Nu Holdings Ltd.

Ladies and gentlemen, welcome to New Holdings Conference Call to discuss the results for the third quarter of 2022. A slide presentation is accompanying today's webcast, which is available in News Investor Relations website www.investors.new in English and www.investidores.nu in Portuguese. This conference is being recorded and the replay can also be accessed on the company's IR website. This call is also available in Portuguese. To access it, 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. Para acessar nossa conferência em português, clique no ícone do globo ao lado inferior direito da sua tela zoom e selecione a opção Portuguese Room. Ao acessar a nova sala, certifique-se de mutar o áudio original. Please be advised that all participants will be in listen-only mode. You may submit online questions at any time today, using the Q&A box on the webcast. I would now like to turn the call over to Mr. Jörg Friedman, Investor Relations Officer at New Holdings. You may proceed.

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 Larach, our President and Chief Operating Officer, and Guilherme Lago, our Chief Financial Officer. Additionally, Jagi Dugal, our Chief Product Officer, will join us for the Q&A session of the call. 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 as defined by IFRS. Reconciliations of the company's 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-on-year, effects-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 a new reliance on them. These statements are subject to numerous risks and uncertainties, and could cause actual results to differ materially from the company's expectations. Please refer to the forward-looking statement's disclosure in the company's earnest press release. Today, our founder and CEO, David Velez, will discuss the main highlights of our third quarter 2022 results and some of the opportunities ahead. Subsequently, Guilherme Lago, our CFO, and Youssef Larache, 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 Davi. Davi, please go ahead.

Thanks, Jorge. Hello, everyone. Thank you for being with us today. I'm happy to share that Nuo turned in another strong quarter. In our nine-year history as a company, we have already seen a lot. We saw a GDP contraction of 7% during the years of 2015-2016, the largest recession in Brazilian history. We saw presidential impeachment. We saw right-leaning governments and left-leaning governments coming and going across the three countries we operate. And today, we see a slightly more volatile environment than we saw in 2021, which brings a bit more caution, but that also creates opportunities to continue capitalizing on our long-term thesis that remains intact. The future of financial services will be built by technology companies, and we're in the lead position in Latin America, one of the largest regions in the world. Today, I'm happy to report that during the third quarter, new reporters break even at the holding level. Posting a net profit of $7.8 million and an adjusted net profit of $63.1 million, while growing revenue at 171% year-over-year and welcoming more than 5 million new customers, becoming the sixth largest financial institution in Latin America by number of active customers. This mix of growth and profitability shows we are being able to balance appropriately the significant growth opportunity we have ahead while strengthening the earnings fundamentals of our business model. We will continue to reinvest our profits to fuel our growth and long-term value creation. During the third quarter, we continue to see progress among all our main business metrics. We passed 70.4 million total customers across our three countries, while seeing our activity rate per customer increase to a new high of 82%. Our purchase volume grew 75% year over year to $21.2 billion, already reaching a market share of 12% in Brazil. And while we have increased the level of resilience of our credit underwriting to account for the more volatile macro environment, our credit portfolio was still able to grow 83% year over year to $9.7 billion, while being fully funded by our own retail deposits that grew to $14 billion. While our business opportunities started by unbundling financial services through a fully digital strategy, Our current imperative is to rebundle and build a diversified, multi-product, multi-country and multi-segment platform. Our customers actively tell us that they want to consolidate their entire financial lives with new. And so this rebundling continues to progress at an accelerated pace, driven by significant existing demand from a base that now accounts for about 40% of the adult population of Brazil. Let me share with you our progress on each of these fronts. We have been able to develop and launch innovative products that are fundamentally better than what one could find in the markets in which we operate, always looking to have the highest Net Promoter Score in every category we choose. The velocity with which we develop and launch new products has accelerated recently as we invest significantly in our own technology platform and ways of working. As you can see on this chart, active users are growing in almost all of our products on a double or triple digit year-over-year basis. New products continue to post even more impressive figures. For instance, personal loans had a 279% increase in active customers over the past year. Our active SMEs accounts reached 1.3 million, an increase of 117% in a year. New invest customers expanded 148% year-over-year. And finally, our recently launched crypto product has grown to 1.3 million active customers, less than six months after launch. Notice that a lot of this growth is driven by the secular trends of digitalization of the economy and products that solve real customer pains and have little to do with the economic cycle. We're still at the early stages of strengthening our platform with products that will further support our product cross-sell strategy and our revenue accretion. We will continue to manufacture our own products when we believe we can be the best-in-class product manufacturer and like their unit economics. But we will also continue to leverage on product partners to complement our skillsets and balance sheet whenever applicable. Our forthcoming launches include collateralized loans, savings accounts in Mexico, and financial planning tools, among others, that will make our platform have an even stronger value proposition for our customers. The second key pillar of our business model is expanding our multi-country platform. We believe the strength of our technology platform has positioned us favorably to cross borders effectively and efficiently innovating how retail banking grows internationally. Together, Mexico and Colombia can be bigger than Brazil for us and we are growing in those markets faster than we grew in Brazil. We could not be more excited with the early success of our multi-country strategy. We have already become the number one issuer of new credit cards in both Mexico and Colombia, and the growth has not shown any sign of slowing down. Although impressive already, client virality tends to accelerate down the road. Once we launch our deposit-taking products in each of Mexico and Colombia, customer growth is expected to experience step-change increases, as we have seen in Brazil. And this change is to happen in both countries over the course of the coming year. The third pillar of our platform is to advance into multiple client segments all at once, as there is customer pain across all segments. We wanted to highlight this point here as we have heard from many investors a fair amount of confusion as to who the typical Luban customer is. As you can see from the demographic breakdown of our current customer base presented in this slide, we have made strong inroads across all demographic segments in Brazil. In fact, our customer segment distribution is similar to those of incumbent banks in the country, highlighting our significant potential to expand further our Average Revenue Productive Customer, or RPAC, as we advance in our roadmap. As of the end of Q3 2022, our RPAC was only one-fifth the average RPAC of Brazilian incumbent banks, which creates significant upside in our monetization plan as we continue our product diversification. Notice also that 8% of our customer base belongs to the high-income group, which is similar to other major financial institutions in Brazil. It also provides good diversification through more challenging macroeconomic cycles. I want to remind you that everything we build to date started from a principle of building the absolute best product in each category. We believe that in a more competitive environment, customers can finally choose the very best product experience. This simple insight continues to be our North Star as a company. This is best captured by our Net Promoter Score metric, which, after almost a decade of our foundation, continues to command indisputable leadership across all of the markets in which we operate. We believe this metric is a leading indicator for growth and then for profitability. We have delivered a strong customer experience that engenders unique loyalty levels among our clients. We chose to make customer experience our most important marketing investment. This has worked well across Brazil, Mexico and Colombia. 70% to 80% of our 70 million plus customers have come to Nu organically, mostly through word of mouth, proving that our formula continues to be effective. We believe to have achieved DAO over MAO ratios of leading social media players, above 50%, as can be observed in this evolution chart. In our view, this demonstrates the opportunity we have to build a powerful and comprehensive consumer platform evolving from a digital banking offering. A very large and engaged consumer base enables a lot of future optionalities in the ecosystem as we go beyond financial services. We're excited with these opportunities and the roadmap ahead of us over the coming years. With that, I would like to pass the floor to our CFO, Guilherme Lago, who will walk you through more details of our results. Thank you.

