NU Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

Key Takeaways

  • By Q2 2024, the company reached 105 million customers, up 60% over two years, with 1.2 million monthly net adds in Brazil and strong traction in Mexico (7.8 million) and Colombia (1.3 million).
  • Revenue jumped 65% YoY to $2.8 billion, gross profit rose 88% to $1.4 billion, net income soared 134% to $487 million, and adjusted net income grew 131% to $563 million.
  • Deposit franchise expanded rapidly, with Mexican retail deposits tripling to over $3 billion in two quarters and Colombia’s new checking account attracting $220 million in Q2.
  • The platform maintained industry-leading efficiency with cost to serve at $0.90 per active customer, an efficiency ratio of 32%, and a record net interest margin of 19.8%.
  • Asset quality metrics showed seasonal NPL upticks—15-to-90-day delinquencies at 4.5% and >90-day NPLs at 7%—reflecting deliberate lending expansion into higher-risk segments.
AI Generated. May Contain Errors.
Earnings Conference Call
NU Q2 2024
00:00 / 00:00

There are 17 speakers on the call.

Operator

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, Youssef Larasch, our President and Chief Operating Officer, Guillermo Lago, our Chief Financial Officer and Jack 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 new 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 a 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 Q2 2024. Subsequently, Guilherme Lago, our CFO and Yousef Larasch, our President and COO, 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 would like to turn the call over to David. David, please go ahead.

Speaker 2

Thank you, Jorg. Good evening, everyone, and thank you again for being with us today. During Q2, 2024, our business model anchored in 3 fundamental principles, customer expansion, revenue per customer and efficient operating costs, demonstrated its formidable strength by accelerating earnings power. Our net customer additions have consistently exceeded expectations, reaching 105,000,000 customers by the end of the quarter, a 60% increase from the 65,000,000 recorded just 2 years ago. Customer growth in Brazil remains outstanding with an average of 1,200,000 new customers monthly, bringing the total to 95,500,000 at the end of the quarter.

Speaker 2

Meanwhile, Mexico also experienced strong growth with 1,200,000 net adds in the quarter, culminating in 7,800,000 customers. This success validates our strategy of increasing deposit yields in Mexico, boosting our momentum and solidifying new as the leading digital financial platform in Mexico. Additionally, Colombia surpassed the 1,000,000 customer mark, ending the quarter with almost 1,300,000 customers following the successful launch of the Cuenta product. Now let's go to some financial highlights. Despite LatAm currencies depreciating against the U.

Speaker 2

S. Dollar during the quarter, our revenue surged to $2,800,000,000 as we continued to successfully cross sell and up sell while introducing relevant new products, reflecting a 65% year over year increase. Our gross profit climbed to $1,400,000,000 marking an 88 percent year over year growth with a gross margin of 47.7%. Net income also saw significant growth, reaching $487,000,000 resulting in a record annualized return of equity of 28%, one of the highest in the Additionally, our adjusted net income hit $563,000,000 with a sequential expansion of 36% quarter over quarter and 131% year over year. These achievements underscore the strength of our business model, which combines robust top line growth with solid profitability.

Speaker 2

In this slide, we again demonstrate how our flywheel effectively drives customer acquisition and data growth while sustaining strong momentum in our key financial metrics. Our models in our end operational strengths are driving significant profitability. In the Q2, new holdings achieved an adjusted net income of $563,000,000 with an adjusted annualized return on equity of 33 percent despite maintaining a robust level of excess capital of $2,400,000,000 at the holding level and with 2 subsidiaries in Mexico and Colombia yet to be profitable. Now, I'd like to pass the floor to our CFO, Guilherme Lago, who will guide you through our financial numbers. Over to you, Lago.

Speaker 3

Thank you, David, and good evening, everyone. As David mentioned, we delivered a robust second quarter as we continue to increase revenue growth, see enhanced customer engagement and deliver strong operating margins and profitability. Now, let's dig deeper into the 2nd quarter results to gain a greater understanding of the progress against each one of these pillars. I will begin with the results of our customer acquisition. During the Q2 of 2024, our customer base grew at a strong pace with 5,200,000 new customers joining our platform.

Speaker 3

By the end of the quarter, our total customer count reached 104,500,000, marking a 25% increase year over year. Once we add more customers, engaging and retaining them becomes our focus. Our active base increased by 27% year over year, followed by another sequential quarterly increase in the monthly activity rate, which now stands at 83.4%, up from 82.2% just 1 year ago. This marks the 11th consecutive increase in this metric, demonstrating our proficiency and offer of compelling value proposition to our customers in Brazil, Mexico and Colombia. Turning our attention to revenue expansion.

Speaker 3

The first chart highlights that NU has established primary banking relationships with around 60% of our active customer base. This solid performance underscores our ability to increase the share of wallet in an agile manner within our customer base. Moreover, recent cohorts are achieving this level of Principality at an increasingly rapid pace. As you can see in the second chart, the number of products per active customer is at 4.1, illustrating the success of our cross selling strategy even as we continue to quickly onboard many new customers. By effectively introducing our products to new customers, we solidify our role as their primary banking partner.

Speaker 3

The last chart illustrates the combined effect of these two powerful dynamics. By having significant customer engagement, as demonstrated in the first chart, coupled with our growing product cross sell capabilities shown in the second chart, we achieved increasingly positive results. While our monthly ARPAK contracted to $11.2 this quarter, compared to $11.4 last quarter, on an FX neutral basis, ARPAK in fact expanded by 6%. On the next slide, we will present the growth rates on an FX neutral basis and you can also note that our more mature cohorts are already generating a monthly RPAC of $25 Our monthly RPAC reached $11.2 However, on an FX neutral basis, it grew 6% sequentially and a robust 30% year over year, up from $9.3 just 1 year ago. We continue to see a clear path to further increase ARPAK towards its full potential.

