Nu Holdings Ltd.

Good afternoon, ladies and gentlemen. Welcome to New Holdings Conference call to discuss the results for the second quarter of 2024. A slide presentation accompanies today's webcast, which is available on New's 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, 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 a 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. Jorg Friedemann, Investor Relations Officer at New Holdings. Mr. Friedemann, you may proceed.

Thank you very much, Operator, and thank you all for joining our earnings call today. If you have not seen our earnest release, a copy is posted in the Results Center section of our Investor Relations website. With me on today's call are Davi Veles, our Founder, Chief Executive Officer and Chairman, Youssef Larache, our President and Chief Operating Officer, Guilherme 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. Reconciliations of our known 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 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 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. Today, our founder, chairman and CEO, Davi Velas, will discuss the main highlights of our second quarter, 2024. Subsequently, Guilherme Lago, our CFO, and Youssef Larach, 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.

Thank you, Jorg. Good evening, everyone, and thank you again for being with us today. During Q2 2024, our business model, anchored in three 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 million customers by the end of the quarter, a 60% increase from the 65 million recorded just two years ago. Customer growth in Brazil remains outstanding, with an average of 1.2 million new customers monthly, bringing the total to 95.5 million at the end of the quarter. Meanwhile, Mexico also experienced strong growth with 1.2 million net ads in the quarter, culminating in 7.8 million customers. This success validates our strategy of increasing deposit yields in Mexico, boosting our momentum and solidifying NU as the leading digital financial platform in Mexico. Additionally, Colombia surpassed the 1 million customer mark, ending the quarter with almost 1.3 million customers following the successful launch of the Cuenta product. Now let's go to some financial highlights. Despite Latin currencies depreciating against the US dollar during the quarter, our revenue surged to $2.8 billion 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 $1.4 billion, marking an 88% year-over-year growth with a gross margin of 47.7%. Net income also saw significant growth, reaching $487 million, resulting in a record annualized return of equity of 28%, one of the highest in the industry. Additionally, our adjusted net income hit $563 million, 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. 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 model's inner and operational strengths are driving significant profitability. In the second quarter, new holdings achieved an adjusted net income of $563 million, with an adjusted analyzed return on equity of 33%, despite maintaining a robust level of excess capital of $2.4 billion at the holding level, and with two subsidiaries in Mexico and Colombia yet to be profitable. Now, I'd like to pass the floor to our CFO, Guillermo Lago, who will guide you through our financial numbers. Over to you, Lago.