Many thanks, David, and good evening, everyone. Before reviewing our third quarter results, let's recap on the key elements of our simple, powerful, and value-generating formula. First is expanding our customer base across our chosen markets, Brazil, Mexico, and Colombia, and quickly converting acquired customers into active ones. The second is expanding average revenue per active customer, or RPAC, through both cross-sell and up-sell. Third is delivering growth while maintaining one of the lowest cost operating platforms in industry. With this in mind, let's look at the third quarter results and see how well these three elements are generating value. With regards to customer acquisition, new continues to grow at a steady pace, adding 5.1 million customers during the third quarter. Importantly, we have been achieving this mainly through organic channels with very low customer acquisition costs, while maintaining the same level of net additions from the two previous quarters. This brought total customers to over 70 million by quarter end, a 46% year-on-year increase. Further, we are seeing faster and sustained growth rates in Mexico and Colombia, which together accounted for approximately 500,000 new customers in this quarter. But we are not in the business of simply collecting customer accounts. We are succeeding in driving monthly activity rates higher. On average, they rose to 82%, up from 73% a year ago and 80% in the prior quarter. This marks the 10th consecutive quarter of higher customer activity, further evidence of our ability to continue expanding NU's ecosystem while driving customer engagement. We estimate that NU is now the 5th largest financial institution in Brazil in number of active customers and the 6th largest financial institution in Latin America using the same concept. On this slide, we show the compounding effect of our ability to drive engagement and to cross and upsell products. As we have stated in the past, these charts show the evolution of our customer cohorts, namely increasing engagement of our customer base and a higher number of products per active customers that are both driving RPAC growth. While we reached a monthly RPAC of $7.9 in the third quarters, Mature cohorts are already at $22. We expect higher RPACs as our customer cohorts continue to mature and we add both new products and features to Nu's ecosystem. Higher engagement combined with more products sold per customer have been significant drivers of our ability to monetize Nu's expanding customer base. This is reflected in RPAC expansion that contributed to triple-digit year-on-year revenue growth, as you can see on the next slide. The compounding effect of a growing number of active customers and higher levels of product upsell and cross-sell enable us to grow monthly RPAC 61% year-over-year on an effects-neutral basis and to deliver another quarter of strong annual revenue growth. Revenue grew 171% year-over-year on an effects-neutral basis to over $1.3 billion, a record high. While monthly RPEC has expanded gradually, as you can see in the left chart, we believe there is still a long way to go to reach our full RPEC potential. As David highlighted previously, we have a growing customer base that resembles the income distribution of clients from incumbent banks, while running at a fraction of their RPACs. We have the ability to increase our RPAC with both credit and non-credit products, with both products manufactured by new and products offered by our product partners. Beyond the substantial upside we see in our RPAC, keep in mind the significant advantages of our low-cost operating platform that enables us to serve customers with lower RPAC levels and still produce very healthy unit economics. Turning to our card business, we continue advancing on this front with purchase volumes up 75% year-over-year on an effects-neutral basis to $21.2 billion. This strong performance also reflects more product cross-sell, up-sell, and sustained customer engagement. Importantly, the vast majority of our credit card book comes from back book, that is, customers we have acquired in past periods. After customers complete 24 months of relationship with new, their credit card average spending in our platform usually triples, while their total average spending usually doubles. And this should continue driving market share gains as we mature new cohorts. In fact, our market share and purchase volume increased once again this quarter and is already running at approximately 12% of the total for the industry. Our consumer finance portfolio, which comprises credit cards and personal loans, expanded 83% year-over-year, bringing our total credit book to $9.7 billion, accelerating versus the previous quarter despite two headwinds. First, FX negatively impacted the balance figures. On an FX neutral basis, however, our credit book would have increased by around $900 million during this quarter or approximately 9.7% quarter over quarter. Second, originations of personal loans continue to be contained at similar levels of the previous quarters as we had indicated in our previous earnings call in August. The goal of this moderation is strengthening our credit resilience in light of a more uncertain short-term outlook for the Brazilian economy. Given the short-term durations of these loans, similar origination levels yield stable balances simply because the originated volume is being offset by the amortized loans in the period. Let's now review in more detail the evolution of our credit card portfolio and originations of personal loans. As discussed last quarter, we have been intentional in our strategy of closing the gap of our interest earning portfolio or IEP versus the market, and this has occurred and should continue to occur via transactions of installments with interest. As you can observe in this chart, IEP arising from installments, including those related to new financing features such as finance bank sleeps, purchase financing, and PICS credit, has outpaced growth in IEP from revolving loans. This strategy might add risk to our book, but has been paid off in terms of risk-adjusted margins, as we will demonstrate in the coming sections. Moving on to origination of personal loans. As we noted in our previous earnings call, the pace of our originations in personal loans is closely tied to the short-term outlook for the Brazilian economy and the credit performance of our cohorts. We have capped our originations and pricing levels relatively constant this past quarter and continue to accrue healthy unit economics across all of our cohorts. Beyond the short-term dynamics, we remain confident in our ability to expand our lending portfolio. We believe we have the best product in the market. Our customers already account for one-third of the personal loan market in Brazil, and we have plenty of capital and liquidity to deploy once credit conditions improve. In other words, the only bottleneck for our growth in personal loans is our own credit risk appetite. Advancing on our strategy to build a robust local currency deposit franchise and lower funding costs, we expanded our deposit base by 73% year-on-year on an effects-neutral basis, closing the quarter with a total deposit balance of $14 billion and a loan-to-deposit ratio of 25%. Remind that this happened Together with two important initiatives that took place in July. First, the launch of the money boxes, which are investment targeting tools aimed at customizing deposits according to specific goals with different income options. And second, the repricing of our short-term deposits, which will no longer be remunerated at 100% of the Brazilian interbank deposit rate if the amount is withdrawn before 30 days. On an effects-neutral basis, deposits would have grown $1.1 billion quarter-over-quarter or almost R$2 billion per month using the average exchange rate for the period, implying no meaningful attrition post the launch of the money boxes and the subsequent changes on the yield remuneration for short-term deposits implemented in July. The successful rollout of this strategy can also be noted by two additional important data points. First, as you can note in the chart on the left-hand side of this slide, funding costs started to come down already during the third quarter. In fact, during the month of September, the average funding cost already had reached 91%, and this should continue to decline during the coming two quarters until it reaches a new normal. Second, until the end of September, only two weeks after the completion of the rollout, more than 1.7 million Nubank customers had created approximately 2.5 million money boxes, with total AUC in the stools amounting to almost $300 million. Together with the growth of our credit portfolio, the gradual decrease of our cost of funding impacts another important metric of our business. Our net interest income, or NII, reached $527 million this quarter, growing 18% quarter-over-quarter or 25% on an effects-neutral basis. As we expand our credit portfolio, we optimize the use of our large and low-cost deposit base and expand our net interest margin, or NIM, as can be seen on this chart. We have achieved a NIM of 11.1% this quarter versus 9.7% during the last quarter and 7.7% during the third quarter of 2021. As we have pointed out, one of the key competitive advantages of our platform is its very low cost to serve. The average monthly cost to serve remains stable at about $0.80, while our monthly RPAC expanded 61% year-over-year and reached $7.9, demonstrating the strong operating leverage of our model. Looking ahead, as we said in the past quarters, we expect our cost to serve to be maintained below the dollar level as the scale gives us significant operating leverage and bargaining power with our partners. Moving down the P&L, we delivered another quarter of record-high gross profit, up 90% year-over-year on an effects-neutral basis, to $427 million. This quarter, we started to observe an inflection in our gross profit, which after four quarters of compression, it started to increase once again and expanded two percentage points to 33%. Operating leverage is a key element of our strategy. As we continue to grow revenues, we further dilute our low-cost operating platform, driving better profitability. As shown on this chart, we have consistently improved our efficiency ratio over time, down to 55.1% this quarter, from 91.6% in the first quarter of 2021, and 58.2% last quarter. We expect this trend to continue and compound over time as we scale up the business. This should be mostly driven by the fact that the majority of our operating expenses is personnel related, and we should expand headcount at a slower pace over the coming quarters compared to the previous quarters when we were staffing our local GEUs. Moving on to the bottom line, our recurring profitability confirms again Thank you for joining us. The execution of this strategy may require us to make additional investments in the short term, consequently postponing profitability ramp-up. We believe this is how we optimize for the long-term value creation for our shareholders, given the number of profitable growth optionalities we have at hand. To sum up, this quarter we have continued to observe the strong early signs of the operating leverage in our platform. And it's important to reemphasize that despite our undeniable growth orientation, as we expand into new product verticals, new markets, and new segments, we keep a tight look into the profitability levers of the business model. We will never abandon our cost diligence, as we firmly believe that digital banking is even more a play of costs than of revenues, and that the long-term winners in the Latin American financial services industry will be tech-enabled companies with the lowest manufacturing costs, which at the same time are able to create the highest rated products that consumers love. In this context, I would like to revisit our four cost pillars and emphasize our competitive advantages. First, we continue to have one of the lowest acquisition costs in the industry, with very limited paid marketing. This is a result of having more than 70% of our customers coming from referrals and word of mouth. Second, our cost to serve that is 85% lower than that of incumbent banks, which is the result of our being a true technology company, conceived under modern, lean, agile, and scalable platforms. Third, significantly better cost of risk compared to the industry in the products and segments in which we operate. On a like-for-like basis, as UCF will demonstrate next, We believe to have NPL ratios 30% lower than those of the industry. Fourth, as we are also fully funded with retail deposits at a cost below the intrabank rate, our 25% loan-to-deposit ratio, one of the lowest in the industry, is the statement of the trust and engagement from our customers. And we should become even more competitive ahead on cost of funding Thank you, Lago. Thank you.