Speaker 3

The second chart highlights that our revenues hit a new record high this quarter, reaching $2,800,000,000 an increase of 65% year over year. Just a year ago, our revenues stood at $1,800,000,000 This impressive growth was driven by 2 things: the increase in active customers, combined with higher ARPAK levels year over year. This quarter, our consumer finance portfolio, encompassing credit cards and lending, showed a strong growth, While the nominal dollar value of our book contracted, it achieved a 49% year over year and an 8% quarter over quarter expansion on an FX neutral basis, reaching a total of $18,900,000,000 This growth was driven by increases across both product categories. Credit cards expanded sequentially, Despite the same FX impact in nominal dollars, it grew by 39% year over year and 6% quarter over quarter, reaching $14,300,000,000 This growth was driven by the consistent increase in the share of wallet across all customer segments. Once again, our lending portfolio performed extremely well, growing 92% year over year and 15% quarter over quarter on an FX neutral basis, reaching $4,600,000,000 Lending growth continues to outpace credit cards and now represents 24% of the total portfolio.

Speaker 3

Consistent with trends from the previous quarters, our lending cohorts continued to show strong credit performance, enabling us to scale originations effectively. Now, let's move to the breakdown of our credit card portfolio. Interest earning installment balance now represents 28% of our total credit card portfolio, up from 26% last quarter. Once again, this growth was fueled by the successful expansion of our PIX and BOLLETO financing products. This type of financing offers an attractive risk adjusted rate of return, enabling us to further expand the monetization of our credit card business while meeting important customer needs.

Speaker 3

Our strategy is further validated by the stability of our revolving receivables, which remain at 6% of total credit card receivables this quarter. Going forward, we expect the percentage relevance of interest earning installments balance to begin to stabilize. Looking at our lending business, originations reached BRL13 1,000,000,000 this quarter, a 78% year over year increase. Unsecured lending remains the primary driver of growth, reaching R11.2 billion dollars in originations this quarter. This highlights our ability to extend credit availability to those who previously lacked access to this product.

Speaker 3

Our secured lending originations reached at R1.8 billion dollars during the Q2 of 2024 or 14% of total lending originations. During the second half of the year, we anticipate a gradual increase in the pace of originations of secure lending, as new features such as portability top ups and refinancings are introduced. We have also signed 6 new collateral agreements to increase eligibility in TAM, including parts of the armed forces and some of the major Brazilian states and municipalities. The integrations of these new entities are ongoing and once completed, we will release the product for newly eligible customers, thus helping us further grow originations. In fact, during the month of July 2024, total originations exceeded BRL5.2 billion, of which BRL750 1,000,000 in secured lending alone.

Speaker 3

Now, let's review the progress on the funding front. Although deposits in our Brazilian business contracted in nominal dollars to C21.7 billion dollars they expanded 10% quarter over quarter on FX neutral terms. Our total deposit base for the quarter increased to DKK25.2 billion, representing a 64% year over year growth, primarily driven by significant expansion in Mexico through Cuentanu. By the end of the Q2 of 2024, we surpassed over $3,000,000,000 in deposits in Mexico, more than tripling in just two quarters. The strong growth in Mexico represents a significant milestone in building 1 of the strongest local currency retail deposits franchise in Latin America.

Speaker 3

Another noteworthy achievement was the launch of New Colombia's checking account product in the Q2 of 2024, which attracted over $220,000,000 in consumer deposits, more than 80% in the month of June. Net interest income, or NII, increased by 77% year over year, reaching another record high of $1,700,000,000 This consistent growth was driven by our expanding credit card and lending products, collectively boosting our NII and net interest margins, or NIM, to new record highs. For the Q2 of 2024, we delivered a net interest margin of 19.8%, an increase of 30 basis points from last quarter and 150 basis points from 1 year ago. Looking ahead and regardless of the directions of interest rates, we are confident that the primary driver for future NIMs will be the continuous deployment of our balance sheet capacity in the form of credit originations growth. Our excess deposits today, invested primarily in public bonds yield much lower returns compared to the lowest yield loan products such as secure credits.

Speaker 3

Let's now turn our attention to the very last pillar of our overall strategy: maintaining a low cost to serve. Our platform remains one of the most cost effective in our markets, with its low cost to serve providing a significant competitive advantage. We anticipate this cost at or below the $1 per active customer for the foreseeable future. And once again, we successfully achieved this goal, with a cost to serve per active customer and 0 point 9 zero dollars On an FX neutral basis, this figure has grown 19% year over year when adjusted by one offs related to networks reimbursements Mexico during the Q2 of 2023. In the same period, our ARPACT expanded by 30%.

Speaker 3

This showcases the strong operating leverage of our business model. Our gross profit reached a new quarterly high of approximately $1,400,000,000 an 88% year over year increase. Our annualized gross margins has rebounded to 2023 levels despite higher cost of funding in the new geos. Our investments in Mexico and Colombia have been effectively offset by the positive trends in Brazil, driving our gross margins to 47.7 percent. A core element of our strategy is achieving operational leverage.

Speaker 3

Our efficiency ratio stood at 32% during the Q2 of 2024, an improvement of 10 basis points from the Q1 of 2024 and more than 300 basis points better than a year ago. We are set to fully harness our platform's operational potential as we expand our customer base, upsell and cross sell products, launch new features and achieve profitability in the new markets of Mexico and Colombia, which are essentially in their investment phases. Let's now review the sustainable advantages across all four cost pillars. Number 1, our cost to acquire was stable at $7 This figure continues to be one of the lowest among consumer fintechs and banks globally. Number 2, as expected, our cost to serve remains exceptionally low, below $1 and approximately 85% lower than those of incumbent banks.

