Executive Summary / Key Takeaways

• Digital Ecosystem as Competitive Fortress: Intercorp Financial Services has built a unique integrated platform across banking, insurance, and wealth management that captures over 80% of retail customers digitally, creating switching costs and cross-selling opportunities that traditional banks cannot easily replicate in Peru's consolidated market.

• Credit Cycle Recovery Validates Risk Management: After navigating a severe consumer credit deterioration in 2023, IFS has emerged with ROE rebounding to 17.4% year-to-date 2025, driven by disciplined de-risking and a commercial banking franchise that gained 130 basis points of market share to reach an all-time high of 10.9%.

• Segment Dynamics Signal Strategic Shift: Commercial banking now drives growth with 17% year-over-year expansion, while the consumer portfolio shows early inflection points—personal loan disbursements rose 51% in Q3 2025—suggesting the higher-yielding book is recovering just as management begins to cautiously rebuild risk appetite.

• Key Risks Concentrated in Execution and Politics: The thesis faces two primary threats: Peru's 2026 presidential transition creating macro volatility, and the normalization of cost of risk from current low levels (2.1% in Q3) as consumer lending accelerates, potentially compressing margins if underwriting discipline wavers.

• Valuation Reflects Recovery Premium: Trading at $39.84 with a P/E of 7.92x and ROE of 17.55%, IFS trades at a discount to regional peers despite superior growth, though this reflects market caution around political risk and the sustainability of credit quality improvements.

Setting the Scene: A Digital-First Challenger in an Oligopoly

Intercorp Financial Services, incorporated in 1897 and headquartered in Lima, Peru, operates in one of Latin America's most concentrated banking markets. Four private banks control over 75% of loans and deposits, creating a rigid hierarchy where scale determines funding costs and regulatory relationships dictate competitive boundaries. IFS holds approximately 13.5% market share, positioning it as a solid mid-tier player trailing Banco de Crédito del Perú (BCP) (BCP) and BBVA Perú (BBVA) but competing directly with Scotiabank Perú (BNS) for the third position.

What distinguishes IFS from this peer group is not size but structure. While competitors built their franchises around branch networks and corporate relationships, IFS has systematically constructed a digital ecosystem where banking, insurance, and wealth management function as integrated components rather than separate divisions. Over 80% of retail customers and 70% of commercial clients are digital users, while payment platforms Izipay and PLIN process transactions that flow back to Interbank accounts at rates exceeding 40%. This creates a self-reinforcing loop: payment activity generates data, data informs credit decisions, and credit relationships deepen primary banking status.

The company makes money through three segments that share customers rather than just infrastructure. Interbank contributes 70% of earnings through net interest income and fees, Interseguro provides insurance products with 19% growth in its contractual service margin, and Inteligo manages $8.1 billion in assets while generating 16% year-over-year fee growth. The integration point is the customer relationship: a small business owner uses Izipay for transactions, borrows from Interbank for working capital, buys disability insurance from Interseguro, and invests excess cash through Inteligo's Interfondos app. Each interaction strengthens the ecosystem's grip.

Peru's banking market is maturing. GDP growth is projected at 3.2% for 2025, with loan growth typically running at 2-2.5x that multiplier. In this environment, market share gains become the primary driver of outperformance. IFS's digital-first approach allows it to acquire customers at lower cost and serve them more efficiently than branch-dependent competitors, while the ecosystem model increases lifetime value through cross-selling. The strategy exploits a structural weakness: traditional banks struggle to integrate fintech capabilities without cannibalizing existing revenue streams, while IFS built its model around digital from inception.

History with a Purpose: How the 2023 Credit Cycle Reshaped Risk Appetite

The 2023 credit cycle was a defining stress test that fundamentally altered IFS's risk management framework. Consumer portfolio deterioration driven by high inflation, low economic growth, and external disruptions forced the bank to confront the limits of its previous underwriting standards. Rather than simply tightening criteria, management implemented a comprehensive de-risking strategy that included enhanced internal risk models and a deliberate shift toward higher-quality commercial borrowers.

This experience explains the current strategic posture. When management describes being "cautiously optimistic" about consumer recovery, they speak from a position of having rebuilt their credit infrastructure from the ground up. The cost of risk peaked above 3% in 2023 but fell to 2.1% by Q3 2025, with retail cost of risk dropping 130 basis points year-over-year to 4%. This improvement wasn't accidental—it resulted from systematically reducing exposure to the riskiest segments while improving collection capabilities through digital channels.