Let me now go over some key indicators of asset quality and overall credit portfolio health for the third quarter of 2022. Let me begin with overall NPL trends. The lead indicator, NPL 15 to 90, increased by 50 basis points quarter over quarter to 4.2%. This was driven by two main factors. First, the deceleration in personal loan origination volumes, which increased NPL for this product, Thank you for watching. We are providing additional analyses in the next few slides showing the trends under our previous write-off methodology for our consumer finance book. I would also like to address potential misconceptions we have heard in the market related to the nexus between our delinquency metrics and credit cards and personal loans. First, the personal loan product is originated exclusively through cross-selling to existing new bank customers. So only the customers about whom we have accumulated prior credit underwriting data. Customers who are delinquent on our credit card product are not eligible for our personal loan product. Again, if you are late with any payment obligations in credit cards, you cannot obtain a personal loan. Second, all renegotiations and refinancing which happen in credit cards remain and are accounted for as credit card receivables. The same applies to personal loans. There are no transfers of receivables or financing from credit cards to personal loans or vice versa. Third, we have not sold any receivables in any of our credit portfolios. Therefore, the NPL metrics presented here fully reflect the inherent individual performance of the credit card and personal loan products. This chart shows two important pieces of information about our credit card book. The six graphs showing the time series of NPL by income band, where the purple line represents new and the gray line represents the industry. And on the right hand side, the breakdown of credit card balances by income band, again, comparing new to the industry. As you can see, news balances are more skewed towards lower income segments than the industry. This alone should cause our NPLs to be higher than the industries because of this different mix. However, As you can appreciate on the aforementioned six graphs, we have consistently outperformed the industry in each income band. And even more importantly, the lower the income band, the more pronounced our comparative advantages. Furthermore, when you look at the trend over time, you see that the gap has been widening for each income band. In other words, our competitive advantage in underwriting is consistent and sustained, and in fact increasing over time and across segments. When we compare our consolidated consumer finance portfolio, including both credit cards and personal loans, on the same set of metrics, we observe a consistent set of trends. This new chart was created by adjusting for the distortions caused by collateralized lines included in the personal loans category, excluding payroll, as reported by the Brazilian Central Bank, since we currently do not have any collateralized lines or loans in our book. We estimate that the mix of these collateralized lines has increased significantly over the past two years and currently account for more than 25% of the personal loans category excluding payroll. Without this adjustment, any comparison of our consumer finance portfolio against the industry would be significantly biased. And while our portfolio is obviously not immune to cyclical trends and deterioration, we are confident, as this analysis demonstrates, that we continue to outperform the industry on a like-for-like basis. In fact, even when you replicate this analysis we just showed on a lagged basis to adjust for growth, we still end up outperforming the industry by a factor of 30% on a like-for-like basis. So the conclusion holds over time, across segments, and on a growth-adjusted basis. To conclude this section, let us now discuss provisions. Our provisions continue to grow primarily driven by the growth of our portfolio. We front load provisions when we originate loans based on the expected losses for the life of the credit. This is the core principle of IFRS 9's expected credit loss methodology on which we base our accounting practices. In addition, although NPLs have increased sequentially in the third quarter, it is important to note that the unit economics of all credit cards and all personnel and cohorts have remained strong and resilient as we continue to adequately price the risk of our credit portfolio. In fact, this can be clearly seen in the improvement of our risk-adjusted net interest margin on this chart. Even with the increase in our credit loss allowance expense, We have managed to increase our risk-adjusted NIM to 3.2% this quarter, up from 2.3% in the prior quarter and 2.6% in the third quarter of 2021. Having shared these data and perspectives on credit and asset quality, let me now turn the call back to our founder and CEO, David Velez, for his concluding remarks.