Speaker 3

This positions NU as one of the most efficient financial services companies worldwide. Number 3, on cost of risk, we have effectively managed credit risk, consistently outperforming competitors on an apples to apples basis with respect to delinquency rates. And finally, number 4, on the cost of funding, we have significantly increased deposits volumes while maintaining our cost of funding at a competitive level of 87% of the blended interbank rates of the countries in which we operate. This has closed the gaps with incumbent banks and widened our advantage over consumer fintechs. And finally, turning to net income, we delivered another quarter of strong profitability, with net income reaching $487,000,000 representing an increase of 134% compared to the previous year.

Speaker 3

These results underscore the effectiveness of our strategy and business model. Additionally, adjusted net income for this quarter reached $563,000,000 growing 131% versus 1 year ago. While we are very encouraged by the 2nd quarter results, our focus remains steadfast on long term value creation. This approach may involve making strategic short term investments to optimize our long term opportunities. Now, I'd like to hand over the call to Youssef, our President and Chief Operating Officer, who will walk you through the key highlights of our asset quality and credit portfolio health.

Speaker 4

Thank you, Laiju, and good evening, everyone. Let's start by having a look at our NPL trends. 1st, following an anticipated seasonal rise in NPL 15 to 90 in the Q1 of 2024, which is typical for early stage delinquencies, it has decreased to 4.5% this quarter, slightly more than historical seasonality. 2nd, our 90 plus NPL ratio increased to 7%, also in line with expectations. The 70 basis point increase in 90 plus NPL this quarter is simply a reflection of the 90 basis point mostly seasonal increase in 15 to 90 NPL we saw last quarter.

Speaker 4

As discussed in past earnings calls, we are intentionally and strategically growing our lending book and expanding down the credit spectrum where we see relevant opportunities. In line with our credit philosophy, we prioritize decisions that optimize the long term net present value of our credit cohorts rather than focusing solely on short term NPL metrics. When we identify asset classes or customer segments with compelling risk adjusted returns that promote responsible customer behavior, we actually pursue growth in those areas. As we will show in the next few slides, the strategy has yielded increased revenue and greater resilience that are more than offsetting the higher delinquency rates that come with it. To illustrate the impact of credit expansion on our consumer finance portfolio, we are presenting this analysis of normalized NPLs starting in December 2022 before the latest waves of credit expansions.

Speaker 4

This shows what our NPLs would have been if we hadn't undertaken these expansions. In other words, you can see clearly that the increase in NPLs in the last several quarters is largely the product of these deliberate expansions. In fact, the evolution of these NPL metrics continues to closely follow our expectations. Similarly to last quarter, we show on this slide asset quality trends under a different basis, considering both 15 to 90 and 90 plus NPLs per interest earning balances rather than total receivables on the previous slides. On this basis, you can clearly see a stable to downward trend in the last few years, aside from the normal seasonal ups and downs, like the ones we saw in Q1, 15 to 90 and in Q2 with 90 plus.

Speaker 4

This goes to show that we have been remunerated for additional risk we've taken. In the next slide, we further validate this conclusion looking directly at risk adjusted returns. To demonstrate the significant value generated by this expansion strategy, we show on this slide the risk adjusted margins, or RAMS, for our Brazil consumer credit portfolio with and without the risk expansions we undertook since late 2022. This clearly indicates that the additional revenues stemming from this expansion strategy have more than offset the additional credit risk and delivered substantially increased returns. Credit loss allowance expenses declined to $760,000,000 this quarter, a decrease of only 2% on a forex neutral basis.

Speaker 4

This slight drop is the result of 2 drivers. The first is the relatively slower growth base in Q2 compared to Q1 as growth is the main driver of our ECL provisions, as you can see in the appendix of this presentation. The second driver is early delinquency, which behaved slightly better than historical seasonality in the Q2, as mentioned previously. Lastly, risk adjusted NIM reached a record high of 11% this quarter, reflecting a 300 basis point expansion from a year ago and 150 basis point increase quarter over quarter. Now, I would like to turn the call over to David.

Speaker 4

David, over to you.

Speaker 2

Over the past decade, we have cultivated unique attributes that position NU to become the largest consumer technology platform in Latin America. These strengths include brand, by consistently simplifying complexity to empower people, we've built 1 of Brazil's most beloved and trusted brands with recognition rapidly growing in Mexico and Colombia. Scale, our significant presence in Brazil, reaching now 56% of the adult population enables us to offer superior products at lower prices, creating a powerful flywheel effect. Data or vast data supported by a cutting edge infrastructure forms the foundation of our advanced customer segmentation and credit underwriting capabilities. Talent, we boast 1 of the world's leading technology and product teams, a distinction unmatched by any other company in Latin America.

Speaker 2

Culture. News values including customer centricity and operational excellence are deeply ingrained in every team member and drive our decision making, ensuring our focus on long term sustainable growth. While our success relies on a combination of these unique attributes, I'd like to double click on some key factors that place us in an unmatched market position: Our exceptional talent, our focus on technology as a driver of sustainable growth in our enduring brand that has galvanized and empowered almost 105,000,000 Latin Americans. Since our beginning, we have described ourselves as a technology company, not a financial institution. Therefore, through our 11 years of history, we have gone to great lengths to build what we think is the leading product engineering team in Latin America.

Speaker 2

Today, we have over 59 nationalities working at Nubank and over 50% of our headcount is focused in technology and analytics. This access to world class technical talent has been a key reason for our historical performance and will continue to be a great enabler of over performance over the long run as competition increases. Additionally, the ongoing AI revolution creates new opportunities for differentiation and we're very focused on building on this talent magnet asset. As an example, I wanted to highlight our recently announced acquisition of Hyperplane. Hyperplane is a Silicon Valley based leader in AI power solutions for the financial services space.

