Inter & Co

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Inter & Co is a Brazilian digital financial services company, offering a range of banking, payment, insurance, and investment products through its “Super App” platform, catering to individuals and businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Inter & Co, formerly Banco Inter, is a Brazilian fintech company that provides a comprehensive suite of financial services through its digital platform.

  • Banking & Spending: The company offers a full-fledged digital account, which allows clients to pay bills, transfer money, and access credit, among other banking features.
  • Investment: The company provides brokerage services, offering customers access to various investment options, including both Brazilian and U.S. markets.
  • Inter Shop & Commerce Plus: Inter’s e-commerce platform, where clients can purchase products from a variety of retailers and brands directly through Inter’s App. The company has recently been focusing on cross-selling its products to existing customers, as well as developing a new platform for retailers that will serve as a marketplace for their products, where Inter acts as a financial partner offering solutions like financial integration and payment methods.
  • Insurance Brokerage: Inter offers various types of insurance, such as life, health, and auto insurance.

In Brazil, the trend has been toward more people using banking apps (digital banking) rather than traditional means of banking. Inter and others are competing for market share in this. Also, the credit market in Brazil is a large and growing one.

The Brazilian financial market is highly competitive, with a mix of traditional banks, fintech companies, and international players.

  • The market is experiencing significant growth in digital banking and financial services, driven by increasing smartphone penetration and internet access in Brazil.
  • The competitive landscape is intense, with both well-established legacy banks and innovative fintech startups vying for market share.
  • Major players in the industry include traditional banks like Banco do Brasil, Itaú Unibanco, and Bradesco as well as digital banks like Nubank and PagBank, and international financial companies.
  • Competition is primarily based on pricing, product offerings, user experience, and brand reputation.

Inter’s primary value proposition centers on its unique blend of banking, payment, insurance, and investment services through a single digital app. It also boasts a very loyal customer base that tends to recommend the product to their friends and family.

Moat Analysis: 2/5

Inter & Co possesses some competitive advantages, but faces stiff competition making it difficult to create a strong moat.

  • Switching Costs: Inter’s core is its financial application, which many clients use as their day to day banking, trading, and financing. This is sticky, because people would need to transfer all of their financial information to another provider to switch. Also it is habit forming and difficult to change. This contributes to customer lock-in, creating switching costs, but competitors can provide similar services making it hard to be truly differentiated on that aspect.
  • Network Effects: They benefit from network effects in a small way because as the user base grows, the app becomes better through more data for the company to use. However, the network effects here are not as powerful as some other industries, since it doesn’t give an advantage to their clients if more people start using it, beyond maybe access to a wider array of products within the app.
  • Brand Recognition: Inter has a recognized brand in Brazil and is the main player that has successfully integrated all these services, banking, brokerage, e-commerce and insurance within a single app, so users that enjoy this benefit may see this as a good differentiator.
  • Limited Differentiation: The market is dominated by the “commoditization” of financial services. Every other player can offer similar banking, investment or insurance offerings. There isn’t too much unique technology in this industry that can’t easily be replicated.

Rating Justification: A score of 2 is justified, because while the company benefits from a small moat in some areas, the industry is extremely competitive and there is not enough differentiation from its competitors, giving little true advantages in the long run.

Risks to the Moat and Business

  • Increased Competition: The biggest risk to Inter is increased competition from other Brazilian banks, both traditional and digital, as well as larger international competitors that may enter the Brazilian market, or try to start similar products or services to Inter.
  • Regulatory Changes: Changes in financial regulations in Brazil or in the foreign countries where Inter operates may affect its profitability and ability to provide certain services or even operate.
  • Macroeconomic Instability: High inflation, interest rates, recession, and unemployment rates in Brazil could adversely affect the company’s growth, revenues and profitability.
  • Cybersecurity Risk: As a fintech company, Inter faces the threat of cyberattacks that can compromise client data and disrupt operations. They need to constantly be working on improving its cybersecurity and data protection measures, because a breach can potentially cause a lot of financial loss, but most importantly, severely damage the trust that its clients have in the company.
  • Execution Risk: The ability of the management to execute well the company’s strategy is crucial for its future success. If management fails to properly introduce its products, or fails to adapt quickly to market changes, then all of its potential for growth may diminish drastically.

Business Resilience: While these risks are serious, Inter has shown resilience in the past.

