Berkshire Hathaway Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2023

There are 19 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to NU Holdings' Conference Call to discuss the results for the Q2 of 2023. A slide presentation is accompanying today's webcast, which is available in NU's Investor Relations website, www.investors. New in English and www.pontoinvestidoresponto new in Portuguese. This conference is being recorded and a 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 Friedemann, 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. If 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 Laras, our President and Chief Operating Officer and Guilherme Lago, our Chief Financial Officer. Throughout this conference call, we will be presenting non IFRS financial information, including adjusted net income. These are important financial measures for the company, but are not financial measures

Speaker 2

Thank you, George. Good evening, everyone, And thank you for being with us today. Further decoupling from the broader markets. In Q2 'twenty three, once again, we achieved quality. We continue to be extremely focused and committed to strong execution on our core priorities, while also maintaining significant investment on future growth opportunities.

Speaker 2

Turning to the main highlights of the quarter. We continue to grow Customers at a strong pace, ending the quarter with 83,700,000 clients. Once again, We're very robust in Brazil and approximately 1,500,000 customers per month. We also assume growth in Mexico and expect an acceleration in the coming quarters As Cuentanou continues to be rolled out, most of the Cuentanou customers added this quarter still came via cross selling from credit Our business model continues to compound growth and profitability. Revenues reached $1,900,000,000 in the 2nd quarter, Expanding 60% year over year.

Speaker 2

Our gross profit amounted to CAD 782 1,000,000, 113% year over year increase, while our gross margin expanded again to 42% this quarter, consolidating the recovery initiated last year. Sequential gross margin expansion alongside ongoing efficiency improvements drove a substantial increase in net income, which reached $224,900,000 or a 53% quarter over quarter growth rate. Adjusted net income reached BRL262.7 million, Reflecting a 39% view of our recent financial performance trends over the past 2 years, Demonstrating our capacity By doubling the number of customers from 42,000,000 acceleration in net income growth, particularly evident in the chart on the right over the past 3 quarters. We expect this compounded effect to continue in the coming periods, offering a valuable combination of growth with enhanced profitability in our platform. As we have previously noted, NOL's inception in 2013 revolved around the concept of unbundling financial services.

Speaker 2

However, today, our most significant business opportunities line the rebounding of Financial Services by building a diversified multiproduct, multisegment and multi country portfolio of businesses. As shown in this slide, even our adjacent businesses have successfully garnered a 1000000 customers, demonstrating our remarkable cross sell capacity. As we will discuss ahead in this presentation, We believe other critical launches taking place this year will continue to help us earn the right to become primary banking providers of more and more customers, supporting our growth and profitability flywheel. Now turning to our profitability, I'd like to highlight the evolution of the key financial metrics we presented over the past quarters. From this quarter on, we will focus only on the numbers of our holding company as we understand that our Brazilian operations are already well understood.

Speaker 2

Into the Q2, as you can see by the numbers on this slide. As Our model, we're holding companies now translating its potential into profits. New holdings recorded an impressive adjusted net income of $263,000,000,000 The Q2 representing an adjusted annualized ROE of 19%. These current levels of profitability already position us on par With many traditional incumbent banks in the Latin American region, even though Mexico and Colombia are still in the early investing stages. Even more remarkable, we achieved these results while maintaining regulatory capital ratios of 20.2% in Brazil And 42.2% in Mexico, significantly above the minimum required of 10.5% in both countries.

Speaker 2

In addition to the capital in our subsidiaries, it's important to note that our excess cash in the holding level of $2,400,000,000 It means that we're extremely well capitalized to deliver on our expected growth ahead. Finally, it is important to emphasize that we're delivering the sound levels of profitability Despite significant investments in future products and geographies as well as our robust 60% year on year revenue growth rate, which few financial institutions at I'll be able to show. Abhin, once more, we're very excited with the momentum of the business. And now I'd like to pass it over to our CFO, Guilherme Lago, who will walk you through our numbers in detail. Go ahead, Lago.

Speaker 2

Thank you.

Speaker 3

Thank you, David, and good evening, everyone. As David noted, we delivered another set of strong operating and financial KPIs driven by our Simple, powerful, value generating formula. 1st, consistently growing our customer base across our 3 geos and rapidly converting them into active ones. 2nd, increasing average revenue per active customer Or ARPAK, by leveraging our cross selling and upselling capabilities. And third, delivering sustainable growth while maintaining one of the lowest operating costs in the industry.

Speaker 3

Now let's look at the 2nd quarter results to see once more how well these three elements keep generating value. Starting with our customer base, Which expanded by 28% year on year as we added 4,600,000 new customers, reaching a total of 83,700,000 customers at quarter end. In Brazil, monthly net adds continue at a level of about 1,500,000 customers Achieved mainly through organic channels with very low customer acquisition costs. We are now the 4th largest financial in the country in number of customers according to the Brazilian Central Bank. As noted in our prior call, we have been achieving Faster and sustained growth rates in Mexico since the launch of our digital savings account, Cuentanu.

Speaker 3

We have reached the mark of more than 1,000,000 customers less than 1 month after its launch in May of this year. In Colombia, we already have 700,000 customers and we expect to grow Even more after the launch of our savings account in the country planned for the end of this year. Active customers increased 32% year over year with the monthly activity rate posting another consecutive quarterly increase Reaching 82.2%, up from 80.2% a year ago. We believe this positive outcome It speaks to new's ability to continue growing our ecosystem while driving higher customer engagement. Moving to our 2nd pillar, which is revenue expansion.

Speaker 3

As shown on the left chart, nearly 60% of our active customers Our already primary banking relationship customers, which represents the percentage of our active customers who Transfer out over 50% of their post tax income on a monthly basis. In general, the more customers use NU as their primary bank, The greater the number of products they use, driving successive increases in the monthly ARPAK they generate. The second chart is our product cross sell chart, which shows how we have accelerated the pace at which our customers use our products. As we launch new products, we are successfully cross selling them to our customer base and earning the right to become their primary bank. Lastly, the 3rd chart is our ARPAK chart.

Speaker 3

The more we engage our customers And the faster we increase our cross sell and up sell capabilities, the more sustainable the monetization of our expanding customer base becomes. This effect can be observed again this quarter as our monthly ARPECT reached a new high of $9.3 The monthly ARPEX of our more mature cohorts are already at $24 Higher ARPEX Led to another quarter of solid revenue growth as shown in the next slide. Monthly ARPEC Continue its steady sequential growth trend, expanding 18% year over year on an FX neutral basis. We are confident that there is still untapped potential for further ARPEC growth, bringing us closer to realizing our full ARPEC potential. Artec growth, along with sustained expansion of our customer base, resulted in a 60% year over year increase In revenue on an FX neutral basis, reaching a new record high of $1,900,000,000 Moving to our cards business.