Thanks, Yusuf. To summarize our efforts this quarter on the basics of our thesis, I would like to reinforce that Nu continues managing the company for the long term while ensuring improvements in all of its business fundamentals. First, during the third quarter we continue growing our revenue in excess of 170% and gross profit at 90% year over year, while achieving positive net income at the holding level. While the macro is a bit more volatile and we increase resilience in our lending products, we also expanded net interest and gross margin, which shows we're being able to price higher risk appropriately while also seeing continued operating leverage. Second, our relentless focus on products that really serve our customers' needs and our excellence in user experience continue to show up in net promoter scores that are virtually two times the average of incumbent players in the markets we serve. Our NPS is the statement that we're customer-centric by design. Across different markets, we have delivered a strong customer experience that engenders loyalty among our customers. We chose to make the overall customer experience our most important marketing investments, and this drove the word of mouth that translated into customer growth and empowerment of our brand. Third, all of this was achieved by maintaining our growth levers intact. In fact, we have already achieved leadership positions in the most relevant Latam markets through our multi-product, multi-country, and multi-segment business model. We have become the sixth largest financial institution in Latam by number of active customers, achieved 12% market share in cars purchase volume, and became top issuer of new cars in three countries we operate. We're very proud of what we have achieved this past quarter and even more excited with what lies ahead of us in the coming quarters. We would like to take your questions now. Thank you very much.

We will now start the Q&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. Thank you, operator. Please wait.

While we collect the questions. And our first question comes from the line of Jorge Cude from Morgan Stanley. Operator, could you please open his line?

Hi, everyone. Good afternoon and congrats on the great results. My question is on the origination of the personal loan book. What visibility do you have on when that could accelerate? Is it fourth quarter, first quarter? Is it sort of more of a second half of next year? How are you seeing that? And how can we from the outside monitor what are the KPIs that you are looking at to call that acceleration or that risk appetite increasing? Thank you.

Hi, Jorge. Thank you so much for the question. So we ended the third quarter with all of our cohorts performing very well, including those of personal loans, with quite robust and resilient unit economics. So if these metrics remain healthy, as we have seen in the past quarter and at the beginning of the fourth quarter 2022, we may potentially increase the origination of personal loans this quarter still. It's also important to note that in 2023, we do expect to begin the ramp-up of our secure personal loan business, composed of investment-backed loans, payroll loans, and FGTS loans. It is quite hard to foresee how fast this ramp-up will happen, but we are super excited with the prospects of complementing our unsecure consumer credit portfolio with secure credit portfolios started in 2023.

Great, Lago, thank you. That was very clear. And congrats again.

Thank you. And our next question comes from the line of Mario Pieri from Bank of America.

Good afternoon, everybody. Congratulations on the results as well. My question is similar to Jorge's. When would you feel more comfortable in accelerating your growth? Because as you show, you have Better asset quality than your peers. There's new loans you're originating. They are creating value. They're not destroying value, as you showed that on your risk-adjusted margins. So I was wondering, are you being too conservative in slowing down now? Why not be more aggressive since you have all these advantages? And it seems to me like your pricing is similar to your peers.

Thanks for the question. I think we are basically trying to be quite disciplined in the way that we develop and ramp up a new product. So as you pointed out, we are not constrained by the demand. So our customers, which now account for about 39% of the adult population of Brazil, they equally account now for more than a third of the personal market in the country. So demand is not a constraint. Thank you very much. Thank you. Capital and liquidity are equally not constraining factors. So the single largest constraining factor for us to grow in personal loans, in unsecured personal loans, is really our comfort with our credit underwriting and the prospects of the Brazilian economy. So we will watch it quite carefully. We are very excited with the prospects, but we do believe that it will serve us better to be more disciplined at this point in time. and Accelerate when the markets send us better signals and we are more comfortable with our ability to successfully deploy our models in this segment. It is, however, a slight different from the Secure credit products. I think for Secure, especially payroll loans, FGTS and investment and back-end loans, I think the credit underwriting is less of a concern and our ability to ramp up those products will not be constrained by that dimension.