The recovery trajectory validates this approach. By Q4 2024, ROE exceeded 18%, and while year-to-date 2025 ROE of 17.4% reflects some normalization, the underlying trend remains strong. Commercial banking's 17% growth and 130 basis points of market share gain demonstrate that the bank can expand while maintaining discipline. The consumer portfolio's inflection—showing 0.4% growth in Q4 2024 after quarters of contraction—signals that the cycle has turned, but management's caution about the pace of recovery reflects hard-won lessons from 2023.

This history establishes the credibility of IFS's risk management. When CFO Michela Ramat warns that cost of risk should "gradually increase" as consumer lending accelerates, she is not speculating—she is describing a carefully modeled scenario based on recent experience. The bank's current 2.1% cost of risk sits well below its 3% guidance, creating a buffer that can absorb normalization while still delivering attractive returns. The key question is whether underwriting discipline will hold as growth pressures mount.

Technology, Products, and Strategic Differentiation: The Digital Moat

IFS's competitive advantage rests on three integrated digital platforms that traditional banks cannot easily replicate. Izipay serves over 1.2 million entrepreneurs, processing payments that generate float balances and deepen commercial relationships. PLIN has achieved double-digit growth in active users and transactions, with PLIN WhatsApp launching in Q3 2025 to enable conversational banking directly within the messaging app. The Interfondos app is evolving from a transactional platform into a digital adviser, supporting Inteligo's 17% AUM growth to $8.1 billion.

These platforms create switching costs through network effects and data integration. When a merchant adopts Izipay, they don't just gain payment processing—they receive working capital offers from Interbank based on transaction history, disability insurance quotes from Interseguro tailored to their business risk, and investment options from Inteligo for excess cash. Each additional service increases the cost of leaving the ecosystem, while the data generated improves the accuracy of risk models and personalization of offers.

The economic impact is measurable. Izipay's flows to Interbank accounts exceed 40%, meaning payment processing directly funds deposit growth. This reduces reliance on wholesale funding and improves the net interest margin, which recovered 10 basis points in Q3 2025 to 3.8% on a risk-adjusted basis. Small business loans grew 33% year-over-year in Q3, representing nearly 4% of the total portfolio, while sales finance market share expanded from 16.9% to over 19% in 2024, making Interbank the second-largest player in the system.

Management's commentary reveals the strategic intent. When CEO Luis Castellanos notes that Izipay and Interbank "capture joint business opportunities" while PLIN "deepens user engagement," he is describing a deliberate strategy to make the ecosystem indispensable. The launch of PLIN Corredores to extend digital payments to the transport sector and PLIN WhatsApp for conversational banking represent expansion of the moat into adjacent verticals, increasing addressable market while reinforcing core relationships.

This digital integration contrasts sharply with competitors' approaches. BCP's Yape digital wallet, while successful with 15 million users, operates largely as a standalone payments app rather than a fully integrated banking platform. BBVA's global technology stack provides advanced capabilities but lacks the local ecosystem integration that IFS leverages through its Intercorp Group (ICP) parentage. Scotiabank's corporate focus leaves it vulnerable in the retail digital race. IFS's moat is not just technology—it's the depth of integration across financial services that creates a unified customer experience.

Financial Performance & Segment Dynamics: Commercial Banking Leads, Consumer Follows

Interbank's financial results demonstrate a clear strategic pivot toward commercial lending while positioning for consumer recovery. The segment contributed 70% of IFS's earnings in the first nine months of 2025, with ROE stabilizing around 16% and a medium-term target of 18%. Total loan growth of 5% year-over-year in Q3 outpaced the system, driven by commercial banking's 19% expansion in Q1 2025 and small business loans surging 33% year-over-year in Q3.

The segment mix shift carries important margin implications. Commercial loans carry lower yields but also lower risk—commercial cost of risk was just 0.4% in Q3 2025 compared to 4% for retail. This creates a more stable earnings profile, though it caps net interest margin expansion. The risk-adjusted NIM of 3.8% reflects this trade-off, improving 40 basis points as higher-yielding consumer and small business loans (now 22% of the portfolio) accelerate while maintaining disciplined pricing.

Consumer lending shows early but encouraging signs. Personal loan disbursements rose 51% in Q3, credit card turnover increased 9% year-over-year, and the consumer portfolio grew 0.6% in Q2 after stabilizing in prior quarters. Management describes this as an "inflection point," but cautions that pension fund withdrawals could temporarily flatten growth. The December liquidity injection from Peru's traditional double salary payment and severance indemnity deposits should support collections and reduce delinquencies, providing a favorable backdrop for Q1 2026 origination.

Interseguro's performance highlights the benefits of ecosystem integration. The contractual service margin grew 19% year-over-year in Q3, driven by individual life and annuities where the company maintains market leadership. Short-term insurance premiums surged over 110% due to disability and survivorship policies acquired through a two-year bidding process from the Peruvian private pension system. This diversifies revenue and leverages Interbank's distribution network, though the segment faces a specific risk from the Rutas de Lima concession.

