Inter & Co: An Underrated Latin Bank With Upside Potential (NASDAQ:INTR)

In recent years, the Brazilian economy has struggled after the 2014 crisis. Its efforts went down the drain when the pandemic came and disrupted business operations. But now, it is poised to rebound from the economic slowdown, although growth rates remain low. Also, it may sustain its recovery, given the continued decrease in inflation. Near-term headwinds stay visible, but macroeconomic indicators become more manageable.

In the midst of all these, Inter & Co., Inc. (NASDAQ:INTR) remains a force to reckon with. Its two quarters in 2022 have been hammered by uncertainties and rising prices. Even so, 4Q proved INTR could withstand these hullaballoos. Revenues and margins remained stable as the company coped with market volatility. Even better, its impressive Balance Sheet shows it can keep things under control as it navigates a tough environment. Meanwhile, the stock price keeps decreasing, making it divorced from the fundamentals. But its discounted value may open opportunities for a buy position.

Company Performance

Inter & Co., Inc. operates in a highly cyclical and volatile market environment. So, it is more exposed to the advantages and risks of macroeconomic changes. We can see how its performance went through massive crests and troughs since it went public. It was more visible in 3Q and 4Q 2022 as inflationary headwinds intensified. But the thing is, Inter & Co., remained a durable company.

Its operating revenue amounted to 4.27 billion BRL, a 96% year-over-year growth. It was highest in 4Q 2022 with 810 million BRL. This impeccable growth shows its solid performance despite economic fluctuations. Both its components had substantial increases with its efficient and prudent asset management and diversification. Various factors led to this massive change. For easier analysis, we will check how revenue components increased. Interest income on loans comprised 66% of the total revenues. It almost doubled in only a year, reaching 2.8 billion BRL. Interest rate hikes were the primary interest income growth driver. Even in the last year, interest rates were already above 10%. It has been an effort to stabilize inflation since 2021. But as inflation peaked, interest rates rose to 13.75% in August and remained there for the following months. INTR Banks was swift to respond with its active loan repricing of long-duration portfolios. That way, loans can be more flexible to higher interest rates. So, it was unsurprising to see its loan portfolio balloon and yield more interest. But what made its loan portfolio impressive is the quality and diversification strategy. Its non-performing loans remained low and stable. The increase was slower than interest rate increases, which limited defaults and delinquencies. Even better, the composition of its loans was ideal for the economic changes in Brazil. Loan originations kept increasing, mainly driven by SMB, credit card, personal, and real estate loans.

Meanwhile, investment securities comprised over 30% of total interest income. At 1.47 billion BRL, its value also nearly doubled. Prudent portfolio diversification was more evident in this segment. Most of its investment securities were inflation-linked. In fact, 76% of them are government-backed securities in the form of treasury notes and bills. Since these are more inflation-linked, they are more secure in a high-interest environment. They have better yields and hedge against valuation losses.

But of course, higher inflation and interest rates drove the increase in interest and non-interest expenses. Interest expenses more than tripled in only a year. In 4Q 2022, it was already more than twice the value in 4Q 2021. Despite this, we can see that the increase in interest rates slowed down from 3Q to 4Q. The same could be seen in non-interest expenses, especially administrative expenses. Another consolation was the sustained increase in the number of clients, which showed higher demand for its banking products and services. Its number of clients of 24.7 million had a 51% year-over-year increase. This increase led to increased flexibility in service and commission fees. At the end of the year, the net income margin was -0.3% better than -2.5% in 2021. Indeed, it worked better even in a high-inflation environment. It was even higher in 4Q 2022 at 3.4% versus -7.2% in 4Q 2021 and -3.8% in 3Q 2022.

This year, Inter & Co., Inc. still faces potential headwinds as interest and mortgage rates remain high. Yet, these may become more manageable as inflation in Brazil continues to relax. It is still way higher than in the years after the economic crisis and before the pandemic. But the economy improves as the current rate of 5.6% is already less than half the 2022 peak. It may become easier for the company to manage loans, deposits, and investment securities.

How Inter & Co., Inc. May Remain A Solid Company This Year

In the previous section, we discussed how Inter & Co., performed amidst macroeconomic headwinds. This year, headwinds may persist, given the potential economic slowdown. Note that interest and mortgage rates remain elevated. But thankfully, hope can be seen on the horizon. The conservative approach of Banco Central do Brasil has paid off. Inflation already subsided, landing at about 5%. With that, I expect interest rates to stay at their current rate. Increments may also remain at 0%, making macroeconomic indicators more manageable. Given the tighter monetary policy, I expect inflation to continue relaxing. Meanwhile, interest and mortgage rates may not decrease immediately to ensure stability. But the downtrend may also happen eventually. We may see their gradual decrease in the latter part of 2023 or 2024. These enhancements may lead to more stable yields on loans, deposits, and investment securities.

But what impresses me most is its stellar Balance Sheet. INTR shows it has more than enough resources to sustain its capacity without sacrificing asset quality and viability. For instance, both loans and deposits are increasing, but the loan-to-deposit ratio remains low at 72%. This percentage proves that the company has more room for lending to raise interest income. It has adequate reserves to cover potential defaults and delinquencies. Given its net interest income, INTR maintains the balance between growth and liquidity. It also stays viable while ensuring sustainability.

Even better, cash and investments are 70% higher than in the previous year. Thanks to the continued cash inflows and impressive investment portfolio diversification. Also, they comprise 45% of the total assets, so the bank is very liquid. They can cover the total liabilities, excluding deposits, so they have a high capacity to withstand more headwinds and rebound.

Stock Price Assessment

The stock price of Inter & Co., Inc. has been in a notable downtrend since it became public. The decrease became sharper last month. At $1.56, the stock price has already been cut by 55%. Despite this, it may offer an opportunity to buy stocks at a discount. The PB Ratio can demonstrate it, given the current BVPS of 17.64 and PB Ratio of 0.09x. It is lower than the whole year average of 0.15x. If we multiply the current BVPS by the average ratio, the target price will be $2.48. It shows a 42% potential upside. Indeed, the stock price is undervalued and an ideal entry point for interested investors.

Bottomline

Inter & Co., Inc. is a solid bank with a robust performance amidst macroeconomic volatility. It has an excellent financial positioning that shows it can withstand more headwinds and sustain its capacity. Its loan and investment portfolios are well-diversified and suitable in a high-interest environment. Even better, the stock price shows an enticing upside. The recommendation is that Inter & Co., Inc. is a buy.