Speaker 3

Purchase volumes increased to $26,300,000,000 Up 30% year over year on an FX neutral basis. Growth was mainly driven by Salesful product upsell and cross sell strategies along with higher customer engagement. The right hand chart Displays how purchase volumes increase as cohorts age. Older cohorts consistently purchase higher volumes. It's worth highlighting the newer cohorts appear to grow more slowly than more mature cohorts due to two factors.

Speaker 3

Number 1, a disparity in scale as these newer cohorts account for almost 20 times more customers than older cohorts. Number 2, newer cohorts have at least initialed a lower credit card penetration Using debit only, which usually implies lower ticket sizes, our market share in terms of purchase volume Is that approximately 13.9% of the industry's total, with debit cards at 14.5% And credit cards at 13.6%. We are confident that we can further increase our shares in the future, Given our steady new customer acquisition and the maturation of their relationships with us, Our consumer finance portfolio composed of credit cards and personal loans reached $14,800,000,000 Up 48% year over year. Total credit card loans maintained their growth trend, Increasing 54% year over year to $12,000,000,000 as we continue to add new customers to our ecosystem, while keeping our low and grow credit expansion approach. However, the highlight this quarter is the lending portfolio, which increased 33% year over year to $2,800,000,000 Lending cohorts Continue to perform better than expected, giving us the confidence to increase originations once again.

Speaker 3

Let's now move on to the breakdown of interest earning loans in our credit card portfolio. As we have previously discussed in our earnings calls, our focus remains on increasing the share of interest earning credit card loans. Our interest earning installment balance continued to expand and now makes up a record high 19% of our total credit card loan book. Conversely, revolving receivables was kept at 7% of total credit card receivables For the 4th consecutive quarter, we believe interest earning installments have attractive risk adjusted rates of returns that allow us to further monetize our credit card business. As our lending portfolio continues to show strong resilience In a better than expected performance, we have once again increased our risk appetite and origination levels.

Speaker 3

This quarter, loan origination was up 53% year over year to BRL7.3 billion. The performance of our personal loans cohort improved over the last several months, giving us the conviction necessary to increase loan originations. As our portfolio continues to show strong credit resilience, we progressively grow within our risk appetite, Seeking to deploy capital profitably and consistently, the launch of public payroll lending complements this strategy and reinforces the opportunities for growth we have ahead. We are confident in our ability to continue to drive attractive growth in lending. This belief is supported by our large customer portfolio, our best in class underwriting platform, our strong capital base and our ample liquidity position.

Speaker 3

Moving on to funding. Total deposits expanded 23% year over year to $18,000,000,000 this quarter as we advance on our goal of building a robust local currency retail deposit franchise to fund the majority of our consumer finance operations. Our loan to deposit ratio increased to 35%, up from 33% last quarter as we continue to optimize our balance sheet. In line with our expectations, our cost of funding in Brazil was at 80% of the interbank deposit rate in the country, demonstrating our progress in leveraging the value of our robust liability franchise. Just one month after the public launch of Quintanou in Mexico, it hit an impressive milestone of 1,000,000 customers.

Speaker 3

At the close of the Q2 of 2023, QuintaNu accounted for 1,300,000 customers And received total deposits of more than MXN1.5 billion, equivalent to MXN90 1,000,000 With a cost of funding lower than 80 percent of TIA, the low co interbank rate and significantly below our current cost of funding in Mexico, We believe our value proposition has been well received, leading to a steady increase in new customers each month. This has contributed to further strengthen our deposit franchise in Latin America. We believe the combination of the continued growth of our credit card and lending portfolios, together with the improvement of our funding costs, Have contributed to the expansion of our net interest income or NII and our net interest margins or NIM to new record high levels. Our NII gained another digit this quarter, reaching $1,000,000,000 which represents yet another strong growth of 133 percent year over year, resulting in an increase of 260 basis points and our net interest margin quarter over quarter. Now focusing on the last pillar of our strategy, Maintaining a low cost to serve.

Speaker 3

We strongly believe that one of our platform's most relevant competitive advantages Is low cost to serve. In the Q2 of 2023, our cost to serve per active customer Remained unchanged year over year at $0.80 while ARPAK increased by 18%, underscoring the strong operating leverage of our business model. As we stated in prior quarters, our aim is to keep our cost to serve At or below the $1 level as we believe our scale provides us with significant operating leverage and bargaining power with our suppliers. Moving down the P and L, gross profit reached a quarterly record high Of $782,000,000 up 113% year over year, Our gross profit margin reached 41.8%, more than 10 percentage points higher year over year, Consolidating the acceleration in the pace of expansion started in the Q3 of 2022. We were able to achieve this result Despite the fact that we had a higher level of provisions in this quarter, resulting from the expansion of the originations of our lending portfolio As we upfront credit loss provisions, operating leverage is a key element of our strategy By further increase in revenues and maintaining a low cost operating platform, we have boosted profitability.

Speaker 3

As shown on this chart, we have improved our efficiency ratio over time. In the second quarter, It reached another all time low of 35.4 percent or 29.2 percent excluding share based compensation, Improving for the 6th consecutive quarter, this level of efficiency already ranks new holdings As one of the most efficient companies in Latin America, we expect to capture additional operating leverage As our scale increases through the continued expansion of our customer base, the up sell and cross sell of our products and the launch of new features, together with improved results in our new geos of Mexico and Colombia, which still operate with losses. Lastly, we continue to drive increased profitability, Delivering adjusted net income of $263,000,000 and net income of $225,000,000 These positive results confirm the effectiveness of our strategy and business model. While we are very pleased with the results we have achieved So far, let me reinforce that we manage our business with a deal towards long term value creation. This can require additional investments in the short term aimed at unlocking long term value creation opportunities.

Speaker 3

To conclude the review of our performance this quarter, let me recap the sustainable advantages across our 4 cost pillars. Number 1, on cost to acquire. We added almost 5,000,000 customers in the quarter, while maintaining one of the lowest customer acquisition costs among consumer fintechs and banks globally. Number 2, on cost to serve, our cost to serve remained below the $1 level, which we estimate as being 85% lower than those of incumbents. Number 3, on cost of risk, We successfully managed the risk of our consumer finance portfolio, aimed at a very challenging backdrop and continue to outperform competitors When comparing apples to apples, Josef will provide more details on this topic shortly.

Speaker 3

And number 4, on cost of funding, We maintain our cost of funding at the level of 80% of CDI as we began to unlock the potential of our retail deposits franchise, Closing the negative gap we had against incumbent banks and widening the positive gap against consumer fintechs. We are very excited about what we achieved this quarter and we are confident in our ability to develop and scale best in class products, Expand internationally and continue to operate at low cost. Now, I'd like to turn the call over to Youssef, our President and Chief Operating Officer, who will walk you through some of the highlights of our asset quality.

