NU Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 14, 2023

There are 19 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to NOO Holdings' Conference Call to discuss the results for the Q3 of 2023. A slide presentation is accompanying today's webcast, which is available in NOO's Investor Relations website, www.investors. New in English and www.pontouinvestidores Ponto Nu in Portuguese. This conference is being recorded, and the replay can also be accessed on the company's IR website.

Operator

This call is also available in Portuguese. To access, you can press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. After that, select mute original audio. Please be advised that all participants will be in listen only mode. You may submit online questions at any time today using the Q and A box on the webcast.

Operator

I would now like to turn the call over to Mr. Jorg Friedman, Investor Relations Officer at NOO Holdings. Mr. Friedman, you may proceed.

Speaker 1

Thank you very much, operator, and thank you all for joining our earnings call today. You have not seen our earnings release, a copy is posted in the Results Center section of our Investor Relations website. With me on today's call are David Velez, our Founder, Chief Executive Officer and Chairman Josef Flarasz, our President and Chief Operating Officer Guilherme Lago, our Chief Financial Officer and Jagie Dougal, our Chief Product Officer. Throughout this conference call, we will be presenting non IFRS financial information, including adjusted net income. These are important financial measures for NU Holdings, but are not financial measures as defined by IFRS and may not be comparable to similar measures from other companies.

Speaker 1

Reconciliations of our non IFRS financial information to the IFRS financial information are available in our earnings press release. Unless noted otherwise, all growth rates are on an year over year FX neutral basis. I would also like to remind everyone that today's discussion might include forward looking statements, which are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties and could cause actual results to differ materially from our expectations. Please refer to the forward looking statements disclosure in our earnings release.

Speaker 1

Today, our Founder, Chairman and CEO, David Velez, will discuss the main highlights of our Q3 2023 results and provide an overview of our company Flywheel. Subsequently, Guilherme Lago, our CFO and Josef Laroche, Our President and CEO will take you through our financial and operating performance for the quarter. After which time we will be happy to take your questions. Now I'd like to turn the call over to David. David, please go ahead.

Speaker 2

Thank you, Jorg. Good evening, everyone, and thank you for being with us today. Once again, in Q3 2023, NOO continued its remarkable upward trajectory, demonstrating strong operating performance, fast growth and increasingly robust profitability. We remain focused on executing our business plan without distractions, while keeping an eye on the significant growth opportunities have as a company in the long run. Reflecting on one of the key milestones of the Q3, our pace of customer growth exceeded our expectations, culminating in over 89,000,000 customers at the end of the quarter.

Speaker 2

Once again, we witnessed robust customer acquisition in Brazil, Mexico and Colombia with slightly more than 1,500,000 new customers per month. Over the past 12 months, our customer base growth in Brazil has outpaced that of the 5 largest incumbent banks combined. Additionally, we welcomed over 700,000 new customers from Mexico during the quarter, driven by the rollout and continued expansion of Cuentanu and the unlocking of our member can member referral programs potential. Our business model continues to demonstrate its ability to drive both growth and profitability. In the 3rd quarter, Our revenue surged to $2,100,000,000 marking a 53% year over year increase.

Speaker 2

Our gross profit reached $915,000,000 doubling year over year, while our gross margin expanded once more, reaching 43% this quarter, solidifying the upward trajectory initiated last year. Sequential gross margin expansion, Coupled with further efficiency improvements, significantly boosted our net income, which reached $303,000,000 And adjusted net income stood at $356,000,000 reflecting a 34% quarter over quarter increase on an FX neutral basis for both. This slide provides a high level overview of our financial performance trends over the past 2 years. It underscores our ability to consistently expand our customer base and increase revenues while driving profitability. Notably, in October, we reached a significant milestone by surpassing 90,000,000 customers, firmly establishing us as the 4th largest financial institution in Brazil in terms of the number of customers, whereas the 2nd largest measured by the number of customers with access to a credit product.

Speaker 2

The robust growth of our customer base, driven by the growing cross selling and up selling Chinnity's facilitated by our highly engaged platform resulted in a more than 4 fold increase in quarterly revenues in just 2 years on an FX neutral basis. This translates to a triple digit revenue annual compounded growth rate over this period. The 3rd chart of this slide effectively illustrates our prudent pricing strategy and robust underwriting capabilities. Our quarterly gross profit calculated as total revenues minus funding costs, transactional expenses and credit loss allowances also increased by more than fourfold in the same period. This growth was achieved while maintaining healthy gross profit margins despite increased credit delinquency observed in the market over the past 12 months.

Speaker 2

Lastly, we believe the synergistic impact Of the mentioned factors, combined with the potent operating leverage of our platform and the maturation of our early products in Brazil, has led to a significant acceleration in net income growth. This growth is evident in the chart on the right, covering the past three quarters. We anticipate this compounding effect to continue in the coming periods, resulting from the combination of sustained growth and enhance profitability within our platform. As evident from this slide, Our platform continues to showcase its cross selling potential, offering our customers comprehensive solutions as we continue to expand the scope and diversity of our product offerings. While our initial focus was primarily oriented towards unbundling financial services, As our platform has evolved, today we expect our most significant opportunities to line the rebounding of financial services by creating a diversified multiproduct, multisegment and multicountry portfolio of businesses.

Speaker 2

As illustrated on this slide, Even our complementary businesses have successfully attracted millions of customers, highlighting our impressive cross selling capabilities. As we will delve into later in this presentation, we believe that critical product launches announced this year and slated for 2024 will help further solidify our position as the preferred banking partner for an increasing number of customers. We expect this In turn, we'll drive the expansion of our growth and profitability engines. I'd like to take a moment to delve into our company's flywheel, a pivotal driver of our past growth and an essential foundation for future success. The core element of our strategy is very simple.

Speaker 2

We work extremely hard to make customers love us fanatically As we build what we think are the very best products and services in the markets we operate, this obsession for our customers' experience Enables our customer base to expand both in terms of size and engagement. By the end of Q3 'twenty three, we had achieved an impressive milestone with over 50% of Brazil's adult population as part of our customer base and steadily increasing market shares in Mexico and Colombia. This level of scale allows us to aggregate both structure and unstructured data, which becomes an invaluable competitive asset as we currently accumulate Over 30,000 data points on each active customer annually, and this is growing exponentially over time. Through harnessing cutting edge technology, we've transformed this data into actionable intelligence, continually enhancing our credit underwriting and customer insights models. These model refinements, in turn, empower us to broaden the scope of our product offerings, reaching even larger segments of the populations we serve.

Speaker 2

This scale also allows us to reduce our operational costs, Efficiency, which we then decide to pass to our customers via lower prices, helping us to provide better products and services at competitive rates and thus starting the virtuous cycle again. The momentum we're seeing over the past 12 months is a direct result of this flywheel accelerating. And in Q3, we had the opportunity to throw fuel to the flywheel with the introduction of new lending products such as payroll lending, where we decided to price at very competitive price points. The efficiency of our model also enables us to make these pricing decisions, While maintaining healthy unit economics, we're seeing meaningful price elasticity in these products and are excited about the opportunity to use our efficient cost structure and data sophistication on our customers' behalf. Now, I'd like to highlight how our flywheel isn't just driving customer acquisition data growth, but also sustaining strong momentum in our key financial metrics.