Speaker 2

As we tested Hyperplane's platform on our vast amount of data, we were impressed by the opportunity to meaningfully improve performance of even our most advanced machine learning models by using a financial services focused foundation model that included our own unstructured data. We're very excited to welcome the Hyperplan team on board and see them as a key part of our AI strategy in the foreseeable future. The powerful tree of trust, exceptional service and competitive pricing also underscores new continued success. This winning combination is the foundation of our beloved brand, attracting customers who seek the most compelling value proposition in the market. We believe that in a world of choices, customers will naturally gravitate towards those who offer superior products and services, and that's exactly what we provide.

Speaker 2

The growth of our deposit base in Mexico and now in Colombia is a testament to this principle. In Mexico, we've attracted $3,300,000,000 in retail deposits in just over a year since the launch of our checking account product. In Colombia, our Cuenta product, launched this quarter, has already garnered over $220,000,000 in new deposits. While other players are pursuing even more aggressive pricing strategies, paying higher yields in their savings account, since launch, NOO has been able to capture over 70% of the deposits in both Mexico and Colombia across all Fintechs combined. This proves that consumers are going beyond whoever simply pays in the highest yield and are coming to NewBank because of our product, our brand, and ultimately, the entire user experience that we are providing.

Speaker 2

With that, we're now ready to address your questions. 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 press the reaction button and then 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 re enter the queue.

Operator

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

Speaker 1

And our first question comes from the line of Jorge Poude, Morgan Stanley.

Speaker 5

Hi, everyone. Good afternoon, and congrats on the results. Thanks for the color on how originations are running in July. That's evidently an impressive number already and are analyzing very not a lot for the quarter already showing very strong run rate. Can you provide some color on how the payroll loan particularly is trending now that you have all of the features that consumers look for mainly the top up.

Speaker 5

What's the acceptance level that you're seeing with your consumers? What is the reaction from competitors? Are you taking share? Or is the growth coming from new customers? Just help us understand sort of like in these early days how this is shaping up?

Speaker 5

Thank you.

Speaker 3

Hi, Jorge. This is Laimo. Thanks so much for the question. So we are super pleased with the performance of what we call our secure lending product, which encompasses both public payroll loans as well as FGTS. And we are still in the very early part of this journey, right?

Speaker 3

So today, we are operating only with 2 collateral agreements, which are INSS and SIAPI. INSS for the pensioners and retirees and SIAPI for the federal public servants. The 2 collateral agreements combined, they account for approximately 50% of the target market that we have in Brazil. We have already signed 6 additional collateral agreements with armed forces in some of the largest states and municipalities in Brazil and we expect to continue to expand this so that by the end of the year, our target market can be expanded from today's 50% to somewhere around 70% to 75 percent and even more is expected to come in, in 2025. So that's one dimension of expansion.

Speaker 3

However, the second dimension of expansion is the launch of new products and features, which are already which are still far from being now complete. You did point out that we have already launched portability and we did so progressively throughout the Q2 of the year. But it's still with some features that are very important missing, specifically related to refinancing and top up. And those two features, refinancing and top up, when coupled with portability, can for the online or the digital players account for more than 50 percent of the ARPAWA. So we are seeing kind of a progressive ramp ups in public payroll loans.

Speaker 3

We do believe that we have structural cost advantages to play in the segment. So as you know, we originate 100% digitally. Therefore, we have no customer acquisition costs whatsoever. We don't operate with loan brokers or branches. And our existing customers account for nearly 40% of the total public payroll on book in Brazil.

Speaker 3

So again, we don't need to fish outside of our fishbowl to tap into more than 40% of the total market. So early days for us, encouraging signs so far on both public payroll loans and also if not primarily in FTTS and we expect that growth will pick up in the coming quarters.

Speaker 5

Thank you, Lagu. That was very clear.

Speaker 1

And the second question comes from the line of Pedro Leduki from Itau.

Speaker 6

Hi, everybody. Thank you so much for the question. I would like to pick our brains a little bit on the provision expense side for bad credit. Here, of course, we have seen it increase a lot during 1Q and back then we discussed how it was related for greater risk taking and well planned conscious move and that had brought up those provision expenses. And now in the Q2, at least on FX neutral, you're sort of flattish, lowering your cost of risk effectively.

Speaker 6

So I want to get your thoughts around this a little bit, probably go around how those recently originated portfolios have behaved, how we are seeing risk in the coming origination harvests, just to get a sense on the provision side. So that's that. Thank you again.

Speaker 7

Hi, Pedro. This is Youssef. Thanks so much for the question. So look, I believe you're referring to Slide 24 of our presentation, which shows our CLA quarter on quarter. And you are correct that there was a slight contraction from Q1 to Q2 on an FX neutral basis about 2% down.

Speaker 7

As I mentioned previously, you have to think about the fact that we provision when we grant loans or book credits on the basis of expected credit losses, right, for IFRS 9. And so what's happened this quarter is the credit quality and the actual performance has played out per our expectations. In fact, slightly better when you look at 15 to 90 as I pointed out. So that's what's in part driving the slight decrease in CLA coupled with the fact that on a relative basis to the size of the portfolio, the relative growth was less in Q2 than Q1. Another way to look at it is if you refer to the appendix of the presentation, I believe it's Slide 37 with the coverage ratios on both the basis of total loans and coverage of 90 plus.

Speaker 7

You see the coverage ratio of total loans has continued to go up as one would intuitively expect given that the net effect of all our growth is expanding credit and expanding credit risk. On the basis of 90% plus, it continues to be hovering around 200%. Again, the fact that it decreased a little bit is just based on the early delinquencies improving, as I mentioned.

Speaker 6

Thank you.