Speaker 1

Thank you, Elijo, and good evening to you all. Once again, let me take you through some of the key indicators of asset quality And credit portfolio health for the Q2 of 2023. Let's start with the NPL trends. Overall, our leading indicator NPL15 to 90 improved slightly over the last quarter, decreasing by 10 basis points to 4.3 percent, in line with our expectations. Part of that drop was driven by the improvement and the performance of our personal loan cohorts as mentioned earlier.

Speaker 1

The 90 plus NPL ratio increased From 5.5 percent to 5.9 percent. As in past quarters, this continues to be driven by the stacking behavior of loans moving through the delinquency buckets, as 90 plus is more of a stock rather than a flow metric. And like in past quarters, we did not sell any credit receivables, which would have otherwise artificially decreased NPL rates by virtue of the purging effect of asset sales. Renegotiations for their part remained at around 9% of the book This quarter. And nearly half of those renegotiations came from loans that were current and not past due at the time of renegotiation.

Speaker 1

Turning to the performance of our credit card portfolio against the industry. This slide shows the type series of NPLs by income band, With the purple lines representing new and the gray lines representing the industry. We continue to see our NPLs outperforming the industry on a like for like basis. And for lower income bands, our comparative advantage remains even more pronounced. Similar to prior quarters, our provisions increased primarily driven by the growth in our portfolio.

Speaker 1

Remember that we front load provisions when we originate loans based on the expected losses for the life of the credit and in accordance with IFRS 9's expected loss methodology. The increase in provisions, therefore, is directly linked to the higher loan origination volumes recorded in the quarter. Our risk adjusted net interest margin reached another record high at 8%, expanding by 140 basis points quarter over quarter and 5.70 basis points higher than a year ago. Having shared these data and perspectives on credit and asset quality, Let me now turn the call back to our Founder and CEO, David Duvelis, for his concluding remarks. David, back to you.

Speaker 2

Thanks, Joseph. As we wrap up, I would like to talk about 2 relevant product launches that took place during recent months: Secured loans in Brazil and Cuentanu in Mexico. We consider these two products as essential additions to our road map for both countries, Given the relevance for us to grow our business and earn the right to become the primary banking relationships of more and more customers. Regarding secured loans, we officially launched payroll loans for federal employees in April started the testing phase of FGTS backed loans a few weeks ago. Including payroll loans in our roadmap is going to be essential for several reasons.

Speaker 2

1st and foremost, we believe it gives us access to a largest asset class for consumer lending in Brazil, amounting to over BRL600 1,000,000,000. Currently, more than 35% of this market is already taken by Novak's clients, but through our banks. 2nd, we believe that offering payroll loans And now also FGTS backed loans, it's crucial for us to establish primary banking relationships with an increasing number of customers that tend to be high income. It serves as the ideal product for those that are eligible, enhancing our engagement with them. Importantly, in these new lines of products, we have Lastly, incorporating secured loans into our portfolio is valuable to the remarkably low level of effective losses associated with this product.

Speaker 2

We believe these initiatives will help us complement, balance and fortify our unsecured credit portfolio with lower risk offers. We're already living with all of these secured credit products, but still in testing mode with relatively small sample sizes. While we're still in the early days, we're on track with our expectations. The conversion rate is progressing nicely, which can be attributed to our differentiated UX By eliminating loan brokers from the process, we have passed on some of the associated benefits to our final borrowers. In addition, the current level of losses for payroll loans has been better than our initial expectations.

Speaker 2

With a well established Sichuan Imperial loans in Brazil, we seek to earn the right to become primary banking providers of more and more customers in the future. Regarding Cuentanoo, we officially launched it in May and within a month crossed the 1,000,000 customer milestone in this product in Mexico. By the end of June, we reached MXN 1,300,000 accounts and collected more than MXN 1,500,000,000 in deposits. Just for the sake of comparison, the average deposit per customer in Mexico is more than 10x. The average of Brazilian customers' Deposits when our checking account was launched in the country in 2017.

Speaker 2

Cuentanu plays a pivotal role in our roadmap for Mexico Based on 3 key factors diversifying funding sources and reducing costs. The Latin markets are highly concentrated, products are usually shallow in LatAm American markets, and they often become inaccessible when needed the most. We believe that to grow our consumer finance business in LatAm, We need to develop local currency retail deposits to provide a stable and sustainable funding source. Today, with an effective yield lower than 80% of the risk free rate. And as mentioned before, significantly below our current cost of funding in Mexico of funding rates plus 100 bps, which means more than 12% per year.

Speaker 2

Accelerating customer growth. Cuentanu had the potential to unlock our referral flywheel, resulting in accelerated customer growth. Until the end of Q1 'twenty three, we could only onboard customers who met our credit card threshold, leading to a high decline ratio of approximately 70% of applications. Now with Cuentanoo in place, we have the opportunity to onboard 100% of Without necessarily incurring additional credit risk. And finally, data driven credit underwriting.

Speaker 2

Since our credit underwriting engine is built on AI and machine learning, making it crucial to have sufficient data scalability, The faster we grow our customer base, the more refined and accurate our credit assessment becomes, strengthening our risk management practices and supporting responsible lending. Notwithstanding the fact that the maturation curve of new products usually take a year, we could not be more optimistic about the future Not only our early progress in these new launches, but also the upcoming additions planned for the second half, which include, to name only a few, Payroll loan portability and refinancing, INSS payroll loans, FGTS Lending and Cuentanou in Colombia. We have repeatedly stated, together with our customer attraction and cost differentiation, superior products and Services foster our cross sell and upsell capabilities, which are essential for our business model, supporting retention, loyalty, growth and profitability. With that, we would like to take your questions now. Thank you very much.

Operator

We will now start the Q and A session 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. I would like to turn the call over to Mr. Joerg Friedman, Investor Relations Officer.

Speaker 4

Thank you, operator. And our first question comes from the line of Tito Labarta, Goldman Sachs.

Speaker 5

Hi, good evening, everyone. Thank you for the call and taking my question. Congratulations on another strong quarter. I guess, my question is on the level of provisioning, good loan growth, and I know the loan growth drives a lot of the provisioning. But just to think about it, early NPLs showed a slight improvement there.

Speaker 5

We've kind of seen that across the industry. Just to think about when provisioning can be start to maybe become a tailwind, right? I mean, your gross margin did improve in the quarter Despite that, but you mentioned in the past that I think gross margins can eventually get to 60% level or so, I know when you're much more mature. But if the credit outlook is improving, can that potentially be a tailwind in the foreseeable future?

Speaker 6

Hi, Tito. This is Youssef. Thanks for the question. So look, we don't provide guidance on Credit quality or delinquencies are consequently provisioning from a forward looking perspective. But I mean, you can take a look at how The coverage ratios have trended on in the appendix of our earnings presentation, Page 33, I believe.