Speaker 2

As our 3 geographic regions continue to expand, benefiting from the inner and operating leverage of our model, where a holding company is effectively converting its potential into profits. In the Q3, NU Holdings achieved an impressive adjusted net income of $356,000,000 reflecting an adjusted annualized return on equity of 25%. We believe our current level of profitability already positions us ahead of most traditional and common banks in the Latin American region. It's worth noting that we achieved these remarkable results even as Mexico and Colombia continue to be in the early stages of investments, And we believe NU maintains a considerably larger capital base compared to our peers. As a reminder, We're a holding company holds $2,300,000,000 in excess capital, which can be strategically allocated to our operating subsidiaries as we continue to grow.

Speaker 2

As a reference, if we take our Brazilian operation, considering this excess cash, we could cover 3.1x The required capital for Brazil. It's important to underscore that we're achieving these strong levels of profitability, while making substantial investments in future products and geographic expansion. Simultaneously, we're delivering a robust 53% year over year revenue growth rate, a feat that we believe few financial institutions at our scale can match. As you can see, we're once again thrilled with the momentum of our business. And now, I'd like to pass the floor to our CFO, Guillermo Lago, who will guide you through our financial numbers.

Speaker 2

Over to you, Lago.

Speaker 3

Thank you, David, and good evening, everyone. As David mentioned, we have once again achieved a strong quarter in terms of our operating and financial key performance indicators. This accomplishment is a result of our commitment to a simple yet powerful value generating strategy, which can be summarized into 3 guiding principles. First, we continue to expand our customer base in the markets where we operate, quickly transforming new customers into active ones. 2nd, we are focused on increasing the average revenue per active customer or ARPAK through effective cross selling and upselling initiatives.

Speaker 3

And third, we are dedicated to achieving growth, while maintaining one of the industry's lowest operating cost structures. Let's delve deeper into our Q3 results to understand how these three principles continue driving value for our company. During the Q3, our customer base continued to display impressive growth, Expanding by 27% year on year as we welcomed 5,400,000 new customers, bringing our total to 89,100,000 customer at the quarter's close. Notably in Brazil, Our monthly net additions remain steady with slightly over 1,500,000 customers, a Significant portion of whom were acquired through cost effective organic channels. In Mexico, our customer count Crossed the $4,300,000 mark and in Colombia, we are now serving nearly 800,000 customers.

Speaker 3

We are preparing to introduce our savings account in Colombia by year end, anticipating further growth. Our active customer base increased by 29% year over year with the monthly activity rate Posting another sequential quarterly increase, reaching 82.8%. We believe this outcome Turning our attention to revenue expansion. The first chart highlights that Niu has established primary banking relationships With nearly 60% of our active customer base, as we have emphasized in previous discussions, The more customers choose NU as their primary bank, the more products they tend to utilize. We see the synergy between these two factors as continuing to be the driving force behind the sustained quarter over quarter growth in the RBAC.

Speaker 3

The second chart illustrates our product cross selling performance, showcasing our successful strategy of introducing new products to our customers, effectively cross selling and establishing ourselves as their primary banking partner. Lastly, The 3rd chart depicts our ARPAK performance. This chart represents the compounding effect of our expanding customer engagement As demonstrated in the first chart, combined with our growing product cross sell capabilities as shown in the second chart, In this quarter, our monthly ARP packet reached a new milestone, breaking into double digits at $10 Furthermore, our more mature cohorts are already achieving a monthly ARPAK of $26 The increase in ARPAK has resulted in another quarter of solid revenue growth as depicted in the next slide. Monthly ARPAK has continued its growth trend, expanding by 18% year over year for yet another quarter. As we have emphasized in previous discussions, our confidence remains high that there is still untapped potential For further ARPAK growth, moving us closer to realizing what we believe is our full ARPAK capacity.

Speaker 3

This ARPAK growth, coupled with the expansion of our customer base, has led to a 53% year over year increase in revenues, reaching a new record high of $2,100,000,000 Now let's delve into our cards business. Purchase volumes have surged to 29,000,000,000 marking a 28% increase compared to a year ago. Once again, this growth has been primarily driven by our successful product up The chart on the right illustrates the correlation between purchase volumes and the aging of customer cohorts. Notably, older cohorts continue to exhibit higher purchase volumes, spending more per month compared to recent cohorts. We believe the compounding effect of integrating millions of new customers each quarter, coupled with their gradual transition to higher spending patterns will help support the future growth of purchase volumes.

Speaker 3

When comparing our purchase volume relative to the market, this quarter, our market share for credit cards stands at approximately 13.7%, up from 12.2% 1 year ago, with prepaid cards at 15.5% compared to 12.8 percent 1 year ago. As we continue to gain ground, our confidence in our ability to capture Additional market share in the future grows. This confidence is grounded in the consistent pace of customer acquisition and the deepening maturity of their relationships with us. Our credit cards and personal loans portfolio, also known as the consumer finance portfolio, reached a significant milestone this quarter, now amounting to $15,400,000,000 and marking a 48% year over year growth. Both segments of our portfolio maintained their growth trends.

Speaker 3

Credit card loans expanded by 46% year over year, now standing at $12,300,000,000 We believe this growth is a direct result of our consistent pace of customers onboarding into our ecosystem and our low and grow credit expanding approach. Furthermore, our personal loans portfolio growth rate accelerated sequentially, Registering a 48% increase year over year and reaching $3,100,000,000 Our personal loan cohorts continue to exhibit the expected behavior, enabling us to increase originations for yet another quarter. We see meaningful opportunities to continue to expand our credit portfolio going forward with attractive returns and robust resilience. As a result, this may intentionally lead to higher delinquency rates, but our goal is to ensure that those will be more than offset by additional revenues and result in higher risk adjusted net interest margins. Now let's delve deeper into the breakdown of interest earning loans within our credit card portfolio.

Speaker 3

Our interest earning installment balance continued its growth this quarter, now constituting 21% of our total credit card loan portfolio. This expansion is a direct result of our strategic commitment to bolstering our transactional financing product portfolio with a special emphasis on fixed financing. This strategy is intended to capitalize on the increasing adoption of peaks in Brazil, where we remain one of the leaders among peak service providers. Over the past year, we have steadily expanded our transactional financing portfolio, and we see its performance reinforcing our belief in its ability to deliver highly attractive risk adjusted rates of return. This approach not only allow us to monetize our credit card business and our fixed market share, but also unlocks substantial value for our customers.

Speaker 3

Our personal loan portfolio continues to demonstrate impressive resilience, aligning with our expectations for asset quality and allowing us to steadily sharpen our credit underwriting and expand our origination levels. In the last quarter, personal loan originations saw a 93% year over year increase, reached an all time high of BRL8.9 billion. Furthermore, We have made substantial progress in broadening our lending product portfolio. Year to date, we have introduced Payroll loans for federal public servants and retirees as well as FGTS back end loans for the wider Brazilian population. Additionally, We have initiated the offering of unsecured personal loans for our Mexican customers.

