Digital Adoption And Payments Expansion Will Drive Stronger Margins And Earnings Stability

Catalysts

About Intercorp Financial Services

Intercorp Financial Services is a leading Peruvian financial group providing banking, insurance and wealth management solutions across retail, commercial and affluent segments.

What are the underlying business or industry changes driving this perspective?

• Acceleration of higher yielding consumer and small business loans, supported by healthier customer vintages and expanding mass market demand for credit, is expected to lift asset yields and structurally support net interest margin and revenue growth.
• Ongoing digital adoption in retail and commercial clients, including PLIN, Izipay and fully digital onboarding, should deepen primary banking relationships, reduce servicing costs and improve operating leverage, supporting higher net margins.
• Rapid expansion of the payments ecosystem, with strong growth in PLIN transactions and Izipay flows, is likely to increase transaction-driven fee income and low cost deposits, boosting revenue diversification and lowering funding costs.
• Double digit growth in wealth management assets under management, coupled with improved fee over assets, positions Inteligo to capture rising savings and investment flows in Peru, driving higher recurring fee revenues and more resilient earnings.
• Continued growth in long term life and annuity products, supported by low insurance penetration and multi channel distribution, should expand contractual service margin and investment income, enhancing earnings visibility and margin stability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Intercorp Financial Services's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.8% today to 31.8% in 3 years time.
• Analysts expect earnings to reach PEN 2.7 billion (and earnings per share of PEN 23.75) by about December 2028, up from PEN 2.0 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 7.7x today. This future PE is greater than the current PE for the PE Banks industry at 7.7x.
• Analysts expect the number of shares outstanding to decline by 1.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The Rutas de Lima dispute introduces prolonged legal and recovery uncertainty. Although current exposure is below 1% of the investment book, any additional impairment beyond the roughly 40% already booked would pressure investment income and insurance segment earnings.
• Successive pension fund withdrawals and unusually high liquidity periods can temporarily flatten or contract consumer loan balances. If this pattern becomes more frequent, it could structurally slow retail credit expansion and weigh on revenue and net interest margin growth.
• Rapid expansion into higher yielding consumer and small business loans, now 22% of the portfolio and still growing, increases sensitivity to an economic slowdown or political shocks in Peru. This could drive up cost of risk over time and compress risk adjusted net interest margins and earnings.
• Intensifying competition and zero fee QR payment adoption in acquiring and payments are already compressing merchant margins at Izipay. If this trend accelerates, it could limit fee income growth and reduce the profitability contribution from the payments ecosystem.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $46.81 for Intercorp Financial Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $52.94, and the most bearish reporting a price target of just $41.53.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be PEN8.5 billion, earnings will come to PEN2.7 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of $40.13, the analyst price target of $46.81 is 14.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.