Speaker 1

And the next question comes from the line of Mario Piai at Bank of

Speaker 8

America. Hi, guys. Good afternoon. Let me stay on this topic of the provisions because I think there was a big surprise this quarter. You show right on, I think, Slide 11 or 12 that your originations went up.

Speaker 8

So you're originating more credits and then you're provisioning less. Like you mentioned, you provision based on expected losses. So does it mean that you expect lower losses on these new originations than you had before? And why would that be the case? Because we continue to see, right, the NPLs going up.

Speaker 8

So, yeah, that's my question. If you can give us a little bit more color on why even if originations going up, revisions are going down?

Speaker 7

Yes, Maja, thanks for the question, Youssef again. So it might be helpful to refer to slide 38 in the appendix of the presentation, which looks at the ECL itself, right? So you see ECL increased by about 300,000,000 or so. 400,000,000 of that was growth. So like the impact of growth is fully reflected there.

Speaker 7

And then we had $110,000,000 of other factors, mostly what I mentioned in terms of the slightly better than expected early delinquency performance. And so in fact, we're continuing to grow this line item, the ECL line item. It's just a little bit better than our expectations when we front loaded provisions in Q1.

Speaker 8

Okay. And Youssef, you mentioned, right, that the NPLs continue to behave according to your expectations. But what are your expectations going forward for NPLs?

Speaker 7

Yes. Good question. So in terms of what to expect going forward, it's very much along the lines of continuing to grow our credit book. You know, there's several dynamics at play. 1st of all, we continue to increase the relevance in the mix of lending, personal loans, both secured and unsecured as a percentage of total receivables.

Speaker 7

Personal loans have been growing faster than credit cards. They tend to have on net a higher risk content, so that tends to push NPLs up and provisions up. But also within credit card, what we've been seeing over the last several quarters is a pickup in interest bearing receivables because we have more interest bearing receivables in the credit card book that gives us better unit economics, which allows us to then expand credit to more customers and more credit to existing and already eligible customers. And then in both products, both personal loans and credit card, as we improve our models, as we get more data, more test results, we're able to serve more customers across the spectrum and expand our credit box. So all those dynamics point to increasing NPLs and also increasing returns as we've illustrated earlier in this call.

Speaker 7

There's one offsetting factor, which is the growth in secured lending, which tends to come with lower NPLs. But on net, I would expect to continue the trend that we've been seeing over the last several quarters. And again, this is all related to our philosophy of what are we trying to optimize when we grow, we try to optimize the NPV of that full customer relationship over its lifetime, including future cross sell opportunities, including principalities, increases, etcetera, rather than trying to minimize NPLs over the short term. So again, when we see opportunities to grow in a way that's resilient, that is suitable for those customers, that is high NPS, high quality, we seize those opportunities. And so we still see a lot of opportunity to grow going forward on that basis.

Speaker 7

You can also just think of it through

Speaker 1

the lens

Speaker 7

of in Brazil, for example, we have about 60% of total adult population. When you look at the proportion of customers who have Nubank as their primary banking account, it's about a third of the total population of Brazil. In contrast, our market share in our most mature product like credit cards is about 13%, 14%. It's even lower. When you look at loans, it's in the single digit secured loans even lower in the small single digit range.

Speaker 7

And so we still see a lot of opportunity to grow those market shares on the basis of the customer base we already have.

Speaker 8

Okay. So then to summarize, basically, you're saying you expect NPLs to continue to go up. But we did see an acceleration in the deterioration this quarter, right, like we saw 70 basis points deterioration, you were deteriorating 20 to 30 basis points before. Is that the 70 basis points that you were

Speaker 7

point out, the way I would think about it is if you go back 1 quarter and you look at what happened to 15 to 90, that was a seasonal pickup in Q1 of about 90 basis points. What we're observing this quarter in 90 plus is merely the impact of that rolling forward into the next bucket of delinquency. So 90 basis points increase in 1590 in Q1 resulted in about 70 basis points increase in Q2 and 90 plus. So that's just kind of the mechanics of it. And remember, Q1 tends to be the peak of delinquency in 15% to 90%, which then translates to a peak increase in the next quarter in 90% plus.

Speaker 7

So I think that's just more than anything seasonality.

Speaker 8

Okay. Thank you very much.

Speaker 1

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

Speaker 9

Hello. Thanks very much for taking the question. We've spoken in the past about moving upmarket initiatives like Ultra Violetta, But the message here feels almost want a moving down market, taking on more risk. If you look at the purchase volumes analysis by cohort that you show, it seems to point to maybe lower purchase volumes for newer customers. So what is the thinking on the shift up market?

Speaker 9

Is that still going to come? Is that pushback? What's happening there?

Speaker 3

So, Geoff, I think I'll try to chime in. I'll let my comments my colleagues add as well. But by no means, the growth that we have had in lending and credit cards suggests a deviation from our intention to grow very fast in high income on the opposite. I think the high income market provides us with tremendous opportunity in consumer credit in Brazil as it accounts for a fairly relevant share of all of the asset classes in which we play. Over the past now 12 to 24 months, we believe that we have made fairly good inroads into our pursuit of increasing our share of wallet within the high income population.

Speaker 3

As we pointed out in prior calls, we have the opportunity now to increase share of wallet largely as a result of our success in having customers over the past now 2 years. Today, if you define high income as a customer in Brazil who earns more than BRL 12,000, We estimate that we already have more than 60% of those high income customers with us. Over the past quarters, we have materially improved brand awareness, materially improved brand considerations for the high income segment. As of December 2023, we have become the number one player in NPS within the high income category And high income has become the fastest growing segment within our purchase volume. So as a reference, the PV of ultra violet, which is our higher tier, has increased by over 70% over the past 12 months, even coming still from a relatively low base.