Speaker 3

While these new products may not have a material impact On origination volumes or on credit portfolio for 2023, we expect them to lay the groundwork for continued growth and an even more resilient credit portfolio in the coming years. Our confidence in our ability to sustain and drive substantial growth in the personal loan segment is underpinned by several factors. This include our substantial and expanding customer base, our strong underwriting platform, our robust capital base and our ample liquidity position. Moreover, as of June 30, around 50% of the outstanding balance of unsecured personal loans in Brazil was already held by NUS clients and nearly 40% of the outstanding balance of payroll loans in Brazil is also held by NOO's clients. In essence, we believe we have significant opportunities to expand our market share in this credit product, while selectively targeting our most valued customers.

Speaker 3

Now let's turn our attention to funding. Our total deposits continue their growth, expanding by 26% year over year and reaching $19,100,000,000 this quarter. This progress indicates another significant strides towards the realization of our objective, which is building one of the most robust local currency retail deposits franchise in the region to support our consumer finance operations across the 3 geos where we operate. Our loan to deposit ratio, or LDR, For this quarter, remained stable at 35%, with deposit growth showing sequential acceleration. 1 year ago, our LDR was at 25%, indicating our ongoing efforts to optimize our balance sheet.

Speaker 3

But we believe there is still ample room for additional balance sheet optimization ahead. Our cost of funding for this quarter Held steady at 80% of the interbank deposit rate of Brazil, aligning with our expectations. This consistency underscores our progress in harnessing the value of our robust liability franchise. We anticipate a slight decrease in the cost of funding next quarter, given the seasonality observed in the final quarter of the year. Regarding Cuentanu in Mexico, at the close of the Q3, we had accrued over $150,000,000 in deposits and amassed almost 2,400,000 accounts.

Speaker 3

We believe the strong reception of our value proposition underscores our potential to further expand our deposit franchise model across Latin America. As mentioned previously, we also expect to launch our savings account in Colombia in the near future. Our net interest income, or NII, reached $1,200,000,000 this quarter, marking another robust period of growth with an 111% year over year increase. We believe this expansion can be attributed to the continued growth of our credit card and personal loans portfolio, which collectively have been the driving force behind the expansion of our NII and our net interest margin or NIM reaching new record highs. Our NIM achieved 18.8% this quarter, showcasing an increase of 7.7 percentage points compared to 1 year ago.

Speaker 3

Now let's focus on the 3rd pillar of our strategy, Achieving a low cost to serve. We firmly believe that our most relevant and differentiating competitive advantage lies in maintaining a low cost to serve. As we have highlighted in previous discussions, our objective is to sustain a cost to serve at or below the $1 level for the foreseeable future. In the Q3 of 2023, we once again successfully realized this goal With a cost to serve per active customer standing at $0.90 This figure currently remains virtually unchanged on an FX neutral basis Compared to 1 year ago, all while our ARPAK increased by 18%. We believe this outcome Underscores the robust operating leverage inherited in our business model.

Speaker 3

Our gross profit increased to a new quarterly record high, reaching $915,000,000 marking an 100% year over year increase. Our gross profit margin reached 42.8%, an increase of 1 percentage point sequentially and a 10 percentage point increase compared to the previous year. This data underscores the margin expansion that began in the Q3 of 2022. Notably, NOO achieved this result even in the face of higher credit provisions, a natural consequence of our growth in both credit card and personal loans as discussed in previous slides. We maintain our commitment to operating leverage as a defining element of our strategy.

Speaker 3

The chart provided here underscores the ongoing enhancement of our efficiency ratio over time. In the Q3 of 2023, We reached a new all time low, registering an efficiency ratio of 35%, marking the 7th consecutive quarter of improvement. We firmly believe that this level of efficiency positions New Holdings as one of the most efficient companies in Latin America. While we have already achieved an impressive level of efficiency, We anticipate additional gains in operating leverage as we continue to scale through increased customer expansion, Product upselling, cross selling and the introduction of new features and products. Also, we believe there is potential For increased leverage in the future, especially as our Mexican and Colombian geos, which are currently operating with losses, reach their inflection points.

Speaker 3

Lastly, in terms of profitability, we are delighted to report yet another Quarter of robust bottom line performance. Our adjusted net income has reached $356,000,000 Meanwhile, net income for the Q3 stood at $303,000,000 This strong and positive results serve as evidence of the effectiveness of our strategy and business model. While we are pleased with the results we have achieved thus far, It's important to reinforce that our business is managed with a keen focus on long term value creation. With this perspective, our strategy may entail additional short term investments aimed at unlocking further SaaSfully added more than 5,000,000 customers this quarter, while maintaining what we believe to be one of the lowest customer acquisition costs among consumer fintechs and banks on a global scale. On cost to serve, we consistently kept it below the $1 threshold, which we estimate to be approximately 85% lower than that of incumbents.

Speaker 3

Our efficiency ratio is at 35%, which we believe makes NU one of the most efficient companies in Latin America. Regarding cost of risk, We have effectively managed the risk within our credit portfolio even in the face of a challenging backdrop, Outperforming competitors on an apples to apple basis in terms of delinquency rates. And finally, On the cost of funding front, we maintain our cost of funding at 80% of CDI, all while increasing deposit volumes Thus, closing the negative gap against in common banks and widening the positive gap over consumer fintechs. We are pleased with the results achieved this quarter, and we remain confident in our ability to develop and scale best in class products, expand internationally and continue to operate at low costs. Now I would like to hand the call over to Youssef, our President and Chief Operating Officer, who will walk you through some of the key highlights

Speaker 4

Thanks, Lago. Good evening, everyone. I will now take you through some of the key indicators of asset Let's begin with NPL trends. Our leading indicator NPL 15 to 90 showed a slight improvement with a decrease of 10 basis points from last quarter ending Q3 at 4.2%. This was in line with our expectations.

Speaker 4

Our 90 plus NPL ratio increased from 5.9% to 6.1% quarter over quarter and was also in line with our expectations. It's important to note that this ratio exhibits a stock behavior due to loans moving through the delinquency buckets rather than a flow behavior. As a reminder, we haven't sold any credit receivables, so our NPL ratios require no adjustment. Renegotiations stood It's worth noting that nearly half of these renegotiations were from loans that were current and not past due at the time of renegotiation. Furthermore, about 90% of renegotiations occur before the loan is 90 days late, thus having a limited impact on NPL rates.

Speaker 4

I'd I'd also like to take the opportunity to reiterate what Lagu mentioned earlier. We see meaningful opportunities to continue to expand our credit portfolio going forward With attractive returns and robust resilience levels, we expect that part of that growth will come from expanding down the credit spectrum. As a result, This may lead to intentionally higher delinquency rates, but our goal is to ensure that these will be more than offset by additional revenues And result in even higher risk adjusted margins as we grow. Now Turning to the performance of our credit card portfolio versus the industry. These 6 graphs show the time series of NPLs for credit cards by incumbent.