Speaker 6

And from a coverage of 90 plus, it's been fairly stable around 213%, 2 14%. And the coverage of balance generally mirrors NPL 90 plus and it has been largely performing per expectations. To your point, should delinquencies improve, obviously, provisions can become a tailwind, but We'll see actual performance as it comes in.

Speaker 5

Great. Thanks, Youssef. And if I could follow-up, I guess, just a little bit on Loan growth, in particular, David, you highlighted payroll loans have now launched. I think Any just initial color on its tracking and if that can be significant in the second half of the year? Or is that more We'll take a little bit longer because that could also be another potential tailwind to that cost of risk given just the risks on the payroll loans that are a lot lower.

Speaker 2

Tito, yes, no, absolutely. So we had to integrate a number of different contracts to launch payroll loans. We did that already. We're up and running on Q2. We've been iterating the product, making sure it's a great product for consumers, easy to understand.

Speaker 2

We're getting comfortable more and more with the type of feedback we are receiving, and I think you'll start seeing us increasing the pace of originations Over the next few quarters, if everything goes according to plan. But yes, I mean, I think over the next Few quarters, you should start seeing meaningful demand. And again, this is the largest profit pool in Financial Services in Brazil, so very large market. And as we've said in the past, our customer base accounts for something like 35% of that entire profit pool. And we are we have a great product going directly to consumers, and we're pricing very Effectively, interest rates are 30% to 40% below market.

Speaker 2

So we think we have very good value proposition That should allow us to take significant share in this market. But again, we'll have to take step by step and see how this goes as we start rolling it out To the

Speaker 3

entire customer base. And Chito, if I may compliment here, a few thoughts on payroll loans. We have launched Now, SIAPI is a pilot test. In the second half of the year, we're going to launch INSS and portability. And I highlight portability because in a declining interest rate environment, the ability to actually port loans from other Banks may be a relevant source of growth for us, and it's something that we intend to lean heavily over the coming quarters.

Speaker 3

Having said that, I do not expect that payroll loans will actually move the needle that much in terms of P and L and loan balance in 2023. I think it is more something for 2024 and beyond.

Speaker 5

That's great. Thanks David, Lago, Youssef

Speaker 4

And our next question comes from the line of Pedro Leduci, Itau.

Speaker 7

Thanks, guys, and congrats. Good evening, everybody. 1 on service revenues, Great job there as well. I think interchange seems to have been flattish and all despite the caps to confirm how you guys see that one going forward as well. You mentioned credit appetite slowly there as well.

Speaker 7

And on the second part on funding costs, a surge in deposits, Very nice to see and very stable costs. And now on the grounds, we see you guys looking for longer term instruments that Would cost more than 80% of the CDI. So just of course, there's other ways to keep it cheap, but just Give us some color how you're seeing that going forward, the interest or the liabilities, cost of funding mix, given that it's changing a little bit. Thank you.

Speaker 3

Pedro, this is Lago. Thanks so much for your questions. I do believe That we will progressively increase the duration of our liabilities as we increase the duration of our assets. So we will continue to actually match very well Our asset liability book, however, we believe that we could do so still with a very healthy balance of Short term deposits at relatively low cost of funding at around 80% of CDI, and we can entertain other pockets of liquidity in the Brazilian and international markets that would allow us to increase the duration of our liabilities. So we have Now recently started to issue longer dated time deposits in our platforms, and we have been very pleased with the results.

Speaker 3

So I would basically separate, we have the short term deposits that we believe will continue to grow at 80% of CDI average cost. And then we have other pockets of liquidity that will be more than sufficient to provide us with adequate asset liability management. As we scale progressively, primarily the book of our secure lending consignanado business.

Speaker 7

Great. Thank you. May I do a follow-up as well?

Speaker 3

Yes, absolutely. Yes. All right.

Speaker 7

When I look at your Credit balance, a very nice portion of the interest bearing growing. And then when I look within The credit card composition, the revolver, no, the rotatimos are basically flat Q on Q in reais, Well, the others, no, especially interest with installments grow. It was a very nice achievement, especially given all the discussions surrounding This line on the revolver, you can elaborate with us and share some line on how you've been able to grow the others, keep that one sort of flat despite the growing TPVs, That would be great.

Speaker 4

Thank you.

Speaker 2

Sure, Pedro. Here's David. So we, from the very beginning, Built a strategy in credit card to focus on trans sectors. We never loved the revolving business for the reasons that you know very well, Which is a market that has a number of different complexities across the chain and ultimately forces issuers To charge very high interest rates. We never liked that.

Speaker 2

And so we decided to build since the beginning a model that look for trans sectors. And in fact, if we could have Since the beginning, if we could have a model that had 100 percent trans sectors, 0% revolvers, we would choose that. We would make we would We effectively make money only on interchange. However, it's impossible. The models are not perfect, and so you end up having that percentage of revolvers.

Speaker 2

But they are kept to effectively the minimum and customers that come in and effectively have High probability of revolve, we wouldn't accept them to be a credit card holder. And that's why you see us having such a smaller percentage of revolver of 7 versus the average market at 16%. Now we see that there are other opportunities To use financing that is good for the customer where there is real price elasticity and we can price at a much lower interest rates. And specifically in our case, Peaks Financing over the past few quarters has been a great avenue where we allow customers to finance Their purchases over a number of installments at lower much lower interest rates, creating this portfolio of much longer dated, Lower delinquency, lower interest type of portfolio, which is ultimately much healthier for us and much better for customers. So That is effectively the part that we want to grow.

Speaker 2

And so that is what you effectively see in the Slide 14, where you see us growing That kind of interest bearing balances from 8% to 19% while trying to maintain revolver to its minimum.

Speaker 4

And our next question comes from the line of Eduardo Rosman, BTG Pactual.

Speaker 8

Hi, everyone. Congrats on the numbers. I have a question related to the revolving credit card theme and these potential changes in Parcelades. What's your take on that? Should we expect something relevant to happen?

Speaker 8

If there's a cap, shouldn't this be an opportunity for NU Given it's much lower cost to serve, you also just mentioned that you have less revolving than peers. So any color here would be great. Thanks.

Speaker 3

Osman, this is Lagu. Thanks for your question. So the discussions around the economics of Credit card in Brazil have been going on for years, and they have certainly intensified over the past few months, involving both The government and many credit card issuers. But those discussions are not simple because the topic is really highly complex. You know, credit card represents a very big industry in Brazil.

Speaker 3

It accounts for about 40% of the personal consumption expenditure or PCE of the country And over 20% of the GDP of Brazil. In 2022, the purchase volume of credit cards accounted for over BRL2 1,000,000,000. So It's a very important, very large industry, and any drastic or material changes to its dynamics may have fairly no Relevant and material consequences to the economic output, I think all of the industry participants, the government and the regulators are fully aware of this, And we are very confident that the industry will provide an adequate solution that we even evolve and further the product In a better equilibrium. I think it is very hard for us, Osman, at this point in time To draw any high conviction outlook as to what is going to happen over the next few weeks or months, But we do not expect any drastic changes in the unit economics, nor do we actually believe That interest rate cap will be welcomed by many of the industry participants or the regulators given the material negative impact

Speaker 4

And our next question comes from the line of Yudhys Hernandez, JPMorgan.