Inteligo's wealth management franchise continues to deliver exceptional results. Assets under management reached $8.1 billion in Q3, growing at a double-digit pace, while fee income increased 16% year-over-year. The launch of a dedicated investment section within the Interbank app and the evolution of Interfondos into a digital adviser position Inteligo to capture Peru's growing mutual fund market, where it has gained share to 16.5%. The segment's ROE of 31% in Q2 2025 demonstrates the scalability of the digital model.

The consolidated cost-to-income ratio of 37.7% in Q3 reflects strategic investments in technology and talent, with a medium-term target of 37%. These investments include AI capabilities, cybersecurity enhancements, and leadership development across subsidiaries. While they pressure near-term efficiency, they strengthen the long-term moat and support the ecosystem's expansion.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 reflects cautious optimism balanced against political and macro uncertainties. The year-end ROE target of 17% acknowledges that Q4 2024's 18%+ performance included seasonal factors and exceptional investment results at Inteligo that won't repeat every quarter. The medium-term target remains 18%, contingent on Interbank fully recovering its consumer loan portfolio and achieving its own 18% ROE target.

Loan growth guidance of high single-digits for 2025 implies continued outperformance versus the system, which typically grows at 2-2.5x GDP. Commercial banking will remain the primary driver, with management noting they "don't foresee high growth" in corporate disbursements due to companies accessing capital markets. This positions midsized companies and small businesses as the growth engines, where IFS has gained 270 basis points of market share to rank third.

The consumer recovery timeline remains the key variable. Management expects pension fund withdrawals to "likely affect consumer loan disbursements in the coming quarters," potentially creating flat or negative growth for one to two months before resuming expansion. This pattern has historically shown a 1-2% market contraction during withdrawal periods, but the impact may be milder this cycle due to improved underwriting and macro conditions. The critical indicator will be whether the 51% increase in personal loan disbursements in Q3 sustains into 2026.

Net interest margin is expected to see "slight recovery" in the second half, driven by lower funding costs as the central bank's reference rate declines and the funding mix improves. However, management notes "there is little room to improve the cost of funds" further, suggesting most NIM expansion must come from loan mix shift toward higher-yielding consumer and small business products. This creates a natural tension with cost of risk normalization.

The cost of risk guidance of around 3% for 2025 remains well above current levels, providing a conservative buffer. As Ramat explicitly states, "as our consumer and small business portfolios keep expanding, now representing 22% of our total portfolio, we should expect the cost of risk to gradually increase." The pace of this normalization will determine whether risk-adjusted margins expand or contract. Current retail cost of risk at 4% provides a baseline, but historical peaks near 9% during the 2023 crisis remind investors of potential downside.

Political risk looms large over the 2026 outlook. Peru's presidential election creates uncertainty that typically reduces economic dynamism in the second half of pre-electoral years. Management acknowledges being "cautious, given that 2025 is a pre-electoral year which could generate some volatility," while noting that "the political transition expected in 2026 does not suggest major changes in financial stability." The key is whether business confidence remains stable in optimistic ranges, as current indicators suggest.

Risks and Asymmetries: Where the Thesis Can Break

The investment thesis faces three material risks that could fundamentally alter the earnings trajectory. First, political uncertainty surrounding the 2026 presidential transition could destabilize business confidence and slow credit demand. While management expresses optimism that strong institutions and prudent monetary policy will maintain stability, historical patterns show that pre-electoral periods typically reduce GDP growth dynamism. If the election results in policy shifts that affect mining investment or fiscal discipline, IFS's commercial loan growth could decelerate sharply.

Second, the normalization of cost of risk represents a significant earnings headwind. Current levels at 2.1% are unsustainably low for a growing consumer book. Management's guidance of 3% implies a 90 basis point increase that would reduce net income by approximately 15-20% if not offset by NIM expansion or fee growth. The risk is asymmetric: if consumer lending accelerates faster than expected or underwriting standards slip, cost of risk could overshoot guidance, compressing ROE toward the mid-teens and erasing the valuation premium.

Third, specific credit exposures create tail risks despite their small size. The Telefonica-related provisions of $144 million in Q1 2025 and the Rutas de Lima impairment of PEN 78 million in Q3 demonstrate that even well-managed banks face idiosyncratic losses. While management claims to be "well covered" on Telefonica and notes Rutas de Lima represents "less than 1% of IFS's total investment holdings," these events reveal governance gaps in risk concentration. The Rutas de Lima situation is particularly concerning, as it involves an ongoing legal dispute between the municipality and concessioner with 40% of the position already impaired and final resolution not expected "in the short term."