Speaker 3

But we are fairly encouraged on our drive to go into La Inca. And we think that it is fairly compatible and addicted to what we are doing in mining.

Speaker 9

Thanks. And the principalities among high income, what would that look like?

Speaker 3

So we the our overall principalities about 60 percent. I don't have the figures for high income, middle income and low income here nor do I think we disclose them, but they are certainly higher within the bottom of the pyramid than they are within the top of the pyramid. The opportunity that we have now as we improve kind of our brand attributes, as we launch new products and features is to gain principal within share of wallets within the high income customers. And we can show that as we track the primary banking relationship or PBR has increased quarter after quarter within the higher income segments in Brazil.

Speaker 9

Great. Thanks very much. Sorry to cut you off that.

Speaker 1

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

Speaker 10

Congrats everybody for the quarter. I have a question. I think it was Lago mentioning in the beginning of the call that he expects interest earning assets from the cards, the installments to start to stabilize. So I want to confirm I heard this correctly. And if that's correct, why?

Speaker 10

Because you continue to make good returns on fixed financing, boletos and credit cards as you always mentioned like this is a good risk adjusted product. So basically confirming that we should see some stabilization on that ER for credit cards. And if yes, why should we see the stabilization? Thank you, guys.

Speaker 3

So, Yudu, thanks for the question. And I think you are referring to my remarks to Slide number 10, in which we see the evolution of our interest earning assets evolving from 19% last year to about 28% this year. So it is, 1st, extremely hard to draw high conviction outlooks for innovative products. So this is an innovation that we like to believe that we helped to introduce in Brazil. You're absolutely right that we are very pleased with the unit economics of this product with the customer adoption.

Speaker 3

We just feel that the adoption curve that we have experienced over the past 4 quarters has been fairly steep. So it's hard for us to believe that we will continue to see the same adoption velocity over the coming quarters. So we are assuming that going forward, there's going to be a slight reduction in the growth, not a reduction in the overall percentage, but probably not going to grow at the same pace as it grew in the prior quarters.

Speaker 10

No, super clear. So it should still gain some penetration, but not maybe at the same pace as we are seeing currently, right? Basically, this is what you're trying to say.

Speaker 3

That's correct.

Speaker 5

Perfect. Thank you, Largo.

Speaker 3

Thanks, Juri.

Speaker 1

And our next question comes from the line of Tito Labarta from Goldman Sachs.

Speaker 11

Hi, good evening. Thanks for the call and taking my question. A bit of a follow-up on asset quality. Looking here at Slide 21 in the presentation, it does look like here that without the expansions, the early NPLs will be doing even better. So just maybe help us think about the credit quality outlook that you see in Brazil versus ex Brazil where it's still very early stages and maybe you're taking on more risk there?

Speaker 11

Like are you feeling more comfortable? I mean, you kind of alluded to this, but that maybe the Brazil credit quality outlook is getting better and can that help you maybe even accelerate growth in Brazil a bit?

Speaker 7

Tito, thanks for the question. So as a reminder, we thinking about macro and credit outlook, we try to refrain from having any making any bets on what's going to happen to macro on a going forward basis. In fact, if you look at our history, starting in Brazil, it is marked by big periods of instability, downturns, etcetera. And so we feel like our philosophy continues to be one of demanding a lot of resilience from whatever growth we underwrite, right. So we always kind of take the stance that the future will be worse than the past.

Speaker 7

And whatever we underwrite needs to be able to withstand a significant amount of deterioration. So typically, our cohorts, as we've said in the past, will withstand a doubling of risk and still be above hurdle. And so we continue to operate in this way where we tend to be fairly agnostic to any forecasts about the future. To your point, what we've seen when you back out the expansions and you look at it, what NPLs would have been without the expansions, we see a period of relative stability over the last year and a half or so. But we're not banking on that or any improvement going forward to be able to continue to grow.

Speaker 11

Okay. No, that's fair. Thanks Youssef for that. And maybe a follow-up, just on the risk adjusted NIM, right, Slide 24, nice improvement there. As you continue to grow the loan book and monetize, do you think there's still room for that to continue to increase further?

Speaker 7

Yes, it's a good question. So as I mentioned earlier, we see continued opportunities to grow. You know, as I described, the various categories of growth that are available to us across our personal loan and credit card products. That said, it's not a trend that I would expect to go on forever, right, because we optimize NPV, as I said, over the lifetime of the customer relationship rather than minimize NPL. But we are constraining that based on resilience, based on churn, based on quality of the product and the relationship at NPS.

Speaker 7

And so those are all important guardrails and governance of how much we allow ourselves to grow down the credit spectrum. I think in the near term, we still see some opportunity. But I don't think these numbers are unbounded by any stretch of the imagination.

Speaker 11

Perfect. Thanks, Youssef.

Speaker 3

The one thing, Chitot, that I would add to what Youssef mentioned is that I would also point out that we have a gigantic opportunity to continue to optimize our balance sheet, right? So our loan to deposit ratio is still below 40%, whereas most of the retail banks in the regions are above 100%. So as we increase loan to deposit ratios, our net interest margins are expected to continue to expand. There will just be an additional tailwind to this trend that Youssef was alluding to.

Speaker 11

Yes, very clear. Thank you, Lago.

Speaker 1

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

Speaker 12

Hi, everyone. I have a question regarding open banking. We have been seeing some important changes recently, right, such as the removal of the requirement for clients to grant access for a limited period. As far as I understand as well, there we've been seeing also important discussions about the granularity of the data that needs to be shared, you know, whether new needs to keep requesting the data or if the other bank, let's say, must provide the information whenever something important to that client occurs. We also have been seeing some new articles talking about potential discussions to eliminate the reimbursement costs in case of portability.