And Lago, if we can ask the other question then related to your cost of funding, right? You showed that 95% of CDI has been improving. You said during your remarks you expected to continue to decline in the next couple of quarters until it reaches a new level. What is that new level? What is the sustainable level that you're looking for?

Yeah, so just stepping back for one second. So we started to deploy the new remuneration strategy for Nuconta in mid-July. We ramp up very carefully from mid-July until the end of September, and only by the end of September Did we reach about 97% rollout? So the impact of the lower funding costs to our financial results in the third quarter of 2022 are still relatively limited. So our funding cost decreased in the quarter to about 95% of CDI. I believe in September it was down to about 91% of CDI. The full impact will only be felt in the fourth quarter of the year, most likely in the first quarter of 2023. Really hard for us to draw any high-conviction direction on where this will end. It will largely depend on the behavior of the consumers going forward. So far, we have been tracking the implications of this move to three dimensions to, you know, Asset inflows, NPS, and engagement. We have not seen any material impact on that, so we are very confident that this was the right move for the company to do and also for our customers. But I'm really not in a position, Mario, to provide you with a high conviction guidance on where this went.

Okay, but when we look at the traditional banks, The cost of funding is closer to 60% of CDI. Do you think you should eventually be able to reach a level similar to them, or should you always have a higher cost of funding than the incumbents?

I think 65 would be too big of a drop in our cost of funding. I think for this first move in the reduction of our cost of funding, I would expect something between that and our current funding cost. Okay, thank you.

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

Hi, good evening. David Lago, Jorg, and Yusuf. Thank you for the call, taking my questions, and congratulations also on the strong results. My question, a little bit of a follow-up on the personal loans, but more just thinking from the asset quality perspective. I mean, your MPLs held up fairly well considering what we've seen in the market and some of the incumbent peers. Looking at their early MPLs, they were up 50 bps in the quarter. Last quarter, they were stable. You had mentioned that that was a good leading indicator for the outlook for asset quality and potential acceleration on your personal loan portfolio. Just to get a little bit more color on that, and I know part of the impact was because of the slower origination you mentioned, and that impacted those early MPLs. But how do you think about that going forward? Was it simply due to a slowdown in origination? I don't know if you have color between like credit cards and personal loans with those early MPLs. How do you think about the early MPLs sort of evolving from here?

Hey, Tito. This is Yusuf. Thank you for your question. So as I mentioned in the earlier remarks, Thinking about the early NPLs, 15 to 90, they did increase by 50 basis points in the quarter and they were two drivers. As you mentioned, one driver was the deceleration in personal loan originations, so-called denominator effect. But there was a second driver, which was kind of broad-based deterioration, similar to what other players in the market have seen. And so it was a combination of those two factors, principally. Now, with respect to going forward, you know, we're watching the performance of all our portfolios, all our cohorts there very closely, and all the, you know, the three, the macroeconomic backdrop in the three markets in which we operate. Given the uncertainty that we're going through, it's really hard to give you any high conviction outlook for going forward and for 2023. But what I can tell you with a high degree of conviction is that we're very confident in our ability to monitor, to take action quickly, and to navigate the cycle as we have navigated prior cycles. We have a relatively short duration credit portfolio, both in credit cards and personal loans. And so we're confident that any actions we take will have a high impact and be reflected in the performance of those portfolios. And if anything, the resilience of origination has increased over the last two, three quarters as a result of those actions. You can see that in particular in the increase in risk-adjusted NIM that we show in the results presentation.

Great. Thanks, Yusuf. That's helpful. Just to maybe explore a little bit further, is this something that you'll be monitoring to be able to accelerate the personal loan growth? And the other thing that we've heard from incumbents, and I think you may have mentioned in the past, the MPL cycle could potentially peak, I don't know if it's 4Q or early next year. I mean, just in terms of When do you think you could be beyond the worst of it? I know it's hard to predict, but is it a quarter or two? Because they are very short-term loans. So just to think about how long this credit cycle could potentially last.

Yeah. Turning points are notoriously hard to predict with any level of confidence or accuracy. So I personally wouldn't venture a guess as to when we will see the peak and when things will turn. But again, I can tell you that we're confident in our ability that when we see things evolving in one direction or another, take action very quickly as we have over the last couple of quarters.

David, just to add here to you, I think the big advantage of personal loan as a credit product is, as you say, very short-term duration, very high, very information-rich. So, we get to monitor the performance of this product and this portfolio really basically daily and are able to make decisions around acceleration or deacceleration across pockets of the different portfolio depending on what we get to see. So, I think this quarter has been much more volatility in the space as it's respected and so the patterns that were shown And our next question comes from Thiago Batista, UBS. Hi, guys. Are you hearing me?

Yes. Yes. So, commercial results, very strong bottom line. I have one question about the high-income segment or the affluent segment. As I was showing the slides, Nubank is a very small presence in this segment. Do you believe that this should be a focus of the bank going forward? How big this should be for Nubank? And if you believe NU need to change the approach for the segment, for instance, maybe have advisory for the investment or kind of manager for the bank business. So if you believe this affluent segment should be more relevant for NU or not?

Yes, thank you. Thanks a lot for your question. Absolutely. It is a big opportunity we have, as you see, that around 8% for a business of around 66 million customers in Brazil. That means we have over 5 million customers high income, which is a pretty sizable percentage of that market segment. Right now, we don't tend to be number one share of wallet for that customer segment. A lot of the times it's missing limits, so we tend to have too low of a limit for this customer segment, or the product is missing certain attributes, either the credit card product, or we're missing products in the investment side or the insurance side. So a lot of the focus over the past year will serve Yoleta. has been about closing those gaps. There's been a lot of investments in us trying to figure out how to increase limits for the higher income population. This is going to be a key focus for us next year as if we manage to take that share of wallet for that high income customer much up, that actually moved the needle pretty significantly for the portfolio and brings a nice diversification also. So I think you bring a pretty big point and it's a key focus for us.

Very clear, thanks.

And our next question comes from Geoffrey Elliott from Autonomous.

Hello, thanks very much for taking the question. First, just a quick clarification. The slides on NPLs by income band, I think they use the old Write-off methodology, the 360 days for both personal loans and credit cards. But could you tell us what that NPL ratio, the 90-day past year ratio, would have been under the prior methodology for the whole portfolio rather than by individual income band?