Speaker 4

The purple line represents new and the gray line represents the Brazilian industry. As you can see, our NPLs continue to outperform the on a like for like basis in most segments. And this is even more pronounced within the lower income bands. The growth of our portfolio has a direct impact on provisions because we front load credit provisions when originating loans in accordance with IFRS 9 standards. Therefore, the increase in credit loss allowance of $628,000,000 this quarter directly reflects The elevated level of loan origination during the period.

Speaker 4

Despite this increase in provision volumes, our risk adjusted net interest margin reached a new all time high of 9.0 percent for the quarter, a 100 basis point increase quarter over quarter. Compared to the same period a year ago, risk adjusted NIM is up nearly 3x. In summary, We're very pleased with our results this quarter, with the progress we've made and the track record we've built over the years. Our asset quality and returns remain robust through the cycle, reflecting our effective approach to pricing and superior credit underwriting capabilities. We couldn't be more excited about the prospects for continued resilient With that, we're now ready to address your questions.

Speaker 4

Thank you very much.

Operator

We will now start the Q and A session for investors and analysts. If you wish to ask a question, Please click on raise your hand. If your question is answered, you can exit the queue by clicking on put your hand down. Please limit yourself to one question and a follow-up. If you have further questions, please reenter the queue.

Operator

You may submit online questions at any time today using the Q and A box on the webcast. I would now like to I'll turn the call over to Mr. Joerg Friedman, Investor Relations Officer.

Speaker 5

Thank you, operator. And our first question

Speaker 6

Hi, everyone. Good afternoon. Hope you can Jeremy, I wanted to ask about well, first of all, congrats on the numbers. I wanted to ask about Credit card growth on a sequential basis, we see the dollar numbers and those seemingly Decelerated quarter on quarter, but I'm wondering what the FX impact is. I don't we just don't know What percentage of the book is Brazil and versus Mexico?

Speaker 6

So it's hard to look at it on an FX neutral basis. But Just assuming most of it is in Brazil. I'm getting to a FX neutral quarter on quarter growth of credit cards Of around 6%, which is lower than the 10% you registered in the 2nd quarter and also 10% in the Q1, so somewhat of a deceleration. So wanted to see Indeed, those are the right numbers on an FX neutral basis. And if so, what do you think explains that much lower growth rate versus the previous quarters?

Speaker 6

Thank you.

Speaker 7

Okay. Thanks so much for the question. Yes, I think you are very much Right. On the needs to do an FX adjustment, I think the Brazilian currency depreciated in the Q3 of the year. And therefore, it probably makes more sense to look at this on an FX neutral basis.

Speaker 7

In our calculations, the FX neutral evolution Our total credit portfolio, both credit cards and lending, grew by about 9%, which we believe is Continues to be a fairly healthy growth. But in terms of credit card more specifically, in the Q3 of 2023, The overall market decelerated a little bit. We, however, continue to gain share. We grew what we estimate to be anywhere between 50 to 60 basis Point market share in the quarter. We believe that we have become the 2nd largest credit card issuer in Brazil already.

Speaker 7

And we also estimate that we will continue to acquire market share in the coming quarters. There is one additional caveat that I would make in the credit card numbers, Jorge, which is an accounting Change that we have made in the way that we account for the credit card receivables, starting in the Q3 of 2023, the credit card receivables Our accounted in our balance sheet has the present value of this future flows, just like the credit card payables, And that has cost us about $150,000,000 to $200,000,000 in the credit card book. Well, all in all, I think in FX neutral growth, anywhere between 7% to 9% for credit card, Robust market share gain and we becoming the 2nd credit card issuer in the country.

Speaker 6

Thanks, Lago. That was Very clear explanation. Thank you. I wanted to ask a follow-up also on credit, if I may. The follow-up is on On payroll loans, is there any metric that you can share on the payroll products during the Q3?

Speaker 6

What cross selling you've been able to do with your clients? What market share of origination you've achieved? Any metric would be very helpful for us to gauge your initial success of that product. Thank you.

Speaker 7

Jorge, let me start with Some comments and Jack who is here with us can certainly share more about the reception of the customer base. So We've launched as a recap the CRP Consignado product back in April 2023. We've launched FGTS in August 2023 And we launched INSS in October 2023. So the INSS, which is the largest payroll loan business, is not yet represented in our September 2023 books. And we have only now launched Portability.

Speaker 7

So we are in the very early days of the consignado Journey or the payroll loan journey in Brazil, but we couldn't be more excited, not only because of the customer reception to which Jack will allude to, But also given the sheer size of the opportunity that we have ahead of us. So the payroll loans is the largest asset class within consumer finance in Brazil. It accounts for about BRL650 1,000,000,000 of credit book and it also accounts for about 1 third of the profit pool of retail industry in Brazil. Our customers, if we stop growing today, our customers account for approximately 40% Of the total payroll loan books in Brazil, so just fishing inside of our fishbowl, we have a tremendous room of growth. In the Q3 of 2023, consignan or payroll loans accounted for about BRL300 million out of our BRL9 billion origination.

Speaker 7

So super incipient to move the needle in 2023, but we are very

Speaker 8

Compliments a few of the points that Lago made. As he said, we couldn't be more encouraged by the initial reception These payroll lending products as we put them out in the market over the last several months. If you look at the net promoter score for secured lending products, They're at 78 versus a category average of 44, so well above the average. As Lago mentioned, Newbank's customers account for 40% of the balances in the market And in our originations in these very early stages of the product getting launched was less than 4%. So we expect a lot of growth In secured being driven by secured lending as we head into 2024.

Speaker 8

The design of the product Has been engineered work backwards from the customer needs. We've built the product to be direct to consumer With a much simpler UX than is typical 100% digital flow, that allows us to Offer disbursement of the loan much, much quicker than what is typical in the market. And we're also able to offer the product At a very low price, typical versus what is typical in the market, our average right now is about 1.39% Versus a market average of about 1.8%. This is also a category where we found customers are Very responsive to competitive price and the price elasticity has been very, very high. So we see a lot of potential here, great early start, But a lot of room to go as we head into 2024.

Speaker 6

Thanks, Lago and Jacques, very clear. Thanks again and congrats on the numbers.

Speaker 5

And our second question comes from the line of Tito Labart at Goldman Sachs.

Speaker 9

Hi, good evening, everybody. Thank you for the call and taking my questions. Congrats also on the strong results. I guess, first question, in terms of the provisioning levels, it seems as you said, as a percentage of Loans actually came down for the first time in some time, actually As far as back as I can see, so some good asset quality trends early NPLs looked a little bit better 90 days, which are lagging, still going up a little bit. But just some thoughts.

Speaker 9

I mean, you mentioned as you grow, NPLs can go up. But in terms of where we are in the credit cycle, are you feeling More comfortable there to continue to accelerate growth? And how do we think about that cost of risk? Does this mean it's peak and maybe that could be a tailwind going forward? And how much of it was kind of impacted By sort of the FX impact on loan growth, I don't know if that had any impact at all.