Speaker 9

I have one question regarding Brazil and the profitability. I understood that the focus would be the holding. But when we look to the earnings from Brazil, Brazil was maybe $190,000,000 It's a good increase from previous quarter $20,000,000 But now we see more increasing maybe in other markets or maybe the holding. So just want to check this. What is the difference between the EUR 225,000,000 we printed in the holding in Brazil that in the previous quarters was over 100% of the profitability of the company.

Speaker 9

Just checking if it's the cash at the holding at higher rates, something like that. Thank you.

Speaker 3

Yuri, thanks for the question. I think Two comments here. 1, I would be very cautious of drawing conclusions on the profitability of our Brazilian operations By looking only at the figures that we provide to the Brazilian Central Bank because these figures, They account only for our legal entities that are fully regulated in Brazil. They do not account for 100% of our operations in the country. So I wouldn't necessarily draw much from the what is reported in the Brazilian Central Bank.

Speaker 3

Your second question though is, it's intuitively, yes, I think The way that we operate, we have now profitable operations in Brazil. We have profitable operations at the holding company, largely as a result of the investment of the 2 point $4,000,000,000 of cash that we have there. And we have operations in Mexico and Colombia that are still now posting losses As they are in high growth investment situations.

Speaker 9

No, thank you, Largo. I was using your presentation. Like, I guess, you still have Brazil up there. And I was Yuzi. I know it's very similar to the report of Bicentro Bank, but I guess it's to have the Brazilian consolidated earnings there.

Speaker 9

And if I may, Lagu, just a second follow-up here. Higher income clients, how relevant is this your strategy here for Numenki, because you kind of have a very good share on lower income and middle income. This is a common topic we So I would love to hear your thoughts about higher income clients.

Speaker 3

Absolutely. So look, the high income Venturing into the high income sector is one of the company's priorities for the 2023, 2024 period. And we have invested now a good amount of time and resources trying to understand globally how companies have succeeded Break it into the high income segments in many parts of the globe. And we have basically crafted a strategy that is composed by 2 steps. One step is customer acquisition.

Speaker 3

The second step is customer monetization. I think the first step, which is customer acquisition, When we look at the past 18 months, we are fairly well pleased with how many high income customers we have Acquiring the country, if you define a high income customer as a customer who earns more than BRL12000, we already have Over 60% of the high income customers of Brazil being customers of Nubank. So I think the first step of this 2 step strategy Has been very successful so far. We are now entering into the second step, which is To deepen the relationship of those customers and to be able to increase our share of wallet of them. So if you compare the demographics of the customer base of NuBank with You see that in terms of number of customers, we have a relatively similar breakdown between low income, middle income and high income.

Speaker 3

However, our share of wallet in the low income and middle income is still much higher than our share of wallet in the high income. And there lies the huge opportunity that we have to grow customer monetization in Brazil over the coming 1 or 2 years. However, Yuri, the growth into any new kind of demographic or segments, it's not a sprint, it's a marathon, by which I mean, It's not something that we're going to be able to show results in 1 quarter to 2 quarters. I think it is a matter of a few years in which we will strengthen our value proposition and progressively grow

Speaker 4

And our next question comes from the line of Thiago Batista, UBS.

Speaker 10

Hi, guys. Congratulations for the results, very strong results. My question is about the good surprise of the ROE of 17% that you guys posted this quarter. Even with excess capital and also with losses in Mexico and Colombia, This level is already higher than most of the incumbents in Brazil, in line with Itau Retail Business. And since that NuBank has structured better efficiency ratio than peers, so my question is, how do you believe Nu will play The superior efficiency in the long term.

Speaker 10

So the bank should deliver or the Fintech should deliver a much higher ROE than peers or Part of these will be shared with clients and consequently, new tend to have a much lower price than peers. So how You guys are likely to play with the superior efficiency versus peers? Yes.

Speaker 2

No, a great question. I think it talks To the heart of the digital banking strategy, we've been pursuing since the very beginning, which similarly to what you've seen when you Half technology companies, fully digital technology companies competing with traditional companies that have more offline operations, We have the opportunity to use the efficiency of our business model that now you can start really seeing, especially around the operating efficiency On behalf of our customers, so that we provide a product that has higher quality, a lower cost, allowing us to win more share. And so you start creating a bit of a flywheel where you gain share, you gain scale, that scale gives you Lower cost to serve, you then go back and pass that efficiency again to the customer via better products and even lower pricing, And you have this reinforcing flywheel. We expect to do that in banking. So we part of our initial value proposition was charged 0 fees.

Speaker 2

So even since the beginning, we started already charging no fees on that side and that meant An opportunity to compete on price. But as we grow and we get more data and our models mature and our cost of Cost of service decreased even lower, we can then start doing both lower fees and lower prices in credit products. So specifically to your question, we think we're going to be doing both. We will use the advantage of the business model to both gain share As well as ultimately see a higher return on equity than traditional incumbents, given ultimately this cost structure advantage It's very strategic, and it's going to be hard for competitors to match that cost structure advantage in a short period of time.

Speaker 10

No, very clear. If I can do a follow-up. My follow-up would be regarding the artificial intelligence. If you guys are already using these and on where these should improve the bank operations? So it will be more on cost, More on the asset quality.

Speaker 10

So how this should improve the operation of the bank?

Speaker 2

Yes. So we've been actively active users of artificial intelligence already for a while. We've also been investing A lot in understanding how specifically large language models can have different applications for us. We think there's really application everywhere from Obvious uses around providing better customer service at lower costs or cost efficiency So even applications around fraud, anti money laundering and defense, we're getting very excited about the type of application that we could see that. But then especially also on the consumer facing front.

Speaker 2

So reinventing the user experience for consumers, One way that we've talked in the past is that when we started the company, we saw the smartphone as a way to put a bank in every consumer's back pocket. We think AI is going to be the opportunity to put a bank and a banker in every consumer's back pocket. And that is going to really be the enabler of Democratizing access to best financial services products to the 95% of the population that even today don't have Great access to the best products. So we're big believers on the different avenues of opportunity that this technology opens up, both on the offense, both on the user experience as well as a lever to increase even more efficiency of the model.

Speaker 4

And our next question comes from the line of Geoff Elliott, Autonomous.

Speaker 11

Hello. Thanks very much for taking the question. I wanted to ask about Mexico. Clearly, quite a different credit card market From Brazil, and I imagine the revolving part of the business is much more important there given the different Economics. How are you seeing credit in Mexico?