On the positive side, two asymmetries could drive upside. If consumer loan growth accelerates faster than expected while maintaining current credit quality, ROE could exceed the 18% medium-term target, justifying a re-rating. Additionally, if digital ecosystem engagement drives higher cross-sell rates than modeled, fee income could grow at low double-digits rather than high single-digits, improving the revenue mix and supporting higher valuations.

Competitive Context and Positioning

IFS competes in a tiered structure where BCP and BBVA dominate through scale and global resources, while Scotiabank and IFS battle for third position. BCP's 30% market share and Yape digital wallet with 15 million users represent formidable competition, but its slower loan growth (0.23% in 2024) suggests a mature franchise struggling to accelerate. BBVA's 20-22% share and advanced digital platforms provide strong corporate capabilities, but its higher exposure to interest rate fluctuations creates vulnerability.

IFS's 13.5% share and 17.55% ROE compare favorably to Scotiabank's similar market position but lower 8.99% ROE. The key differentiator is growth trajectory: IFS's 81% year-over-year net income growth through Q3 2025 dramatically outpaces peers, driven by commercial banking share gains and digital ecosystem expansion. While BCP and BBVA can leverage lower funding costs from larger deposit bases, IFS's loan-to-deposit ratio of 96% matches the industry average, suggesting competitive funding access.

The digital moat provides sustainable differentiation. IFS's integrated approach contrasts with competitors' siloed structures: BCP's Yape operates largely standalone, BBVA's global tech lacks local ecosystem integration, and Scotiabank's corporate focus leaves retail digital gaps. IFS's ability to cross-sell across segments increases customer lifetime value and reduces acquisition costs, supporting higher margins on growth. However, the smaller scale creates vulnerability if BCP or BBVA decide to aggressively price consumer loans to defend market share.

Valuation Context

Trading at $39.84 per share, IFS carries a market capitalization of $4.44 billion and enterprise value of $4.63 billion. The stock trades at 7.92x trailing earnings and 2.23x sales, a discount to regional peers despite superior growth. BCP trades at 11.51x earnings with 18.55% ROE, while BBVA commands 10.74x earnings at the group level. The discount reflects market concerns about political risk and credit quality sustainability.

Key metrics support a more optimistic view. Return on equity of 17.55% exceeds the cost of equity in Peru's stable macro environment, while the 2.44% dividend yield provides income alongside growth. The price-to-book ratio of 1.26x suggests modest asset premium, appropriate for a bank with improving returns. Operating margin of 41.24% demonstrates efficiency gains from digital investments.

The balance sheet remains sound, with total capital ratio around 15% and core equity Tier 1 above 12% as of Q3 2025. Deposits fund 81% of the balance sheet, providing stable low-cost funding. The loan-to-deposit ratio of 96% aligns with industry norms, while the cost of deposits continues declining as efficient funding reaches 36% of the mix.

Management's capital allocation supports the thesis. A $100 million buyback program launched in 2023 has seen $75 million executed, with a new program awaiting shareholder approval. The planned call of 2030 Tier 2 bonds demonstrates proactive liability management. These actions suggest confidence in excess capital generation, though investors should monitor whether buybacks continue at current valuations.

Conclusion: Digital Moat Meets Macro Crossroads

Intercorp Financial Services has engineered a remarkable recovery from its 2023 credit cycle challenges, leveraging a digital ecosystem strategy that creates genuine competitive differentiation in Peru's oligopolistic banking market. The 17.4% ROE year-to-date, driven by commercial banking's 130 basis points of market share gains and early consumer portfolio inflection, demonstrates that disciplined risk management can coexist with profitable growth.

The core thesis hinges on whether IFS can sustain this momentum while navigating two critical transitions: the normalization of consumer credit risk as higher-yielding loans accelerate, and Peru's 2026 political transition without derailing business confidence. Management's cautious guidance—targeting 17% ROE versus the 18% medium-term goal—reflects appropriate conservatism given these uncertainties.

The digital moat provides downside protection through ecosystem stickiness and cross-sell revenue, while creating upside optionality if consumer lending recovery exceeds expectations. Valuation at 7.92x earnings offers a margin of safety relative to peers and historical performance, but this discount will only close if IFS executes flawlessly on its consumer rebuild and maintains credit quality.

For investors, the critical variables to monitor are the pace of consumer loan growth relative to cost of risk normalization, and political developments' impact on business confidence and mining investment. If IFS can deliver 18% ROE while keeping cost of risk below 3%, the stock's discount to regional peers should compress, delivering attractive returns. If political volatility or credit deterioration accelerates, the digital moat may prove insufficient to offset macro headwinds. The next 12 months will determine whether IFS is a structural winner or a cyclical recovery story.