Jeff, this is Yusuf, so thank you for the question. Yeah, you're correct. Those slides that analysis was done on the basis of the old write-off methodology. And just as a reminder, the principal difference between the old and new write-off methodology is that for personal loans, we now write off at 121 days delinquent. We used to write off at 361, similar to credit cards. So to your question, NPL 15 to 90 would have been substantially similar, up 50 basis points in the quarter, because there's relatively little impact of the change in methodology on early delinquencies, as I mentioned. 90-plus NPLs would have increased 130 basis points in the quarter. Why the larger increase? You have to think about the fact that the difference between the two metrics in the old write-off methodology is basically made up of all the personal loans that were 121 all the way up to 360 days delinquent. That pool of loans is basically a reflection of the growth in the personal loan portfolio Between two and four quarters ago, right, because those were delinquents between four and twelve months. And between two and four quarters ago, our personal loan portfolio grew by about 50%, as you can appreciate in the results presentation. I believe it's page 15, which Lago went through. So it's merely a reflection of the increase in the size of the book that would explain that higher increase in value plus.

Thanks for clarifying that. And then just stepping back on the deterioration, I appreciate it's broad, it's happening at other banks, but in some ways it's kind of confusing that this would happen now when you've got Fuel tax cuts, unemployment falling, auxiliar Brazil, welfare payments increase. What's your take on what's going on and why there is this broader deterioration in credit across the industry?

It's a great question, Jeff. I think there's a number of puts and takes and a lot has changed in the last year or so. There's been Normalization from very low levels of delinquency about a year or so ago. There's been high levels of inflation, and there's been changes in government assistance programs, which peaked in 2020. And our next question comes from Marcelo Tales from Credit Suisse.

Hi, everyone.

Can you hear me well?

Now we can.

Yes. So, congratulations on the very strong results. My question is with regards to asset quality. It's very interesting to see your asset quality performance decoupling. From the rest of the industry for those specific products. And it's interesting, especially in the context that when we see, for instance, players kind of pulling out a bit from the credit card segment, such as Banco do Brasil or Bradesco. So can you explain to us what do you think is making you so different vis-à-vis Thank you. Thank you.

Yeah, Yusuf, again, a great question. I'd say there are several factors that explain and are at the root of our underwriting capabilities. As you mentioned, there is data richness, which takes the form for the vast majority of our customer of not only external data we get from credit bureaus and the like, but actual experience and transaction data with us. The vast, vast majority of credit card customers We already have not only deposit account data, but also credit card experience and data. So that gives us a lot of rich information on the right. That's certainly a big driver of it. I would say we've also built over the last several years Thank you for joining us. Maintaining discipline of resilience and returns. We have multiple lines and levels of reviews whenever we make credit decisions. So, you know, it's a combination of several factors that we think are at the root of that. And ongoing testing, I should say, to make sure we understand, you know, all of the causal drivers of credit performance and of overall returns. Okay.

Thank you.

I just want to highlight one point that you just mentioned. I think it's important to highlight here, which is while, let's say, four or five years ago, we were really giving credit cards to customers that we did not know since we started just with a credit card product. Today, David Velez-Osomo, Roberto de Oliveira Campos Neto, Guilherme Marques do Lago, Eric Young, Guilherme Souto, Suzana Kubric, Henrique Camossa Saldanha And once they start receiving their salary in their accounts, once they start paying, once they start using PIX, which, by the way, we're one of the largest players in PIX in Brazil, then that gives you a lot of information to get comfortable with giving a credit card, which a lot of the times begins with a low limit. And that's the way that we manage our downside risk. We begin with a low on growth strategy. Limits are low. And as we get to know this customer more over the next 6 to 12 months, this limit goes dynamically up. And in situations with much more volatility, like the one where today we get to not increase limits or increase those limits slowly. So it really ends up being a different approach than I think a lot of the fintechs in the market today that are really going after monoliners or they just have one product of credit and end up by default attracting at times a lot of adverse elections.

Thank you. Very clear. And Ethan, allow me just to follow up with one question kind of tied to this in terms of product cross-sell that you mentioned. When you think about your mature customers, it's quite remarkable. Your mature customers now, I think you have an RPAC of around $22, which I think is actually an increase from the $21 you had in the previous quarter despite the currency depreciation. So, what are the products that you have to cross-sell to get to that $22 of this mature client? It's just, let's say, more usage of the credit card or getting bigger credit card limits or maybe it's insurance or other types of products. How should you think about the path towards the $22 ARPAC?

So, that is a super good question. I think when you look to the mature cohorts that we have today, The majority of those RPACs is basically composed by interchange of prepaid cards and credit cards and with a very small yet penetration of personal loans. Going forward, I think, as we increase personal loans penetration in our bays, both unsecured and secured, a substantial amount of RPAC should actually be associated with this specific cross-sell. So what we have seen is RPEC expansion as of today has been primarily driven by the upsell of credit cards and prepaid accounts and prepaid cards and investments. Going forward, it will equally be driven by the cross-sell of new products, personal loans, secured and unsecured, investments, insurance, marketplace, crypto, and SME accounts.

Very clear. Thank you, and congrats again.

And our next question comes from the line of Pedro Leducchi, Itaú.

Thank you so much. Good evening, everybody. A little bit on credit cards, please. So here on the personal loan, a deceleration, and recall this being offered mostly to your credit card clients, the better piece of it. How is that making you think about credit cards? How are you adapting? And as I think about coverage ratios, And your expected loss model, probably being fed with new data, as is everybody's, a little bit worse data. Shouldn't it be resulting in higher coverage ratios for credit cards? Should we think about coverage going forward under this new, probably a little bit worse scenario? Thank you.

So, thanks for your question. I think we have seen increases in individual coverage ratios of the balances that we have. They actually went from about 9.7% to 10.6% and the coverage ratios of credit cards have also gone up a little bit if you take a look in our explanatory notes in our financial statements. I think going forward, we are quite comfortable with the COVID ratios that we have for both personal loans and credit cards. As the 90-plus NPLs begins to stabilize, we think that the overall coverage ratios of the industry and ours will start to converge back to pre-COVID levels. But so far, I think credit card coverage has gone up and overall coverage ratios are above 200%, probably going below 200% once the 90 plus NPL stabilizes.