Speaker 12

I think that this has been an issue for you on, on payroll. So a lot of things happening and important discussions. So it would be great if you guys could give us an update and let let us know if if these changes could be material for Nous? Thanks.

Speaker 3

Hi, Usman. Thanks so much for your question. Look, open banking is probably one of the regulatory developments with which we are most excited in Brazil. If you step back for a moment and if you look at the regulatory framework of open banking that has been adopted in the country, it is probably one of the most progressive open banking frameworks that we have seen globally, even if you compare this with the frameworks that have been developed in India or in the U. K.

Speaker 3

It has a tremendous opportunity to lower the barriers for the exchange of information, to lower the attrition for the movements of data and to lower the attrition for the movements of both assets and liabilities. So it is something that we have been investing quite a lot of time and energy and we are very excited with the prospects. Going a little bit more into the details. So there has been a lot of efforts from many players to first gain confidence from consumers to gain access to their data over the past years. We are happy to say that we probably have a market share that approaches 1 third of all of the constants in Brazil.

Speaker 3

We ended the Q2 of 2024 with about 15,000,000 customers 50,000,000, consents. And that basically translates into additional data that feeds into our customer segmentation, credit underwriting models and translates into better products and features that we can offer to our consumers. Going forward, there's a lot to be had to change in the next 6 to 18 months. And we think that given the guidelines that have now been indicated by the Brazilian Central Bank, you will see lower barriers to exchange assets. So assets credit assets, both unsecured and secured, to also exchange liabilities, I.

Speaker 3

E. Deposits and funds and also insurance and capital markets. So this can be really transformational to the Brazilian banking sector. We are monitoring this very hard and we are very glad with the cooperation that

Speaker 13

the Brazilian Central Bank has been fostering among the industry. Rosman and David here. I would just add that the agenda is very ambitious at Open Finance as I was mentioning. The regulators commitment is very, very focused in making it work. But the agenda has been so ambitious that the execution in the industry has been a couple of So there's been a couple of bumps in the road I think in terms of the timeline how it has been executed.

Speaker 13

Now I think conceptually the will that we see from the regulator is that it's going to happen, it's going to work out and it's so clearly good for the consumer to be able to have access to that data and have an increase the competition in financial services that ultimately consumer, society, government and regulators are very much aligned in making it work. So while it's been a bit of a big bumpy road or bumpy I think that people expected that there is very clear line of sight into creating pretty significant changes in the Brazilian market.

Speaker 12

Great. Thanks a lot, Laguer and David.

Speaker 1

And our next question comes from the line of Thiago Batista at UBS. Thiago, your line is open. I think Thiago is having difficulties to connect. So let's move to the Can

Speaker 14

you hear me?

Speaker 1

Yes. Can you hear me?

Speaker 14

Okay. Sorry, guys.

Speaker 8

I have one question about

Speaker 14

the new do not have a banking license in Brazil. Do you believe it would make sense to ask a bank license? And what would be the main positive and negatives of the bank in Brazil right now? And finally, do you see any material change if Central Bank started to consider new as S1 and not S3 as it is today?

Speaker 3

Hi, this is Lagu. Those are great questions. So today, we don't see a need to acquire or apply for a banking license in Brazil. Our financial institution license called Financera, coupled with our payment institution license, basically allow us to offer every single thing that we believe is necessary to provide a fairly compelling offer to consumers, both individuals and SMEs. So I.

Speaker 3

E, we can take deposits, we can issue credit cards, we can extend loans. Over time, it may be natural that we will try to simplify and consolidate our legal structure in Brazil and we may eventually apply or get a banking license at some point in time as the simplification of all of the legal entities that we have. What would be the implications if we were to do that in terms of no regulatory capital, in terms of no reporting requirements? The answer is 0 in terms of regulatory capital and very little in terms of additional disclosure requirements. So we don't see any material change if and when we were to pursue this path in Brazil.

Speaker 3

Your second question is, we are an S3 financial institution in the country. We think it is very likely that we will become an S2 financial institution in the country, most likely by mid 2025. Again, what are the implications to that? From a regulatory capital perspective, it's 0, no implication whatsoever. We may have to do certain additional reports, analysis and disclosure requirements that may increase marginally our compliance cost.

Speaker 3

But those are completely immaterial given our overall regulation. Now more importantly than the name of the license or if it is an S1, S2 or S3, we would like to believe that we have been able to collaborate very effectively and efficiently with the Brazilian Central Bank and try to know jointly with them address any challenge, opportunities and concerns that our growth may generate in the countries where we operate.

Speaker 1

And our next question comes from the line of Brian Flores at Citigroup.

Speaker 15

Perfect. Can you hear me?

Speaker 1

Yes. Yes.

Speaker 15

Yes. Perfect. Thank you. Thank you for the opportunity. Just wanted to ask a bit on Mexico.

Speaker 15

The information we saw from your information in as of the second quarter maybe showed a decrease in the loans to deposit ratio. Just wanted to pick up your brains and see how things are evolving there. You mentioned 3,300,000,000 in deposits, which is impressive. How is the credit part of the deployment going? Any news from the regulator?

Speaker 15

Any more color on Mexico would be greatly appreciated. Thank you.

Speaker 13

Sure. Thank you for the question. So we're very excited with what we're seeing in Mexico. The deposits number that you mentioned really surpassed any expectations. I think that made us kind of realize that there is a significant opportunity to really challenge the conventional wisdom in the Mexico market about how consumers see banks in their savings.

Speaker 13

The average cost of funding in banks in Mexico something like 30% of the risk free rate. The majority of consumers are not paid any yield whatsoever. And so the moment that we went to market with a very competitive yield it began changing behavior. And once you change that behavior and you change that idea in consumer behavior, I think it's very hard to go back. So we like to see the beginning here of an environment where consumers are going to be expecting to get higher remuneration for their deposits.