Speaker 9

Thank you.

Speaker 10

Hi, Tito. This is Youssef. Thanks for the question. So let me address your question with a couple of points. First off, as you know, we don't provide guidance on NPLs or otherwise, nor do we try to time the cycle.

Speaker 10

Our philosophy is Credit is to originate and manage credit with strong resilient returns through the cycle. And I think our track record over the last 10 years is a good testament to that. But That being said, I would point out that what you see in our asset quality and delinquency metrics for both credit cards and unsecured lending The net result of 2 offsetting forces. The first thing is you got older cohorts that we've originated in the That are maturing and as they mature, they exhibit lower levels of delinquency. The second effect is new cohorts and growth brings Higher levels of delinquency as they are in the early part of their life cycle.

Speaker 10

And as Lago and I mentioned in the earlier part of the call, If anything, we see more opportunities to grow our credit portfolio in part through expansions, which will likely increase NPLs going forward. That's very intentional and we're very comfortable growing and accelerating that growth because we see those opportunities to expand. They will come with higher levels of returns and higher resilience that will more than offset those higher delinquency rates. So at the end of the day, our objective is not to minimize NPL, it's to maximize NPV, to originate resilient high return business. So Our posture is entirely consistent with that objective, and we feel very comfortable growing going forward.

Speaker 9

Okay. Thanks. That's helpful. Thanks for the color on that. And then following up, I guess, a little bit more kind of on the growth Outlook that you see.

Speaker 9

Maybe just on Mexico, if you can give any color, just looking at the regulated data, it looks like The loan portfolio is still not growing, but nice growth in deposits, clients, you mentioned, picked up as well. I think, Lago, you were in the press recently saying that we shouldn't expect Mexico to maybe be profitable next year. But any color you can give on the growth outlook For Mexico, both on deposits and loans into next year.

Speaker 2

Sure, Tito. Hi, this is David. So listen, we remain incredibly excited about Mexico. This is potentially as big of an opportunity As we have in Brazil, it's a very large market with an 11% credit card penetration. And we've seen very good product market fit since we launched about 3 years ago.

Speaker 2

I think on the credit side, What you will see us doing forward and what you might have seen us doing historically is growing a credit product is never a Trade line into the upper right. You will accelerate at times, you will de accelerate at times as we include new data sources, As we new food models into production, as we evolve our methodology, as we look at our test data, I would say, over the past Couple of months, we are in a phase in Mexico where we are increasing significantly the capabilities of our models and we're reading a bit The kind of the data that's coming out of our models after having gone from 0 to 1 of the largest credit card issuers in the country in about 3 years. So that's why you might see a bit of an acceleration on the growth on the credit card side. Expect us to continue growing as we get more comfortable in certain areas and we read better data, especially around the bank population, which is The challenge as well as the opportunity that we see in Mexico is bank arising 89% of the country. So on the credit side, I think we continue to grow fast, but I would say we are in a bit of a let's invest more and reaccelerate over the next few months.

Speaker 2

On the debit side, Encompact has been a phenomenal success. We're super happy with the initial receivable of the product, Which happened over a couple of months. We opened over 2,400,000 accounts, over $150,000,000 in deposits in a couple of weeks. We even decided to increase the yields that we're offering in the Nuquenta in Mexico to double down On the market opportunity that we're seeing there and making sure that we really position Nuquenta as the undisputable Best savings product in the country. And I think with this move on the US side, we are doing that.

Speaker 2

So we're very focused on winning this market And that's where we're willing to invest. You alluded to breakeven next year. We want breakeven next year in Mexico. We want to continue investing. As we see this opportunity of growth, we'll invest even more.

Speaker 2

We're in an opportunity where we have a very valuable and Earnings generating Brazilian business that can fund our growth into new geos. And so that's the playbook that we expect to Executing Mexico and in Colombia. And so just generally, we are really excited about what we're seeing, but Yes, we'll it will not necessarily be a full straight line. We will accelerate at times. We'll take different speeds.

Speaker 2

We'll go in one direction. We'll go in a bit of that direction, ultimately trying to become the leading digital banking franchise in the country.

Speaker 9

That's great. Thanks, David, and congrats again on the results.

Speaker 2

Thank you, Tinto.

Speaker 5

And our next question comes from the line of Mario Pierry at Bank of America.

Speaker 11

Hey, guys. Good afternoon. Congratulations on the quarter. Let me ask 2 questions as well and they're kind of follow ups to the questions that have been asked. When I look at your slide on Page 14, your loan book this quarter expanded by about $600,000,000 Huawei had expanded by $2,000,000,000 in the previous quarter.

Speaker 11

And then when we look on Page 16, Tim, you show that your origination jumped to $8,900,000,000 from $7,300,000,000 So I'm wondering why if you're originating so much more this quarter, why your loan book wouldn't have expanded at a faster pace? So I don't know if there's any accounting issues there. So that's question number 1. Question number 2 It's related to your slide on Page 26, the NPL trends. You clearly show, right, that you have lower NPLs Then the industry, but in some of these charts, we see that the industry seems to have that NPLs have peaked for the industry.

Speaker 11

But When I look at your numbers, they're still rising, especially when I look at the 1 to 2 months of minimum wage, The 2 to 3 months and also now you're seeing higher NPLs in the higher income brackets than the industry. So I would just like to hear your views here like the industry seems to be peaking, you're not peaking yet. What could explain that? And why are you seeing higher delinquencies in the higher income segments? Thank you.

Speaker 7

Mario, thank you so much for your questions. Let me try to take the first one and Youssef can eventually address the second one. So I think The two slides that you mentioned, the main difference that justifies the magnitude of growth is the facts. So The Slide 16, if you take a look at the title, it is denominated in local Brazilian reals currency. And when you look on Slide 14, That is dominated in dollars.

Speaker 7

So if you take a look at the growth of our loan book, It would have grown by only 4% in nominal dollar terms. But once you do FX neutral adjustment, it goes from It goes to between 9% 10% just because of the FX movements in the quarter. So we do believe that most of The potential discrepancy in growth base is a result of the FX depreciation of the Brazilian currency.

Speaker 10

And Mario, with respect to your second question on the NPL trends compared to the industry, you're correct in your observation, Some of these segments industry seems to have peaked and it's coming down. With respect to our trends, I'd go back to what I said A few minutes earlier, which is the net impact of older cohorts maturing and more growth being put on the book with higher levels of NPLs, That's the result of that dynamic. We actually expect that dynamic, if anything, to continue into the future as we see opportunities to expand. And then lastly on the highest income band, two things I'd say there is historically, we haven't had A big delta either way up or down versus the industry. And where it actually matters the most is where you have a higher risk content.

Speaker 10

So the lower Buckets is where we tend to have a much bigger advantage in terms of sort of apples to apples NPL comparisons.

Speaker 11

Okay. But as part of your strategy, it is right like you're trying to eventually increase your presence among the higher income Population in Brazil, does that mean that you're trying to be a little bit more aggressive and that's why that NPL could be a little bit higher?