Speaker 11

Can you give us a feel for How credit quality has been performing, maybe a sense of how what you've seen there compares with Brazil? Thank you.

Speaker 6

Hi, Jeff. This is Youssef. Thank you for the question. Yes, you're right. There are some important structural differences in terms of the credit card product In Mexico, how customers view it and use it, it tends to be much more of a borrowing vehicle Rather than a payment vehicle, which tends to be the predominant use in Brazil.

Speaker 6

So consequently, you see a couple of things. You see higher interest bearing receivables. You see Higher risk as well. On net, returns are actually comparable, if not better than in Brazil. Maybe the other salient thing that I would point out with respect to Mexico is the levels of penetration of So the levels of penetration of financial services in general and credit cards in particular are much lower than in Brazil.

Speaker 6

So that will lead to much more of Financial inclusion play and consequently just higher levels of delinquency. But We've been very pleased with what we've seen in Mexico in terms of the traction we've gotten in the market since our entry about 3 years ago, Closing in on 4,000,000 customers now having launched our second product. We think that the launch of Quanta is going to be a game changer in terms of being able to approve Everybody has a customer in terms of gathering data, in terms of building ultimately, Principality and higher levels of engagement. And so we're quite pleased with the traction so far.

Speaker 2

The one point I would add, Geoff, on Mexico also is that The fact that Mexico and also then later Colombia is more of an unbanked story versus a bank story, which was Brazil, Creates both a challenge as well as an opportunity. A challenge, obviously, because we have to underwrite as we grow to Percentage of the population that never had access to credit, which means at times we're going to have to slow down a bit, retreat, read our model, accelerate a bit, Pause. And we're totally comfortable with doing that. That's what we that's how we built our models in Brazil and we tend to accelerate. We create a Put a new model into production, we test a number of different alternatives.

Speaker 2

So we'll have to do a little bit we'll have to be a little bit more careful as we go into this new territory. But it's a great opportunity because if we crack the code, then we really are the only one in the market that knows how to underwrite 88% of the entire population, because the traditional banks have been there for decades and they haven't done it. They've continued to provide credit cards To 12% of the population that already have credit cards. So you only get a credit card if you have a credit card. It's the safest, lowest risk strategy, obviously, But there is no real differentiation there.

Speaker 2

So we'll take our time and it's accelerating and pausing at times, but ultimately, We think it's a really exciting market because we can build a real moat in how to underwrite And provide credit to effectively the majority of the entire country.

Speaker 4

And our next question comes from the line of Flavio Yoshida at Bank of America.

Speaker 12

Hi, everyone. Congrats on the results. So my first question is on payroll loans. So I was wondering if you guys could share some Tales of the evolution under the SIAC operation, is it coming better than expected? What are the main challenges faced so far?

Speaker 12

And how should we think about the overall NIM and ROE for Nubank going forward given the fact that payroll Loans should have a greater relevance on the total portfolio, especially taking

Speaker 3

Flavio, thanks for your questions. We have launched what we, I would say, is a partial launch of our Singinabo business in Brazil in a way that we started in late April by launching only the SIAPI product, But still without portability, right? So I think the main features that we're going to be adding in the second half of the year are Fairly important for us to be able to ramp up the product, mainly the portability of SIAPI plus IANESIAC plus FGTS. So I think with those three asset classes, we will have on our shelf products that represent The book of the secured credit market in Brazil, which is the single largest targetable addressable market in the country. So we are super encouraged With the early results.

Speaker 3

And what we have seen so far since we started to operate with Consignonado back in April, as I mentioned, Yes, fairly strong signs of product market fit. So customers love the product, conversion has been better than expected, And we have been able to have lower than expected operational losses, fraud. So we like what we find so far, but it's Too early to call kind of a victory on this. It's going to be a longer journey. We don't expect that Conseganado or FGTS We'll move the needle in 2023 in terms of loan originations or loan balance, but it will be fairly important for us the next, you know, 3 to 5 years as it represents the largest market in Brazil.

Speaker 3

Now it will, as you corrected pointed out, Involve lower net interest margins, which is the essence of the payroll loan business in Brazil. However, it will not necessarily come with much lower ROEs because it also draws less regulatory Capital and we are confident that given our cost structure, we will be able to deliver growth, lower prices to consumer And still very compelling levels of ROEs. I think we've mentioned in the prior calls that we are aiming at having ROEs of about 30% of our loan book, And we do expect that the combination of all of these products will be able to deliver on that.

Speaker 12

Okay. Thanks for the very complete answer. And my second question is a follow-up on Yuri's question. So this was the Q1 that we saw a positive result for the holding company without Brazil. And I was wondering if there was any change on the investment strategy and if we should expect further positive results in the coming quarters.

Speaker 3

No, I think what we have seen is slightly better results in our Treasury operations at the holding company given the $2,400,000,000 $2,500,000,000 that we have there, but mostly as a result of the more benign markets that we have, Our investment policy at the holding company has been fairly conservative, and we expect to continue to be fairly conservative, Investing in basically very safe and liquid investment assets.

Speaker 10

Okay. Thanks a lot.

Speaker 4

And our next question comes from the line of Rafael Frade, Citi.

Speaker 13

Hi, everybody. Good evening and congrats on the numbers. I have a question only related to capital. So I understand that now you are at for the Q3, you should already have all the regulated entities in Brazil Under the same umbrella in terms of capital. So just to have a sense of what would be your basal At the current in this current configuration?

Speaker 3

Yes, Frasier, thanks so much for your question. So just for the purpose of everyone here, So we are all on the same page. I believe you are referring to the Resolution 200 that the Brazilian Central Bank enacted back in the Q1 of 2022, Which harmonized the regulatory capital regulations for both payment institutions and financial institutions. We that regulation became effect July 1, 2023. And we have Now as you correctly pointed out, Frade, been operating as a regulatory financial conglomerate in Brazil, Encapsulating our payment institution and our financial institution.

Speaker 3

We are if we look at our financial Only our basal ratio is above 20%. If you were to look at our whole conglomerate, Our capital ratio would be closer to 12% in Brazil compared with the minimum regulatory requirement of 6.75%, which is The metric that has been used by this new regulation. So we have almost twice as much capital that we need to operate in Brazil.

Speaker 13

Okay. That's perfect. Thank you, Claudio.

Speaker 3

Thank you, Frasier.

Speaker 4

And our next question comes from the line of Daniel Vas, Credit Suisse.

Speaker 14

Hi, everyone. Hi, David, Lago, Youssef, and your congrats On the strong results. It's my question is practically a follow-up on Fadi's question. There's also A potential significant increase in your CET1 or base ratio from July onwards considering the Central Bank 2.29 resolution and consequent reduced RWA factors considering the transactional portion of your credit card portfolio. So On the net impacts from the 30% already from the Type 3 prudential adjustments and these 2.29%, Would it be correct to assume that you're net positive for capital ratios?

