Inter & Co: New Strategy Being Executed Impeccably (NASDAQ:INTR)

Investment Thesis

I recommend buying Inter & Co (NASDAQ:NASDAQ:INTR) shares. Inter & Co was one of the first digital banks to carry out an IPO in the West and simply quadrupled the number of customers between 2018 and 2020, reaching more than 8 million. At that time, Inter & Co had a P/B multiple of 6x, and the strategy of all fintechs in the world was to grow without worrying about profitability.

However, Brazil and the world went through a major cycle of rising interest rates from 2021 to 2023. With the deteriorating economy and aggressive competition, Inter & Co reached a P/B of 0.4x. Seeing this, the bank’s managers adopted a new strategy, which has been improving the company’s results. The strategy can be the trigger for great results again and a repricing of multiples.

Introduction

There were around 400 neobanks in 2021 serving around 1 billion customers who were dissatisfied with traditional banking services. In Latin America, for example, around 70% of the population does not even have a bank account.

In Brazil, only 3% of the population does not have a bank account, but until 10 years ago, banking services in Brazil were considered to be of low quality. It was in this scenario of opportunity that neobanks emerged. Another highlight is that, according to a recent study, Brazil is the country with the highest number of Neobank account users.

This occurs because Brazil has major players such Inter & Co (NASDAQ:INTR), PagSeguro (NYSE:PAGS) and Nu (NYSE:NU). Now let’s better understand Inter & Co’s history and business model, and how it supports my bullish thesis for the shares.

History Of Inter & Co

Inter & Co is a bank based in Belo Horizonte/MG, and founded by the Menin family, also controller of MRV (a company listed on the Brazilian stock exchange and with operations in the USA). Launching its digital account in 2016, Inter was one of the first Brazilian neobanks. Let’s look at your timeline:

When it carried out its IPO in Brazil in 2018, Inter & Co had 2.2 million customers and traded at 6x P/B (market value of $1.4 billion). At the end of 2019, the market cap was $3 billion, with Inter exploiting its first-mover advantage, and status as the “only” listed digital bank in the West.

With low interest rates, in 2020 the customer base was already 8.5 million, deposits increased by 150% y/y, and revenues soared. Inter & Co created a disruptive app and was growing rapidly in insurance and investments. At the peak of the share, in August 2021, the market value was $11 billion, leading Inter to carry out the IPO on Nasdaq.

However, excellent results were needed to justify a valuation of 6x P/B. The bull market and cheap money apparently deceived the market. Well, in the following years, interest rates rose, as did the cost of capital. Additionally the company had difficulties with cost control, operational leverage, and a reduced liquidity, which caused the company’s shares to plummet.

It was then that the bank’s managers completely changed the company’s strategy, reducing growth and focusing on profitability. Let’s address this strategy, but first I need to explain Inter & Co’s business model.

Business Model

Inter & Co has monetized its broad and growing customer base with product and service offerings through its app, resulting in a good diversification of its revenue base across types of assets and services.

Currently, Inter & Co is the 3rd largest neobank in Brazil in terms of customers. Nu leads with 82 million customers, followed by PagSeguro with 30 million, and in 3rd place is Inter & Co with 27 million customers.

Its credit portfolio, which was worth $1 billion in December 2019, now reaches almost $6 billion. The composition of the portfolio, which in 2019 had more than 50% of real estate loans, currently has a more balanced composition, with real estate loans and credit cards totaling between 20% and 30% each:

In relation to diversification and revenue volume, Inter & Co is becoming more resilient and prepared to face adverse scenarios. But this was only possible due to the new strategy used by the company. This strategy is being used to achieve a bold management goal in 2027. We will talk more about this strategy below and how it corroborates my bullish thesis for the shares.

New Strategy, New Results

At the beginning of 2023, Inter & Co adopted a new strategy and announced a growth plan for the next 5 years. The “60-30-30” plan indicates the metrics the bank wants to achieve:

• 60 million total customers
• Efficiency index of 30%
• ROE of 30%.

Furthermore, management signaled its intention to achieve a credit portfolio of $20 billion and $1 billion in net income by the year 2027. But what actions will the company take to achieve these aggressive goals?

The bank now focuses more on the search for products and services that improve profits, such as loans with FGTS and loans with property as collateral (Home Equity).