Speaker 10

No, I don't think the monetization or the getting deeper in wallet in high income Would cause the trend we've observed on NPLs to deviate substantially. I think it's just it's the way it's been historically.

Speaker 11

Okay. And Laguer, let me go back then to the first part of the question, right, because if we convert the origination to dollars, Ryan, like we again, I quickly look at the FX here. You originated about $1,800,000,000 this quarter versus $1,500,000,000 in the second quarter. So when you originated $1,500,000,000 in the last quarter, we saw your loan book grow by almost $2,000,000,000 In this quarter, your loan book only grew $600,000,000 So is there any change in the maturity of the loans you're originating or You originated previously?

Speaker 7

No, Amar, I think there is no there has not been any material change in the average duration or in the I think the origination that you're showing that you're referring to is related to personal loans only, Which accounts for about 20% of our book more or less, right? So if you take a look on Slide 14 And if you do an FX adjusted GAAP, you will see the gap in growth is justified for us having an average duration of the personal loan book Somewhere between 5 6 months.

Speaker 11

Okay. Thank you.

Speaker 7

Thank you, Mario.

Speaker 5

As a reminder, I asked analysts to restrict yourselves to one question and follow-up, so we can take all of the questions in the And our next question comes from the line of Jeff Elliott, Agoutonemes.

Speaker 12

Hello. Thanks very much for taking the question. Can you hear me okay?

Speaker 5

Yes. We can hear you well. Thank you.

Speaker 12

Thank you. Question on the deposit side. There was quite A big increase in interest expense and particularly interest expense on Deposits in the quarter, I think, up from something like $400,000,000 to 4 60,000,000 I mean, I guess the growth in the previous quarter was a factor, but can you just help us understand that? It looks like quite a Big step up in deposit costs this quarter.

Speaker 7

I mean, thanks for the question. If I understand right, you're asking why our interest expense have gone up. And it's just not only the growth in deposits, but also the growth in our finances. So our operations In Mexico and Colombia are primarily funded through bilateral financings and syndicated loans, and they have also contributed to

Speaker 12

Thanks. I was more focused, I think you break out the deposit part in the financial Statements and that part specifically $401,000,000 in 2Q, dollars 464,000,000 In 3Q, so pretty big increase just on the deposit side.

Speaker 7

Yes. So I think the deposit size, the 3 months Deposits, I'm looking at the financial statements, Joe, it went from for the 3 months, Went from about $430,000,000 to $463,000,000 in interest and financial expenses, the interest expense and deposits, which is largely a result of the growth in the sheer size of deposits that reached $19,100,000,000 in the quarter. The other relatively jump that you see in interest expenses going from $29,000,000 $74,000,000 that is the direct result of the growth in the finances of Mexico and Colombia.

Speaker 12

Okay, thanks. Numbers I can see for 2Q look a little bit different, but maybe we follow-up later. Thanks very much.

Speaker 7

Thank

Speaker 5

you. And our next question comes from the line of Pedro Leduci of Pedro, your line is open. Pedro, I think we can hear you. So let's try to take the next question and we can Come back to Pedro later. So our next question will come from the line of Thiago Batista at UBS.

Speaker 13

Yes. Hi, guys. Ernest, me?

Speaker 5

Yes. As you can hear, Thiago. Thank you.

Speaker 13

Okay. Hi, guys. My question is about the high income segment. You already commented in the past that this Should be a focus of new in the future. And my question is, the first one, is it possible to really Chief to this client without a kind of banking manager or branch manager or financial advisor.

Speaker 13

Do you see this Nunu Bank serving those clients fully digital? And also, if it's possible to maintain The same level of ROE in your Brazilian operation, let's say, 30% to 40% in this high income segment.

Speaker 8

Thank you for the question. If you think as we think about the high income segment, which you are correct, is an important focus For the company, we think about it in 2 steps. The first step for context is customer acquisition And the second step is how do we monetize that customer base. Our customer acquisition has Made a lot of progress over the recent quarters. We now have about 60% of the high income customer segment As customers of Newbank and within the high income customer segment, we have The leading NPS in the market.

Speaker 8

On the monetization side, it's a marathon. It's not a sprint and we're still in the very Early days of that process. We do believe that both the customer acquisition as we've already demonstrated, but also the monetization can be achieved With a high degree of customer satisfaction and customer happiness in a digital way, We do intend to invest additional focused efforts to make sure that we're doing everything we can to delight the high income customers, but we think that Can be done following the template of how Newbank has operated over many years, so essentially in a digital first manner. The initial signs on monetization have been very positive as we build out as we build on our customer acquisition efforts. There are, we believe, 3 core components to having a compelling solution for high income customers.

Speaker 8

There is having a payments and banking and account infrastructure that they find compelling. And on that front, we are the leader in terms of, for example, PIX usage at well over 20% Share as a transactional account. On the credit side, we've made a lot of progress this year. We have for our Ultra Violeta product, for example, been able to double the average credit limit. We've been able to roughly double the number of Ultra Violeta Customers and we've also been able to double the purchase volume on the Ultra Vialanta credit card.

Speaker 8

And as we go forward, We are working on wrapping a bundled solution around that flagship credit card product that will drive the event. And on the investment side, overall, we've seen AUC grow 50% year on year. So we believe we're making a lot of progress with high income customers, Getting them to try and start developing the habit of using our products. We have a long journey ahead of us, But we are confident in the direction we're going. We believe we can do that with strong unit economics and overall returns, And we believe we can do that with following the new bank template that we've had historically across the market with a digital first approach.

Speaker 7

And just to compliment, no, we do not expect that our share of wallet gain in high income will dilute our margins and returns.

Speaker 13

No, very clear. If I can do a small follow-up. You said you commented a couple of minutes ago that it's possible See a higher delinquency ratio together with higher margins or margins after provisions at least. This Yes. How do you guys see the peaks finance?

Speaker 13

Do you believe that peaks finance should bring higher delinquency ratio with higher after provisions margins?

Speaker 10

So, Teva, the way I would think about the impact of fixed financing is just One additional way to enhance the product, it adds our pack per customer. It brings more interest bearing balances at the customer level. And so it just makes the unit economics of credit card More attractive, which in turn allow us to do a couple of things. 1 is increase credit limit selectively and also acquire more customers profitably that we might not have acquired So you kind of get the second order impact of being able to grow more at more attractive returns, albeit for part of those The higher growth at higher levels of NPLs.

Speaker 13

Very clear and congrats for the results.

Speaker 5

Thank you. And we will try to come once again to the line of Pedro Leduci, Editau.

Speaker 14

All right. Thank you so much, Jorg.

Speaker 2

Hope you

Speaker 14

can hear me now. Coming back quickly To the before mentioned accounting change that you had and impact of the credit card balance, the reason I'm asking is because In our BRL estimates, it looks like the installment credit card product decelerated a lot, and it's probably where this accounting change Most impact. So it probably grew, if you can understand, help us understand by how much And the innovation products, PIX Credit, Toboleto, how relevant they are becoming and how much they grew this quarter, But really trying to get all accounting constant growth figure for the installment credit card with interest figure for the quarter. Thank you.