Speaker 13

The $3,300,000,000 deposit is way more than we need. And so as we've done in Brazil over the next forever really, there's going to be an optimization of the balance sheet in how we allocate those deposits but also the yield that we pay. And the other good news in Mexico really for us has been we continue to see very good environment in terms of credit quality and opportunities to growth credit. We really accelerated credit over the last quarter and we think that that continues to grow. We're close to 8,000,000 customer in Mexico, which really positions us already as one of the leading financial institutions in Mexico.

Speaker 13

And as you know, we've asked for a banking license. We apply last year. We've received a couple of back and forth from the regulator. Everything else so far is going as expected. And we hopefully that process continues to go well and we can get that banking license over the next month or so.

Speaker 13

So far we feel very good with the opportunity market, very large market, 120,000,000 people, higher GDP per capita than Brazil, only 12% credit card penetration that hasn't really moved in over 3 decades. So it's a perfect configuration for full disruption with our business model. And the kind of the branding that we build, the consumer base that we build, all the different pieces are falling into place and we are excited about continuing to investing heavily in growth in this market.

Speaker 15

Thank you. And just as a follow-up, so in terms of your credit risk models, are you already comfortable in terms of increasing a bit more aggressively your credit portfolio going forward?

Speaker 13

Yes. So this is the way we do credit is a dynamic decision. It literally is a weekly decision. We look at data actively, really daily data. We look at the market.

Speaker 13

We see a performance of 4 different cohorts and we accelerate on one end or with the accelerator on our end. You'll see that the growth curves that we've had in basically all our products in Brazil and Mexico tend to be curves that are not straight lines. They tend to have phases of acceleration, phases of pauses. That's because we launch a new model, we integrate a new data source, we're testing a new algorithm. And so in Mexico that's what happening.

Speaker 13

I think right now we if you look at some of the numbers from Q2 we're going through a bit of an acceleration phase. We see good opportunities to growth. But if we might have possibly if we see something that worse in certain area or we might accelerate a little bit more if we get more comfortable. So these are very much dynamic decision. But in general, we see a market that is really wide open.

Speaker 13

And the methodology that we've really perfected in or we're in the process of perfecting in Brazil around low grow beginning with your own bank population with low credit limits and low and grow it, get to know the customer for the 1st 15 to 30 days, increase limit a bit more, get to know the customer a little bit more. That dynamic way to approach risk is something that lends itself very well so far in Mexico market that has little access to credit. So we're very optimistic about that opportunity.

Speaker 15

And just

Speaker 7

a little bit more color on the credit quality trends we've been seeing. When you look at the trajectory since we introduced Quanta product with a very high yield, attractively priced yield. What we've seen in fact is a nearly doubling of our credit card customer originations, right. So a number of customers come in to enjoy the high yield, but also take a credit card at the same time. Those customers tend to be positively selected and much better credit quality.

Speaker 7

And so you add to that to the fact that the data we get on the Quint actually helps us underwrite better. You add that to the fact that we now have more experience in the market, more test results, more of returns from the foundational testing we've been doing since the early days. So that gives us a lot of confidence to continue to grow credit and underwrite better as we go. And if you look at credit quality indicators, either those we disclosed as a SoFIFO or otherwise in Mexico, there's significant improvement year over year. And I would say credit quality has been lately behaving better than our own expectations.

Speaker 7

So as David said, we to be very optimistic, very excited about prospects for growth in Mexico.

Speaker 15

Thank you, Tim.

Speaker 1

And our next question comes from the line of Craig Morer from Feet Partners.

Speaker 16

Thanks for taking the question. I wanted to ask about the evolution of the credit card market in Brazil. Maybe if you were able to break down your growth in both spending and loans between customers who are taking their first credit card versus those where you're winning share away from other banks? And secondly, I wanted to ask about Mexico and how you're viewing the nontraditional competition, say, from like a MercadoLibre, who's being aggressive in the consumer finance space? Thanks.

Speaker 3

So Craig, let me take you the first question. And if you don't mind, I'll try to combine that with the second because it's good to draw a parallel between the credit card markets in Brazil and the credit card markets in Mexico. So Brazil has a credit card market that is relatively mature in terms of penetration. So credit card penetration accounts for nearly 50% of the population in Brazil compared to about 12% in Mexico. But people often use credit cards in Brazil as a means of payments, not as a means of financing.

Speaker 3

And therefore, historically, the IDB interest bearing balance as a percentage of the total receivables of credit cards in Brazil has been below those of the other lots in the American markets at about 20% to 25%. In Mexico, conversely, consumers tend to use credit cards more as a means of financing than as a means of payments And therefore, IBV over total credit card receivables tends to be much higher, more in the 60% to 65% of the total credit card receivables. So very, very, very different markets with very kind of different nuances, but both having fairly compelling unit economics for the product. Therefore, given the penetration of each country, the customers that we get in Brazil have been historically customers that already had a banking relationship with another bank, but that we have groomed and upgraded and graduated to a healthier and higher credit life with us. Whereas in Mexico, the main opportunity that we have there is more related to financial inclusion is really to offer kind of a banking product and credit cards for the 85 plus percent of the Mexican population who are currently unbanked or underbanked.

Speaker 1

Okay. So we are now concluding today's call. On behalf of Novo Nordisk and of our Investor Relations team, I want to thank you very much for your time and participation in our earnings call today. We are very excited with our developments as we continue strengthening our position in the markets we operate. Over the coming days, we will be following up with the questions received by our platform and with those that were not able to ask questions tonight.

Speaker 1

So please do not hesitate to reach out to our team if you have any further questions. Thank you and have a good night.

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