Speaker 14

Or have you calculated the impacts already?

Speaker 3

Thanks for the question. I think we are super well capitalized. Our capital in Brazil far Sees the regulatory capital requirements that the new regulation imposes on us without mentioning the $2,400,000,000 in excess capital we have in our holding company. So we are fairly comfortably now capitalized. To give you just a general sense, Today, our capital position in Brazil amounts to approximately $2,000,000,000 The minimum regulatory That we have is about 1.2.

Speaker 3

So that is the buffer that we have to operate as of today. And our Brazilian operations, as you have pointed out, continues to be quite profitable, generating relevant amounts of earnings. So we do expect to continue to have a very comfortable capital position.

Speaker 14

So, Lago, maybe a follow-up here. Yes. So we see a good level of peso ratio with also strong profitability of 17% ROE at the holding level. So With this good level of organic buildup, is management considering to distribute dividends or somehow we should expect a stronger capital buffer to support increased Origination levels or for credit, for example?

Speaker 3

So at the holding company level, we have no plans To distribute dividends at this point in time, we do believe that the amount of earnings that we're going to be able to generate in Brazil and later on in Mexico and Colombia We'll basically be reinvested in organic growth opportunities that we have ahead of us in those 3 geos, right? So What we may do at some point in time is do distributions from Brazil to the holding company and to optimize our capital structure. But we believe that most of the early surplus will be generated and reinvested in the business in the foreseeable future.

Speaker 4

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

Speaker 15

Hi, congratulations on the good quarter and thank you for taking my questions. My first question is on yields. When I look at the yields for both your credit card And your personal portfolio and only interest bearing part. I see that the yields in the last 2, 3 quarters have been going up. Are you consciously repricing up, which is leading to higher yields?

Speaker 15

Or is there any other factor playing in there? And I contrast that with, I think, what you mentioned, if I heard it correctly about the payroll loans that you would like to use your Cost advantage in the payroll product and be competitive in terms of pricing for the payroll product. Is that correct? And should we expect a similar trajectory for the personal loans and credit card products as you gain profitability? My second question is a quick one on the cost to income ratio.

Speaker 15

Given the growth now you have to deposit product in Mexico and given future growth

Speaker 13

in Mexico, do

Speaker 15

you expect to accelerate investments in Do you expect to accelerate investments in Mexico? Or are you at a level where you have all the fixed costs required To operate in Mexico. Thank you so much.

Speaker 3

Neha, thank you for your question. A lot of questions in this one. So let me try to slice them a little bit. In terms of our re pricing our personal loans and credit card business, the answer is no, right? We have basically operated with now similar pricing levels over the past few quarters.

Speaker 3

You may have seen a change in the mix of the products within each of them, and that may have been what It has driven a little bit more of yields in each of those products. In credit cards, what you will see in the effective yield of the total portfolio Is the greater relevance of the interest bearing balance, as you may see on here On Slide 14 of our earnings presentation. But in short, no, there has not been any material re Pricing in our credit cards or personal loan business in Brazil over the past few quarters. I think your second question is on Whether we expect to translate the pricing effectiveness that we believe we will be able to implement in or payroll loans into credit cards and personal loans. And I think the general or answer is yes, We do expect to translate additional cost advantages that we acquire into progressively better terms and conditions for our customers throughout all of our products.

Speaker 3

So whenever we see compelling opportunities, we will now flex the pricing muscle accordingly in a very analytical manner. I think the third question is on sorry, I'll pause here Neha on pricing to see if I address your question before I go into efficiency ratio.

Speaker 15

So just to clarify on the personal loans and credit cards, so you would be Probably competing on pricing or reducing prices for these two products in the coming quarters?

Speaker 3

Well, I don't foresee any material changes to our current pricing policies for the No, in the short term, in the next 1 or 2 quarters. Conceptually and in the medium and long term, we do expect to actually use our better cost advantages To leverage pricing muscles and be even more competitive in those markets. Although as I said

Speaker 2

De Al, as I said earlier, we do our pricing Below in the new secured lending type of products that we're launching. So ultimately, if secured lending, what we call, consignado, Does end up growing and being meaningful, that will decrease the average rate that we're charging across the entire portfolio. That would also dilute So the losses and delinquency numbers that we also show for unsecured lending.

Speaker 3

And then I'll try to address your the second part of your question, which is on efficiency ratio. So As you note on Page 20 of the earnings presentation, we have reached about 35% cost to income. We do not believe That we are anywhere near our efficiency frontier. We think we can actually continue to improve the efficiency ratio going forward, Nor do we expect that the additional investments that we're going to make in Mexico and Colombia will preclude us from continuing to make investments on those fronts, Right. So we have already front loaded quite a lot of the investments that we have made in Mexico and Colombia, especially in terms of headcount.

Speaker 3

And the velocity through which we're going to grow headcount over the next, let's say, 12 to 24 months, it's probably going to be lower than the velocity through which we grew head Count over the prior 24 months.

Speaker 15

Great. If I can squeeze just one last thing. The asset quality seems to have turned around and stabilized, early delinquency stabilizing for Brazil. You seem to be having good momentum in Mexico. What are some of the key challenges or concerns that you're mindful of in the coming

Speaker 2

I think a lot of the challenges or the main challenge that we are all here very much focused on day in and day out is around those, I would say the 3 key priorities we've been discussing since the beginning of the year and then number 4, I'll go through them quickly. The first one is Secured Lending. So we launched Secured Lending in Q2. We now really see got to see it scaling. It's a big opportunity for us.

Speaker 2

So and it's all about execution. High income, as Lago earlier said, it's a marathon, not a sprint, Because it's a competitive space and there is a lot that we need to build to win in that category and to get to the share that we want to be getting. So we're putting All hands on deck on trying to put together the great value proposition there for that customer segment That we already have in the building, which is the good news, but we need to figure out how to increase the share. And then really cracking new content funding in Mexico and Colombia, which are a critical aspect to decrease Funding cost in both countries, get the funding that we need to continue growing in both countries and then also accelerate user growth, customer growth. So those are the 3 key kind of strategic priorities for us in the company that we are very much focused on.

Speaker 2

I think beyond that, it really is the multi product story. It is this evolution that has already taken a couple of years and we need to continue executing on becoming a full place, A full complete having a full complete portfolio of products of financial products and beyond. As we execute the marketplace strategy, We have integrated already over 150 different commerce partners into our app. People are being able to make reservations in our app. People are being able To shop in our app, we see the opportunity of us being bigger than a financial service We think opportunity is a consumer technology platform where over 85,000,000 customers That have very significant engagement and usage come to transact in a number of different ways, and we're able to help them Even beyond financial services.

Speaker 2

So that is going beyond financial services. That takes a number of different skill sets and learnings That we are trying to build in house and there is a lot of focus in us also executing that core part of the longer strategy of the company.