Speaker 7

Thank you for your question, Pedro. So let me request. So the accounting change that we implemented with respect to Credit card receivables and credit card payables in the Q3 was one whereby we are now representing those receivables and payables According to their respective present value. And what does that change? So if you take a look at our financial statements in the credit card receivables In the line that we call receivables installments, that is where you will see those numbers being affected.

Speaker 7

And in the liability side, in where you call payable to the networks is where you're going to see a corresponding impact Almost offsetting each other. With respect, Pedro, to your question about the growth of our interest bearing balance, I would draw your attention to Slide 15, 15, in which you can see that for another consecutive quarter, our The share of revolving balance has remained largely unchanged at about 7%, whereas the share of the finance portion went from 19% to 21%. Most of this growth can still be attributed To the continuous growth of PIX and Bolidento Finance.

Speaker 14

Okay. And this slide, Lago, the 2Q was also restated For that accounting change, so it's comparable?

Speaker 7

No, no, no, it has not. Only we started to make this new accounting treatment only in the Q3 of Only in the Q3 of 2023. There has been a lot of volatility whatsoever.

Speaker 14

And the impact you said earlier was like $150,000,000 to $100,000,000 So we can Probably do the adjustments here to the comparable.

Speaker 7

That's correct, Pedro. Thank you.

Speaker 14

Thank you.

Speaker 5

And our next question comes from the line of Edoardo Rosman at BTG.

Speaker 15

Hi, everyone. I have a question, I think, to David. I think in a recent podcast interview, I think you talked about going beyond financial services and that you would be dedicating an important part of your time chasing that goal. So Can you share with us the potential opportunities there? Is this something that we should be seeing a couple of years down the road?

Speaker 15

Or Can we expect something, let's say, in the short term? So it would be interesting to know what you're thinking about. Thanks.

Speaker 2

Yes, sure, absolutely. So listen, I think when we take a step back and we think about what we're building and what we have built in these 10 years. We realized that with a $90,000,000 and growing fully digital consumer base, Which is one of the largest in Latin America already, one of the most valuable brands and highest NPS, a really data rich ecosystem, Very high engagement and an opportunity to do a lot of cross sells. This platform that we're building opens up a bunch of new optionalities ahead of us. These are optionalities that are going to take a long time to figure out, not necessarily something that happens very fast.

Speaker 2

We are actively thinking about how do we As we think a bit of our evolution around, effectively the 1st 10 years, we had to catch up to the big banks, Right. We started with our simple credit card, unbundling the entire financial services products, and then we were in a complete race to try to fill all the gaps that we had in financial services to be a priority. And we are Services to be at parity. And we are getting close to parity. Obviously, there are a couple of things that we need to improve in certain areas, More insurance products, more investment products, very valid proposition for high income.

Speaker 2

But in generally, we're at least getting very close to the core products that somebody needs to Have to choose us as their primary bank account. And then we Our thinking about the next 10 years are on how do we really change the game in the market? How do we escape competition? And this is Reinventing a number of several products and this is using all of those assets that I mentioned, specifically this base To provide more products and services to our users. So we are here thinking about Year 4, 5, 6, 7 from now, these are going to be generally low investments over the next few years.

Speaker 2

We're operating In our way, we have a number of different startups within the startup. Some of the products that we've launched already that we're growing are, for example, marketplace, Where we already have several 1000000 users already buying non financial products and services in our app. We are seeing pricing into contraction in NUPAY, which is a new way to pay online today with a number of different merchants. We are bringing increasingly the concept of the AI Private Bank, where we see AI being able to play a significant role. And under those roof, there is a number of our initiatives that we are spinning out, always in a way where they are Provide a lot of optionality.

Speaker 2

We like to invest little money upfront, let the teams run. And as we start seeing product market feeding, we get excited about the Potentially, in the long run, we invest more resources and energy into this. So Big answer to effectively tell you, we're actively thinking about the next 5 years, but we're also actively thinking about the next 10 years. And we think the opportunity ahead of us is just much bigger That's simply building one of the most profitable and efficient banks in the world, which we're getting close to be. And we want to make sure that we take advantage of the opportunity of some of the different assets that we are being able to accommodate and aggregate under one roof for the past few years.

Speaker 15

No, great. And again, thanks for the numbers and congrats on the results.

Speaker 2

Thank you so much.

Speaker 5

And our next question comes from the line of Neha Agarwala at HSBC.

Speaker 16

Hi, congratulations on the results. And I have a few questions. First one on credit card.

Speaker 7

Sorry, Nina, I apologize that we can't hear you very well. Would you mind speaking up a little bit?

Speaker 16

Sure. Is this better?

Speaker 7

Yes, it's slightly better. Thank you.

Speaker 16

Okay. I'll try to speak loudly.

Speaker 7

That was perfect. Thank you.

Speaker 16

Okay, perfect. So first question is on the credit cards. I noticed that the Stage 3 loans for credit cards has continued to rise for the last few quarters an increase from 7.7% last quarter to 8.1% this quarter, while the cost of risk for credit cards as such has continued to decline quarter on quarter. So could you explain that dynamic why the cost of fiscal is declining and the Stage 3 loans continue to increase? My second question is on capital.

Speaker 16

I noticed the increase in the RWA and that the Basel ratio has halved To almost 11% now, given the large increase in the RWAs, Do you see the need of, say, sending some capital to Brazil in next year? Or do you think The profit that is generated in Brazil will be sufficient to meet the capital requirements. Any color on that? And lastly, and I know this is something which We don't have much clarity on today, but any update or any news on the pending credit card regulation would be very helpful. Thank you so much.

Speaker 7

Thank you so much for your questions. Let me try to start from the last one and then We'll bring forward. So on the credit card industry regulation, so those continue to be ongoing discussions Involving multiple parties of the credit card industry, both issuers, acquirers, merchants, consumers And the Brazilian Central Bank and the Ministry of Finance and the Ministry of Planning as well. We have been an active participant in those discussions And we believe we have the unique opportunity to promote more ambitious and positive overhaul How credit card is structured in Brazil. And we are very encouraged by the last discussions that we have had with the parties.

Speaker 7

And we believe that we will probably have more clarity about this when we have our next earnings call. Very June 1st to actually draw any high conviction outlook on how this will unfold, but we are working very hard together with the industry and the regulator To have a positive outcome that allows us to have a much more balanced product going forward. To your second question, I think you related The increase in capital, I believe it's important to highlight that in 2022, The Brazilian Central Bank put forward a new regulation, which is usually referred to as Resolution 200, Which basically harmonize the capital regulations of payment institutions and financial institutions. And as a result of that, As you can see on Section 32 of our financial statements, you will note that the Brazilian Central Bank has enacted A gradual implementation of this new norm, whereby the minimum capital adequacy ratio starts at 6.75% in 2023 goes to 8.75 percent in 2024 and then finally to 10.5% in 2025. And also payment institutions that control financial conglomerates will now have to report consolidated capital adequacy ratios.