  • The company has a loyal customer base, which it can maintain or even grow with a good product.
  • Its digital business model allows them to be quick to adapt to new market conditions and introduce new products more easily than its legacy competitors.
  • The company has a well-defined strategy in place which helps it to navigate through competition from its competitors.

Financials

Inter & Co’s financials show mixed results, reflecting its growth and expansion efforts, but also some of the challenges faced by the company:

  • Revenue Growth: Over the years, Inter’s revenue has shown consistent growth, which shows the increasing adoption of its products and services.
  • Profitability: Although it has shown strong growth in revenues, Inter struggles to make substantial profits. For the years ending 2020-2022 they were consistently unprofitable, with an operating loss of -R$1.9 Billion (2022), -R$1.2 Billion (2021), and -R$741 Million (2020). For the 9 months ending on Sept 30 2023, they were also unprofitable at -R$255.6 Million. However the adjusted EBITDA for these same periods have been on average around 20%. This is partially due to heavy marketing and operational expenses that the company incurs as they scale.
  • Margins: Even if the company is operating at a net loss, gross profit and EBITDA margins are improving as more customers join the platform, the costs of running and operating the business are spread out among a greater client base.
  • Capital Adequacy: The company holds more than 20 percent of equity relative to risk-weighted assets. This is considerably higher than its local competitors.
  • Leverage: Inter’s debt levels are low relative to equity and assets. The majority of financing comes through deposits of clients.
  • Cash Balance: The company has a cash equivalent balance of over 7 Billion Reais, which translates to over 1.5 Billion USD.

It is worth noting that a lot of the company’s losses come from non-recurring expenses related to previous acquisitions and other one-time expenses, which they do not count when evaluating their real underlying profitability and how the business is growing.

Understandability Rating: 4 / 5

The company is a fairly easy to understand business, that does not rely on highly specialized operations to bring value.

  • The company’s products and services are generally simple to understand (checking accounts, credit cards, loans, insurance and brokerage).
  • The company operates primarily in Brazil, which is well-defined and with some consistent characteristics.
  • Financial statements of the business are quite straightforward to analyze.

However, the market is complex due to regulations and the amount of competition, making it hard to evaluate the company without having in-depth market knowledge.

  • There are constant regulatory and governmental announcements, changes, rules, and implications that the management has to constantly adapt to.
  • There are numerous competitors offering similar products, even if Inter has more integration of services in its Super App.

Justification: The simplicity of the business model, but complex regulatory structure and high competition brings the understandability score to a 4.

Balance Sheet Health Rating: 3/5

Inter has a decent balance sheet, but not without some areas of concern:

  • Liquidity: The company is not highly leveraged and has a very large cash balance. It can cover all its financial obligations and still operate without the worry of going bankrupt, even during a temporary downturn in its business.
  • Solvency: The company’s equity-to-asset ratio is 24%, above the regulatory minimums. It has sufficient resources to handle potential losses or write-offs. Also, the debt levels are low compared to equity and assets.
  • Asset Quality: The majority of assets are in the form of loans to customers, and a smaller amount is in cash. While this is acceptable, these type of assets are not totally safe, because they depend on the repayment capacity of their clients. The quality and diversity of the loan book is a key aspect to consider.
  • Profitability: The company is not profitable in its operations and is still relying on external capital to maintain its business. However, operating and gross profits are improving over time.
  • Capital Adequacy: The company currently holds capital at more than the regulatory requirements and has no intention to raise more capital.

Justification: A score of 3 is given due to the fact that the company has a solid balance sheet, but is not a highly profitable company.

Recent Controversies and Problems

  • Macroeconomic instability: Brazil has been in a state of economic uncertainty. High interest rates and high inflation have resulted in lower customer spending, which has affected all banks.
  • Political risk: The political situation in Brazil is uncertain and this has made the investors wary of the future of Brazilian companies. Recent change in government has spooked investors.
  • Increased competition: Competition from Nubank, PicPay, and other banks have hurt the earnings and customer acquisition rates of the company.
  • Credit Risk: There are always concerns over the quality of lending when the credit markets are highly uncertain.

Management’s view: The management team has acknowledged that there are some difficulties in the business environment, but they see them as opportunities to innovate and improve the business. They have continued to show improved customer acquisition rates and increase the percentage of engaged clients. Also, management has implemented several plans to reduce operating costs. One of them includes increasing their revenue by focusing on cross-selling their different financial products, rather than focusing on only growing their customer base. They have also mentioned their focus on providing highly personalized experiences to their clients.