Speaker 15

Perfect. Thank you so much for the answers.

Speaker 2

Thank you.

Speaker 4

And we go now to Alex Margraf at KeyBanc.

Speaker 16

Thanks, everyone. I appreciate the Question. Maybe just first would love to hear a bit about how credit limits within the credit card product Have changed kind of on a sequential basis through the year as you look at new cohorts?

Speaker 6

Alex, thanks for the question. This is Youssef. So Our approach generally on credit limits is to start with a fairly conservative credit limit, Also known as the lowering growth strategy for most customers, especially the customers that tend to be in the middle to higher risk Segments of the universe. And so what you observe is for a given cohort, we tend to start pretty low and then expand As we observe data and good repayment and performance behavior, so on a given cohort that you'll see fairly rapid expansion of credit limits. But then as new cohorts show up, they tend to dilute the average.

Speaker 6

But in general, I would say like the rate at which we're increasing credit limits Has been pretty steady across the last couple of quarters.

Speaker 16

And just to clarify that The starting point, I guess, is part of the question, that level of conservatism, has that Change materially?

Speaker 6

No, it really hasn't. I mean, as a matter of fact, our general credit philosophy is Irrespective of the point at which we are in the cycle, we subject any new credit grants, we have any new cohorts to fairly high requirements in terms of resilience. So typically, We expect, whether it's our credit card or personal loan cohorts to be able to withstand a doubling of losses and still be above hurdle in terms of returns and NPV positive. And so that's what we do kind of throughout the cycle And that hasn't really changed materially in the past.

Speaker 16

Okay. And then just one quick follow-up on the cost to Acquire is kind of moving higher the last several quarters. Just I mean the paid marketing component seems to be stable. Just wanted to understand kind of what's driving that. Obviously, it's still very good number, but I just want to understand what's taking it to $7 versus what was previously, I think, $5

Speaker 3

Alex, what we have seen in customer acquisition cost is Our being a bit more aggressive in Mexico and Colombia as we expand into these geos. And Especially at the beginning when we were operating with credit cards only. What you will see, however, in Mexico over the coming quarters Is as we launch Cuentanu, our banking account product, and millions and customers are onboarded, the customer acquisition cost of Mexico to come down. What we expect, however, going forward is customer acquisition cost to be between $5 $10 and that range still provides us With what we believe to be a very compelling LTV to CAC.

Speaker 4

And our next question comes from the line of Eugenie Simoni at MoffettNathanson.

Speaker 17

Hi, guys. Thanks for squeezing me in. Great results here. I just wanted to ask about card issuance volumes Trends in Brazil and for you guys, obviously, very strong number with kind of 30% year over year growth in your purchase Volume FX neutral, I believe, much, much better consistently than what Brazil market is doing. But It is decelerating at a relatively rapid pace.

Speaker 17

And when we look at the Brazil overall numbers, kind of what ABEX reports, There seems to be significant deceleration this year as well. So just curious to hear your thoughts on kind of what's going on in the market overall in terms of Card issuance in Brazil, maybe some impact from PIKs that you are seeing and then how that then gets reflected in your personal growth and kind of what we can expect in the second half of the year and going forward?

Speaker 3

Eugene, thanks for the question. I think it's very hard to address this question without making reference to the normalization post COVID. What we have seen over the past 2 years, I would say, 2021 2022 in Brazil, it was a very strong recovery from COVID loss And a fairly aggressive extension of additional credits in the country, additional credit cards in the country. And over the past, I want to say, 6 to 12 months, you've seen deceleration of credit expansion in consumer finance in Brazil, Including but not limited to credit cards. We continue to outpace the industry by fairly large amounts.

Speaker 3

We have been gaining No market share at a clip of about 40 to 50 basis points per quarter throughout the past quarters. And we expect that this pace is to continue in the coming quarters, even though we do not necessarily target kind of a market share goals. But the pace at which we have been able to onboard new customers, the pace at which we have been able to mature existing cohorts And cross sell credit cards suggest that we will continue to gain market share at good paces in the foreseeable future.

Speaker 17

Got it. And just maybe a very quick follow-up. Are you seeing any sort of negative impact from PIK's Success on card volumes?

Speaker 3

No, absolutely. No, I think we have seen What we have seen is PIX being a phenomenal kind of payment mechanism in Brazil. But 1st and foremost, what Peaks has been cannibalized in our view is cash. So that's the first item that Peaks has been cannibalizing. We also have seen some early signs of peaks potentially cannibalizing debit and prepaid cards, but we have not seen Any evidence of peaks cannibalizing credit cards?

Speaker 3

In fact, if anything, what we have seen is a very strong correlation of The adoption of peaks and financial inclusion in Brazil and financial inclusion in Brazil sometimes comes coupled with the expansion of credit cards. It's also a relatively similar trend to the one you may have seen in India with UPI, but it's too early to draw many parallels between those two geographies.

Speaker 6

This is Youssef. I would just also reiterate something that David spoke about and we spoke about spoken about in the past, which is First order impact for our portfolio of PIX has been on credit has been the rapid adoption of PIX Financing using credit card limits. And so that's been a big driver of the increase in interest bearing balances for us. So that's been a tailwind, quite frankly.

Speaker 4

And our last question comes from the line of Jamie Friedman, SIG.

Speaker 18

Thank you, York. Lago, in your prepared remarks, you observed the strength in The debit and prepaid component of the newer cohorts. And I'm just it's like Slide 9 and 10. I'm just wondering as That population or that representation increases in your portfolio, are there specific Products for financial inclusion that you would think would be better targeted towards that type of population? I'm just curious about the debit prepaid mix.

Speaker 3

Thanks for the question. I think if we if I can draw your attention to number 12. You will be able to see the evolution of credit cards and prepaid theirs. And as I have noted before, For the younger and earlier cohorts, you do see a higher preponderance of prepaid cards there. And we think that, that is a good pathway into a consumer credit strategy in Sinubank in which we can start The relationship with a customer with a prepaid card only, as we learn more about the customer, their income patterns, spending patterns and savings patterns, We can progressively gain more comfort and offer this customer a credit line in the credit card.

Speaker 3

We usually start, as Youssef mentioned, with a relatively low credit lines through low and grow. And then as the customer builds his or her own Capa credit history with us, We expand this over time and you can see that the purchase volume follows this expansion. Usually purchase volume can triple within the 1st 24 months. That has been very successful for in the form of customer engagement, but also in the form of asset quality. And it's probably a formula that we expect to Continue to pursue in the coming years.

Speaker 4

And in the name of Nourdys and its management team, I'd like to thank you all for the participation in this conference call. Over the coming days, our team will be responding to the questions sent through our webcast and e mail. We also take the And this concludes our earnings call. Everyone, a good night.

Operator

The Annual Holdings conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.

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