Another way that Inter & Co found to generate more profitability was through the points program (Loop), which has become popular among Brazilians. According to the institutional presentation, clients who use Loop tend to generate 60% more profitability than ordinary clients:

Furthermore, profitability can benefit from a slowdown in the cost of credit (a cycle of falling interest rates) and the search for efficiency gains through cost reduction and containment. Speaking of costs, the company identified that improving results also involves efficient cost management. A key indicator for identifying the efficiency of a neobank is the number of active customers per employee, and we can see how Inter & Co has improved this indicator:

Well, with the focus adjusted to products with greater profitability and better cost management, the company’s shares accumulated more than 200% gains in one year and the following results:

But does the company have a stretched valuation after a 200% rise in shares in one year? Let’s do a financial analysis of Inter & Co and its competitors, and then we’ll look at the valuation.

Inter & Co Fundamentals

Next, I will use the Seeking Alpha tools to carry out a financial analysis between the Brazilian neobanks Inter & Co, PagSeguro and Nu:

Click to enlarge

Now it is clear to understand why Nu is the largest neobank in the world. The company has simply doubled its revenue per year without giving up profitability, its net margin is more than 10%. It is also interesting to highlight Inter & Co’s strong revenue growth, surpassing PagSeguro in the last 3 years.

As we have seen, Inter & Co has plans to reach an ROE of 30% in 2027 and has succeeded in expanding ROE during 2023, but is the valuation already considering this growth?

Despite The Appreciation, The Valuation Is Favorable

As we are analyzing neobanks, it is appropriate to use P/B in conjunction with ROE to check Inter & Co’s valuation:

When we analyze the results, we see that it is difficult to make any average for the sector, as the difference between the values is very large. However, it seems that Inter & Co and PagSeguro are very cheap compared to Nu, correct?

It is important to remember that Inter had its IPO in Brazil in 2018, a year later the share rose more than 250% and was one of the highlights in the world of appreciation. In that period, Inter’s P/B was 6x.

It is true that the scenario has changed completely, however, management is impeccably executing a new strategy that is greatly improving the company’s results. Maybe the company won’t reach a 30% ROE in 2027, like the plan, but what if it reaches at least Nu’s ROE?

In my opinion, it is quite possible that Inter & Co will reach at least 20% ROE, and then there will be a repricing of the company’s multiples. Therefore, the valuation seems extremely attractive and corroborates my bullish thesis for the shares. Let’s now analyze Seeking Alpha’s Quant tool to obtain better conclusions.

Inter & Co According to Quant Ranking and Factor Grande

According to Quant Ranking and Factor Grades, Inter & Co is an excellent option in all grades:

Especially in the situation described, where the evaluation against competitors presents very large differences, the Seeking Alpha tools are of great help and corroborate my bullish thesis for the shares. However, to invest efficiently it is necessary to know the risks of the thesis, and that is what we will do below.

Potential Risks To The Bullish Thesis

One of the biggest risks that make investors not buy a share is its liquidity. When Inter & Co held its IPO on Nasdaq, the complaint of many investors was that there was little liquidity to invest in the shares. However, the company recently released a follow-on. Although follow-on is used as a justification for increasing liquidity, it can also indicate that shares are relatively expensive in the view of managers.

Another potential risk concerns the execution of the strategic plan. In the 4th quarter results, although costs and expenses continued to be reduced, there was an increase in the volume of renegotiations and the granting of discounts. Periodic monitoring of results is necessary to ensure that there is no dispersion of the profitability focus.

Finally, the company operates in a segment with low barriers to entry and is known for constant disruption caused by innovation. Therefore, competition with disruptive players is an inherent business risk. The risks of investing in Inter & Co shares are diverse, so it is important that investors know them well before making their investment.

The Bottom Line

One thing that catches my attention about a company is its management’s ability to change strategy when necessary. And Inter & Co’s management has changed its strategy and is improving results impeccably.

In a comparative analysis, Inter & Co’s shares are discounted compared to the competition and its own history. Furthermore, the bold growth plan for 2027 can indeed be achieved if the company continues to improve results every quarter as it has been doing.

In my opinion, there is a great opportunity since the risk and return are attractive considering that the investor is buying a growing company.Based on this analysis, my recommendation is to buy Inter & Co shares. Investors should pay attention to the improvement in results and impeccable execution of the new growth plan so far.