A fintech with potential in Brazil - Inter & Co (INTR US)

I think the world is on the cusp of change. Inflation is coming back. Countries are fighting for resources to ensure self-sufficiency. S&D demand shortfalls will develop in some commodities sometime in the future e.g. copper. Most people may have forgotten.. In the 1990s, Latam was the best performing region in equities, even better than developed markets.

Why Brazil ? Brazil is the largest economy in the region. The country has a lot of natural resources. It stands to benefit as commodity prices rise. There are two other important drivers.  Unlike most countries in the world, Brazil central bank has plenty of room to cut rate. Inflation is around 4-5% vs. interest rate of 15% or so. In addition, Brazil will have its general election in Oct 26. If the opposition wins, it will be bullish for the domestic market.

Inter is a digital bank in Brazil. Why should we be interested in a digital bank in Brazil ? Access to credit remains "constrained" for consumers. Domestic credit card interest rate can be punishing (well over 50%).  The incumbent banks have locked up the well to do folks. Fees were high. There are plenty of loan products for Fintech to disrupt and younger folks have growing banking needs as well.

When it comes to a bank, it is important to look at its track record. It has grown revenue over 30% CAGR in recent years. ROE went from break even to 15%. It grew its active clients from 10M to 26M since 2022.

What is impressive about Inter is it has the lowest cost of deposit in Brazil. Reason is its technology stack i.e. its online banking app is so easy to use that consumers park their transaction account at Inter over other banks.

Unlike its fellow fintech with a high profile (NuBank), Inter's loan book is more like a traditional bank than a fashionable fintech. 2/3 of its loans are secured.  Importantly, in the past few years, it kept its credit quality under control despite growing fast. Remember Brazil has been in this punishing high interest rate for some years... Inter's credit engine is proven.

What is so interesting about Inter ? It has proven itself that it is more than a typical run of the mill fintech. It has scaled to a decent size (26M active accounts i.e. around 10% of the population use Inter). It managed to develop new loan types e.g. private pay roll, mortgage, credit card etc etc.... It managed to re-price its loans as interest rate jumped. It is a decent fast growing bank, rather than a "fintech" in my view. The management team is solid and entrepreneurial.

Inter has a long growth runway. It has 44M accounts, of which only 9M accounts borrow from Inter. So cross selling potential is there. Its lower funding cost + lower cost to serve (as it is a digital bank) will allow it to grow market share in different lucrative credit products (see pic 3). It is building out its presence in high margin businesses e.g. remittance/accounts catering to Brazilians overseas, accounts for SMBs etc etc.

In the next 3 years, its management is aiming for the "Rule of 50" i.e. ROE + growth will add up to 50%. Put it another way, Inter sees a path to 20% ROE at 30% growth... And at some point, ROE will hit 25% when growth may slow to 25%.

One risk worth mentioning is analysts are concerned about credit/loan quality in early 2026... My take is Inter will work through this credit cost hike in time. Furthermore, as central bank cuts rate, consumers will be less pressured. Also 2/3 of its loans are secured so credit quality will remain under control. NIM should still hold steady enough.

Valuation is attactive... Trading at 1.2X book... 8X PE in 2026.

In summary, I am betting on rising interest in Brazil from global money. Consumers will feel better as rates are cut. Inter is a good bank that is under rated by most analysts. Let's play around with some numbers. Earnings is expected to double between 2025-2029 (it is fast growing). ROE is expected to expand from 15% to 25% at some point. Why shouldn't Inter re-rate to 2-2.5X book in time ? In 3-4 years, stock should more than double.

Disclaimer: DYOR. Not financial advice. I may own the stock.