Speaker 7

The result of all that is that we have a capital adequacy ratio in Brazil of 11%, whereas the minimum capital requirements today, It's 6.75 percent. So we have a fairly relevant buffer in Brazil. And in addition to that, we have $2,300,000,000 Of excess liquidity at our holding company. So we are super comfortable. It's unclear to us whether We will ever need to capitalize our Brazilian entities going forward.

Speaker 7

It will largely depend on the growth base Of our credit book, but we are very comfortable that with the business plans that we have for Brazil, Mexico and Colombia, Those are fully funded and fully capitalized and the earnings that we generate in Brazil, plus the excess capital that we have in the whole company, We'll more than suffice to fund all of this plan for the next now for the foreseeable future.

Speaker 10

Hi, Neha. This is Youssef. So with respect to your first question on what is going on in the dynamics of the various stages and provisioning, I would refer you to Note 13 in our financial statements, which contains all the breakdowns and the details stage by stage. You can look at the coverage ratios And the migration across buckets. But overall, I would summarize it just very simply by saying that Stage 3 tends to largely correlate with 90 plus past due delinquency rates.

Speaker 10

So it kind of mirrors what is going on there. And as I mentioned earlier in the call, As we write off credit card loans in our Brazil credit card portfolio at 3 So what tends to happen is you enter a 90 plus and then for several months, those loans accumulate. And as they accumulate And go further and further in delinquency stages, what tends to happen is coverage ratio increases. And so you see just those mechanics playing out.

Speaker 16

Thank you so much.

Speaker 7

Thank you, Lea.

Speaker 5

And our next question comes from the line of Yuri Fernandes at JPMorgan.

Speaker 17

Thank you, everybody, and congrats also on the another good quarter you printed. I have a question on fees. We see interchange is still being 75% of your total fees, but we don't see other fees growing. You have many initiatives, right? You have the investment platform, you have the insurance, you have the program of need of those molecules.

Speaker 17

When should we see the fee line growing? Because the interchange are growing, but it's growing like 25%, 26% year over year, And we still don't see. So just trying to get your expectations on those non credit related business. Thank you.

Speaker 7

So Yuri, thanks for the question. And look, we do have this portfolio of business throughout the company, which we Classifying 3 archetypes. We have the anchor business, the growth business and the moonshots. And the anchor business, which we classify as the Credit card lending and our banking account are doing extremely well and their profitability It's basically overshadowing the very positive results and performance that we are having in more emerging business. But you pointed out to some of the business that we have today that are actually performing fairly well.

Speaker 7

I would highlight the investment business Those assets have increased by over 50% over the past 12 months. Number of customers have doubled. So we do That over the coming 4 to 8 quarters, we will have much more visibility on the more growth in woodshop business that will progressively emerge into our new anchor business over the next now 3 to 5 years. Having said that, however, If you take a look at the profit pool of the Brazilian retail industry, about 70% of the profit pool It's still composed by consumer credit, namely credit cards, unsecured personal loans and secured personal loans. So it should not be a surprise that as of today, the majority of our revenues and gross profit margin also comes from some of those consumer finance products.

Speaker 7

But I believe as the new business that we have, namely investments, marketplace, insurance continue to emerge, We will have more and more visibility of their financial and non financial performance in the coming future.

Speaker 17

Super clear, Lagu. Thank you. And I will limit myself to just one question. Thank you.

Speaker 7

Thanks, Uli.

Speaker 5

Thank you, Uli. And our next question comes from the line of Greg Mueller at Feet Partners.

Speaker 18

Thanks for taking the questions. So two questions. One, the activity rate showed strong improvement. Can you characterize what were the underlying drivers To that, was it the growth in primary banking relationships or was it the launch of payroll? And secondly, You're talking about going down the credit quality ladder, which could drive delinquencies a bit higher.

Speaker 18

I'm curious your thoughts on how that might affect the portfolio if you go if Brazil goes into another soft period regarding credit. Should we expect to see a more significant rise in losses As a result and how you're thinking about that with regard to provisioning?

Speaker 7

Bill, thank you so much for your question. Let us take this in stab. So the first question is about the activity rate and I would draw your attention to slide number 10 in which you see that activity rate has Basically continued to go up from about 82% to now closer to 83%, Notwithstanding the very strong growth of our customer base, I think that is largely explained and correlated with our No progress towards primary banking relationship. If you take a look at the chart on Slide 11, which is the following one, The chart on the left indicates the primary banking relationship cohort analysis that we present every single quarter. And as you may note, we now have almost 60% of our active customers being primary banking relationship customers.

Speaker 7

And you can also note that we are getting to more than 50% faster and faster over time. For the 2018, 2019 cohorts, it used to take us about 50 months to get there. Now it's taken us less than 12 months to get there. Why is this happening? I think it is happening as a result of external factors and internal factors.

Speaker 7

External factors is that As consumers where we operate embrace real time currency pigs, embrace digital banks more and more, They more easily embrace the business model of Nubank that has become even more pronounced during and after COVID. The internal factors is actually the chart that you can see in the center of this slide, which is as we launch more products, as we launch more features, We earned the right to be the primary banking relationship of more and more customers. So if you were a customer of the bank back in 2017, You had only one product, credit card. Arguably, it was very hard for you to get our primary banking relationship customers with credit card only. But as we launch bank account, PIX, investments, insurance, marketplace, new coin, we have a much more compelling value proposition, a much more Complete set of products and that foster primary banking relationship that foster engagement.

Speaker 7

We do not see this trend stopping We're declining. On the contrary, we think that we will continue to launch best in class products, disruptive solutions. And with that, we will not only sustain high levels of activity, but we will also foster the continuous expansion of those activities. So I'll pause here. I will pass the floor to Youssef to address your second question related to credit underwriting.

Speaker 7

Hey, Craig, on the credit expansions and what does that do

Speaker 10

to the credit book In the event of a downturn. So just as a reminder, we underwrite, obviously, try to seeking to maximize NPV, but also we underwrite For resilience, what does that mean practically? It means that every additional loan we book, every new customer that we onboard, We want them to be profitable and above hurdle returns in the event of a downturn. So specifically, when you look at a cohort level, We underwrite our cohorts such that they're able to withstand the doubling of losses and still be NBB positive. So that gives us a lot of resilience And a lot of and a strong ability to withstand variability and the ups and downs of the cycle.

Speaker 10

That's one thing. The other thing I'll point out is thinking about various segments within the credit spectrum, having a high risk segment doesn't It's going to be a higher volatility segment in the event of a downturn. Those tend to be sort of very dependent on what kind of down cycle we're in. We've In other markets, mortgage holders deteriorate more than the average. We've seen small businesses sometimes deteriorate more than the average.

Speaker 10

So it really depends on what kind of Cyclical dynamic you're facing. And again, we take the approach of wanting to have through the cycle strong resilient returns

Speaker 18

Okay. Thanks for the answers guys.

Speaker 5

Thank you. And this concludes the earnings call for the Q3. In the name of the holdings and its management team, I want to thank you all And we will be responding to questions sent via webcast over the coming days. With that, we finish our earnings call. Have a good night.

Speaker 5

Thank you.

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