] Note 35. Transactions with Related Parties The Group engages in transactions with related parties, including its parent company, associates, key management personnel, and other related entities As of June 30, 2023, total assets with related parties amounted to R$1.44 billion, primarily in loans (R$579.4 million) and amounts due from financial institutions (R$755.7 million) The global compensation for management personnel approved for 2023 is R$99.8 million Assets with Related Parties (as of 06/30/2023, in thousands of BRL) | Asset Type | Amount | | :--- | :--- | | Loans and advances to customers | 579,427 | | Amounts due from financial institutions | 755,745 | | Securities | 109,374 | | Total | 1,444,546 | - The global compensation for key management personnel approved for 2023 is R$99,791 thousand[217] - In February 2023, Stone sold its entire interest in Inter and is no longer considered a related party[213] Note 36. Subsequent Events On August 7, 2023, a capital increase of R$100 million was approved for the associate company, Granito Instituição de Pagamento S.A Inter will subscribe and pay in R$50 million of this amount, pending approval from the Central Bank of Brazil - On August 7, 2023, a R$100 million capital increase was approved for associate Granito, with Inter contributing R$50 million The transaction is subject to approval by the Central Bank of Brazil[219]