It's clear. Thank you.

And the next question comes from the line of Rafael Friday at Citibank.

Hi guys, good evening. I have a question about the slide 14. In the slide 14, you show the breakdown of the transaction volume by prepaid cards and credit cards. I was a little surprised by the size of the prepaid cards in the total transaction volumes. I'd like to understand how this translates to the credit card portfolio, if the credit card portfolio has more or less the same breakdown or not. And a second question would be related to the interest bearing loans that there were a significant increase in revolver lines on the total. I would like to understand if this is something that it's by design you are provoking this or it's related to the needs for the clients to use more revolving lines. So understand a little bit about this. Thank you.

Thanks for the question. Let me try to split them in two. So first, I think on slide 14, and I think your second question is probably more related to slide 16. But I think to the first question, what you have seen here is the evolution of the purchase volumes for both credit cards and prepaid cards. You can see that the prepaid cards have outpaced credit cards over the past four or five quarters. And our market share in prepaid plus debit volumes has started to catch up with that of credit cards. I think for credit cards, We have approached the market share of about 12, 12.2% in the third quarter in terms of purchase volumes. I think prepaid cards we used to be slightly below that, but we are quickly catching up. The average purchase volume On prepaid cards, this is likely lower than the average purchase volume of credit cards, and that's one of the reasons why you see on the right-hand side of slide 14 that the newer cohorts start with relatively lower levels. So I think that's the answer to Your first question.

I would like to understand also how this translates for the credit portfolio. So when I look for the credit card portfolio, part of it is related to prepaid cards or it's only credit cards?

No, I think it's a credit card, it's only credit cards. There's no nexus between the purchase volume of prepaid cards and our credit book of credit cards.

Okay, perfect.

Then going to your second question, I think I would draw your attention to slide number 16, and we tried to break down the credit card portfolio in three buckets, as you can see. So you can see the non-IEP, the revolving IP, and the non-revolving IP. And there are two things that I will draw your attention here. So first, I think we have an IDB, interest-bearing balance, as a percentage of the total portfolio that has been below that of the industry, and we have been catching up over time. Now, we have not been catching up over time by increasing the revolving balance. So if you take a look, the revolving balance has remained pretty much stable between 6% and 7%. What has really driven the growth in our IDB has been the increase in the financing portfolio that went from 5% to 10%. And that has been a very intentional addition of products and features that we have added into credit card that basically allows consumers to basically take finances within the credit card, like PIX financing, Boleto financing, and even Bill financing. Those are intentional features that we have successfully launched over the past quarters that have increased the usage of credit cards to our customers. Now, it's important to mention, as I think Youssef highlighted in his opening remarks, that even though those are described as financing features within credit cards, they are accounted for as the credit card family. So there is no transferring of receivables or financing from credit card to personal loans or vice versa.

That's perfect. Thank you, Lago.

And our next question comes from the line of Jamie Friedman at SIG.

Hi. Hi, guys. Jorg, Youssef, David, Lago. So in prior calls, you had disclosed some detail about principality. I don't see it in the slide deck. I may have missed it. I apologize, Lago. But any commentary you might have on principality would be useful.

Sure. I think let me draw your attention to slide 12. So, in slide 12, on the left-hand side, you can see our definition of primary banking relationship customers. So, first, a little bit of definition. How do we define a primary banking relationship customer? So, we define a customer to be our primary banking relationship customer when he or she transfers to new every month more than 50% of his income of his or her post-tax income, right? So when you transfer to us more than 50% of your post-tax income, we consider that you have become our primary banking relationship customers. And two things I will draw your attention in this chart. So first, you can see that across all of the cohorts, starting from January 17 until January 2022, we have become the primary banking relationship of more than 50% of our customers. So we are not again in the business of collecting social security numbers. We are in the business of becoming the primary banking relationship of our customers. The second thing that I would highlight in this chart is that we are getting to 50% primary banking relationship faster and faster. If for the January 17 cohort, it took us about 60 months to get there, now it's taken us less than 12 months to get there. Why is this happening? I think it is happening for two reasons. One exogenous, the other one endogenous. The exogenous one is I think the advent of digital banking has been embraced by more and more Latin American consumers. PIX has been a massive tailwind for the adoption of digital banking in Brazil specifically. The second reason is more endogenous. If you take a look at the chart in the middle of this slide, Thank you very much. Prepaid Cards, Bank Accounts, Investments, Insurance. So that has also been a phenomenal engine to take up the primary banking relationship of our customers.

Okay, thanks for that. And then for my follow-up for Lago or David, in both your prepared remarks, you mentioned the secured lending initiatives. Just wondering how we should be thinking about the impact of margins As you roll out more and more secure lending products. Thank you.

So I think on the secure lending product, there are two things that I would highlight, and specifically on consignado payroll lending and investment-backed loans. First and foremost, The amount of up-front provisioning that we have to constitute and build is lower than unsecured lending. So our payback from an accounting standpoint is faster. The second one is that the secured personal loans, they draw much less capital than the unsecured personal loans, and therefore the risk-adjusted net interest margins are fairly compelling, as well as the return on capital are equally very compelling. It's important, however, to build the right expectations. We are super excited with the launching and the ramp up of the secure lending business throughout 2023. But it's very uncertain how fast this ramp up will happen. So we do believe that most of the originations that we're going to have in 2023 will remain coming from unsecured personal loans. I think the secure personal loans is a ramp up story that will likely get traction, you know, starting in the first half, but more heavily in the second half of the year.

Got it. Thank you, Lago.

And our next question comes from the line of Eugene Simoni at Moffett Netizen.

Guys, good evening. Thank you for this detailed presentation. I wanted to ask a relatively high-level question just on the gross profit margin trajectory tick up this quarter. Could you talk us through a little bit what are the kind of the puts and takes that created this tick up this quarter and how permanent is this trajectory up of the gross profit margin?

