Regulatory Tightening And Competition Will Undermine Prospects Despite Network Effects

Key Takeaways

• Rising regulatory costs and macroeconomic instability threaten profitability by driving up compliance expenses and loan-loss provisions, diminishing Inter & Co's branchless banking advantage.
  
• Intensifying competition and service commoditization pressure margins and engagement, challenging Inter & Co's ability to defend market share and sustain topline growth.
  
• Strong client growth, expanded product offerings, and international diversification are driving improved profitability, higher margins, and greater resilience against credit and market risks.

Catalysts

Through its subsidiaries, engages in the banking and spending, investments, insurance brokerage, and inter shop businesses in Brazil and the United States.

• Despite strong user and transaction growth, Inter & Co faces the threat of increasing regulatory scrutiny and compliance costs, particularly as Brazil and the broader region tighten rules around data privacy and anti-money laundering. This could significantly suppress net margins and profitability by forcing substantial ongoing investments in backend compliance infrastructure, eroding the cost advantage of its branchless model.
  
• The accelerating rollout of digital banking services in Latin America makes differentiation increasingly difficult, raising the risk of commoditization. As offerings like payments and credit become ubiquitous, Inter & Co's ability to maintain premium pricing or superior engagement rates will be undermined, exerting downward pressure on fee-based revenue and overall earnings growth.
  
• Intensifying competition from global technology giants and both local and international fintechs threatens Inter & Co's market share, particularly in core products such as digital payments, payroll loans, and marketplace services. This will likely drive up customer acquisition and retention costs, squeezing operating leverage and putting further pressure on margins and net income as incentives rise to remain competitive.
  
• Execution risk in the company's aggressive international and cross-border expansion remains elevated; any missteps or underperformance in new markets, especially in scaling U.S.-Brazil remittance products and global accounts, could generate higher credit losses, asset impairments, or operational inefficiencies. This would result in increased loan provisions and drag on earnings volatility and topline growth.
  
• The macroeconomic environment in Brazil and Latin America is increasingly unstable, marked by persistent inflation, currency devaluation, and political uncertainty. These conditions threaten the quality of Inter & Co's fast-growing loan book, particularly as credit penetration in higher-risk products like private payroll and unsecured loans increases. The likely outcome is a structural rise in cost of risk, heavier provisioning, and elevated NPLs over time, compressing profitability and undermining projected ROE improvements.

Inter & Co Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Inter & Co compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Inter & Co's revenue will grow by 34.5% annually over the next 3 years.
• The bearish analysts are assuming Inter & Co's profit margins will remain the same at 20.4% over the next 3 years.
• The bearish analysts expect earnings to reach R$2.5 billion (and earnings per share of R$5.41) by about August 2028, up from R$1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 18.3x today. This future PE is lower than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.76%, as per the Simply Wall St company report.

Inter & Co Future Earnings Per Share Growth

Risks

• Strong and consistent client growth, reaching 40 million users with high activation and engagement rates, demonstrates a powerful network effect that can drive sustained topline revenue expansion over the long term and counter potential share price declines.
  
• The successful rollout of integrated new products-such as My Credit and My Piggy Bank By Savings Goals-has materially improved cross-selling, customer monetization, and fee-based revenue, supporting both revenue and net margin growth through ecosystem expansion.
  
• Substantial improvements in profitability (record ROE of 13.9% and accelerating towards even higher levels), along with steady operational leverage-evidenced by declining efficiency ratios and cost-to-serve per client-indicate that expanding scale is translating into higher earnings and margin resilience.
  
• Growth in well-collateralized lending, such as mortgages and FGTS-backed loans, as well as initial outperformance in digital payroll lending (with lower-than-expected delinquency and high ROE), enhances asset quality and supports sustainable net interest margin improvement while limiting risks to earnings from credit losses.
  
• The company's ongoing international expansion, acceleration of global deposits, and successful migration of share liquidity to the U.S. market diversify revenue sources and investor base, potentially increasing both topline growth and price-to-book valuations over the long term.

Valuation

• The assumed bearish price target for Inter & Co is $5.15, which represents two standard deviations below the consensus price target of $7.63. This valuation is based on what can be assumed as the expectations of Inter & Co's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $4.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$12.1 billion, earnings will come to R$2.5 billion, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 11.8%.
  
• Given the current share price of $7.78, the bearish analyst price target of $5.15 is 51.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.