Absolutely. So I think this uptick that we had in the gross profit margin has been driven by two things primarily. Number one is the velocity of the growth of the credit portfolio, and number two is the movements in interest rates. So as interest rates go up in the country, as they have gone over the past six, eight months, you actually see a compression in the gross profit margin. and as interest rates stabilize in the country, it opens room for gross profit margins to reconverge back to their original levels of no high 30s, low 40s. Right. The second thing is as we basically accelerate the ramp-up of no secure personal loans, This should allow us to equally improve our credit portfolio and increase our credit portfolio without putting as much pressure to our gross profit margin as the growth of unsecured credit portfolio. However, if and when we do accelerate unsecured personal loans, I think it was one of the questions that I believe Mario and Jorge asked us at the beginning of the call, It will put additional pressure on gross profit margins because we will again have to basically front load the constitution of provisions. So there will be a few puts and takes going forward and we will expect that this will be preserved or expanded mildly over the coming quarters.

Got it. Got it. Very clear. Thank you. And then for my follow-up strategic question, I wanted to ask you guys to comment quickly on your strategy as it relates to crypto. Over the last quarter, there's been a couple of interesting developments. Thank you for joining us.

Sure, absolutely. So, obviously a lot of noise around crypto these days, but for us, it's been mainly a factor around customer engagement and support in providing a product that customers are actively asking about. Over the past 12 to 24 months, we would actually see more outflows going to crypto brokers than to Even traditional investment brokers. And so there is a huge amount of interest even through this crypto winter. And we've been just surprised about the level of adoption in our own crypto platform of surpassing 2 million crypto users getting to 1.3 million active. So we want to be with customers here. And this is an asset that customers are continuously invested behind. That's number one. We've also announced that we're working on our own crypto token related to a potential loyalty angle across our entire ecosystem. We're still in the process of setting it up with Polygon, but I think we ultimately think about this as a really big lever to increase loyalty and engagement across all the different products that we have in our ecosystem and perhaps even go beyond as we start building a marketplace between the 70 million customers we have on one end and the over 2.3 million small businesses customers that we have on the other end, as well as the large big merchants that are Thank you.

And our next question comes from the line of Spot Virtual at Wolf.

Hey guys, good evening and thanks for taking my questions. It's great to see the monthly active rate continue to expand, but just wondering really how we should think about it going forward just as it continues to sort of expand into this above 80% level and the amount of non-active users continues to decrease. Just wondering how you're thinking about the trajectory of your monthly active user rate and If there's any sort of shift in strategy you're pondering to sort of get this ever-shrinking amount of non-active users to transition into monthly actives. Thanks.

Hi, Scott. Thank you for the question. This is Jag Dougal. I'm the Chief Product Officer at NewBank, and I'll take a stab at your great question. A few thoughts. First of all, as Lago noted earlier, we've seen a strong, consistent trajectory now multi-year of improving our monthly active rate as you've seen. So no doubt as we continue to hit higher and higher levels, the rate of growth is going to slow and the difficulty of continuing to tick it up is going to get harder. But we are determined to continue Thank you for joining us. David Velez-Osomo And similarly, we've talked a lot about our primary banking relationship rate, which continues to edge up continuously. So even as our baseline engagement in monthly actives will no doubt hit some level of saturation at some point, we believe we can continue to drive engagement up at deeper and deeper levels, whether it's down mile, whether it's primary banking relationship and really the confluence of the two. But as we have always done, and as Lago and David both pointed out in their presentations, the engagement of our customers and the NPS and the love of our customers of the products we provide is our North Star, and we continue to see if we can push the frontier there. That's been our focus and will continue to be as we go forward.

Great, that's very helpful. And just as a follow-up, sort of similar topic, but when we sort of look at the new geographies in Mexico and Colombia, I know it's early days there, but anything you can sort of share color-wise in terms of what you're seeing with activity rates in those geographies, maybe relative to what you're seeing in Brazil and also relative to what you had seen, you know, sort of in the early days of your launch in Brazil as well?

Absolutely. So we added, just in slide five, a bit of some data of that on the growth. But I would basically, as requested, say that both Mexico and Colombia are beating Brazil at effectively every single metric, from growth rate, virality rate, CAC, RPAC, NPS. It's been really surprising to see both countries operating at a higher level than Brazil, as we frankly thought initially that the Brazil story was going to be hard to beat. You don't really see any other examples globally of a financial services firm growing virally through word of mouth. And so when we thought about taking these two next in Colombia, we were not expecting that. We think partly what's happening is that there is actually a better product market fit in these countries. Financial services penetration is lower. And so in Mexico, for example, we have a net promoter score of 94, which is really probably the highest NPS of any consumer product in any category globally. So that's up. That just shows the product market fits we see in this market. And just the lack of access to financial services ultimately is a very, very big pain. So we're very encouraged. by the example of these two countries, still a lot to prove. We still need to launch Shavings. We still need to really start doing the entire multi-product playbook. But so far, I feel very, very good about the track record in both countries.

Great. Very helpful. Thanks, guys. Thank you.

And our last question comes from the line of Alex Margraf at KeyBank.

Hi, all. Thanks for taking the question. To start, maybe just to continue on that last thought, David, I think you had mentioned some rough timing of the launch of the savings and checking products and your other geos. Any more specifics you can provide to kind of indicate where you are in the process of launching those and maybe what steps are left or what you're waiting on with respect to those offerings?

Sure. The bottlenecks have been a lot of the regulatory permissions. We acquired a license in Mexico and are in the process of applying for a Greenfield license in Colombia. In Mexico, we're very close. I expect that we will be testing this product with customers already in Q4. and accelerating ramp up if everything goes according to plan with regulators through 2023. Colombia should also be an MVP testing customers in 2023, but probably towards the second half of next year. But definitely the delivery of savings for both countries should be happening next year at a larger and larger scale.

Super helpful, and just a quick follow-up on, I think it's slide 12, the products per active customer per cohort. Can you just describe the kind of credit versus non-credit mix as you look at some of those earlier cohorts?

Yeah, so I think the first high penetration product is credit card, which is more of a credit one. But all of the other products, with the exception of personal loans, which was launched over the past two years only, are non-credit products. So the most relevant products that constitute and seal the cross-sell that you see on the chart in the middle of slide 12 are non-credits, such as Nuconta, the bank account, investments, insurance, marketplace, PICS. Those are all high-engagement, non-consumer credit products.

Thank you all.

And this concludes our conference call today. Thank you for attending.