Thank you, Davi, and good evening, everyone. As Davi mentioned, we deliver 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 second 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 second quarter of 2024, our customer base grew at a strong pace with 5.2 million new customers joining our platform. By the end of the quarter, our total customer count reached 104.5 million, 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 one year ago. This marks the 11th consecutive increase in this metric, demonstrating our proficiency and consistently offer of compelling value proposition to our customers in Brazil, Mexico and Colombia. Turning our attention to revenue expansion. The first chart highlights the new 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. 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 achieve increasingly positive results. While our monthly RPAC contracted to $11.2 this quarter compared to $11.4 last quarter, on an FX-neutral basis, RPAC 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 effects-neutral basis, it grew 6% sequentially and a robust 30% year-over-year, up from $9.3 just one year ago. We continue to see a clear path to further increase RPAC towards its full potential. The second chart highlights that our revenues hit a new record high this quarter, reaching $2.8 billion, an increase of 65% year over year. Just a year ago, our revenues stood at $1.8 billion. This impressive growth was driven by two things, the increase in active customers combined with higher RPEC 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 $18.9 billion. 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 $14.3 billion. 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 effects-neutral basis, reaching $4.6 billion. Lending growth continues to outpace credit cards and now represents 24% of the total portfolio. 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 installments 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 Boleto 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. 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 R$13 billion this quarter, a 78% year-over-year increase. Unsecured lending remains the primary driver of growth, reaching R$11.2 billion in originations this quarter. This highlights our ability to extend credit availability to those who previously lacked access to this product. Our secure lending originations reached R$1.8 billion during the second quarter of 2024, or 14% of total lending originations. During the second half of the year, we anticipate a gradual increase in the pace of originations of secure lending, as new features such as portability top-ups and refinancings are introduced. We have also signed six new collateral agreements to increase eligibility in TAM, including parts of the armed forces and some of the major Brazilian states and municipalities. The integrations of these new entities are ongoing, and once completed, we will release the product for newly eligible customers, thus helping us further grow Originations. In fact, during the month of July 2024, total originations exceeded R$ 5.2 billion, of which R$ 750 million in secure lending alone. Now, let's review the progress on the funding front. Although deposits in our Brazilian business contracted in nominal dollars to $21.7 billion, they expanded 10% quarter-over-quarter on FX-neutral terms. Our total deposit base for the quarter increased to $25.2 billion, representing a 64% year-over-year growth, primarily driven by significant expansion in Mexico through Quentinu. By the end of the second quarter of 2024, we surpassed over $3 billion in deposits in Mexico, more than tripling in just two quarters. The strong growth in Mexico represents a significant milestone in building one of the strongest local currency retail deposits franchise in Latin America. Another noteworthy achievement was the launch of New Columbia's checking account product in the second quarter of 2024, which attracted over $220 million 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 $1.7 billion. 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 second quarter of 2024, we deliver a net interest margin of 19.8%, an increase of 30 basis points from last quarter and 150 basis points from one 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. 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 proactive customer at $0.90. On an effects-neutral basis, this figure has grown 19% year-over-year when adjusted by one-offs related to networks reimbursements in Mexico during the second quarter of 2023. In the same period, our RPAC expanded by 30%. This showcases the strong operating leverage of our business model. Our gross profit reached a new quarterly high of approximately $1.4 billion, an 88% year-over-year increase. Our annualized gross margins has rebounded to 2023 levels, despite higher costs 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%. A core element of our strategy is achieving operational leverage. Our efficiency ratio stood at 32% during the second quarter of 2024, an improvement of 10 basis points from the first quarter 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 one, our cost to acquire was stable at $7. This figure continues to be one of the lowest among consumer fintechs and banks globally. Number two, as expected, our cost to serve remains exceptionally low, below $1 and approximately 85% lower than those of incumbent banks. This position is new as one of the most efficient financial services companies worldwide. Number three, 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 four, 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 deliver another quarter of strong profitability, with net income reaching $487 million, representing an increase of 134% compared to the previous year. These results underscore the effectiveness of our strategy and business model. Additionally, adjusted net income for this quarter reached $563 million, growing 131% versus one year ago. While we are very encouraged by the second 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.

Thank you, Ligo, and good evening, everyone. Let's start by having a look at our NPL trends. First, following an anticipated seasonal rise in NPL 15 to 90 in the first quarter of 2024, which is typical for early stage delinquencies, it has decreased to 4.5% this quarter, slightly more than historical seasonality. Second, 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. 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 actively pursue growth in those areas. As we will show in the next few slides, this 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. 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 with 15 to 90 and in Q2 with 90 plus. 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 million this quarter, a decrease of only 2% on a Forex-neutral basis. This slight drop is the result of two 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 second quarter, 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. David, over to you.

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 one of Brazil's most beloved and trusted brands with recognition rapidly growing in Mexico and Colombia. Scale or 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. Our vast data, supported by a cutting-edge infrastructure, forms the foundation of our advanced customer segmentation and credit underwriting capabilities. Talent. We boast one of the world's leading technology and product teams, a distinction unmatched by any other company in Latin America. Culture. News values, including customer centricity and operational excellence, are deeply ingrained in every team member and driver of 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, and our enduring brand that has galvanized and empowered almost 105 million 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. 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 our 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. 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 Hyperplane team on board and see them as a key part of our AI strategy in the foreseeable future. The powerful trio of trust, exceptional service and competitive pricing also underscores news continuing 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. The growth of our deposit base in Mexico and now in Colombia is a testament to this principle. In Mexico, we've attracted $3.3 billion in retail deposits in just over a year since the launch of our checking account product. In Colombia, our Quenta product, launched this quarter, has already garnered over $220 million in new deposits. While other players are pursuing even more aggressive pricing strategies, paying higher yields in their savings account, since launch, Nu 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 them the highest yield and are coming to Nubank because of our product, our brand, and ultimately the entire user experience that we are providing. With that, we're now ready to address your questions. Thank you very much.

Please limit yourself to one question and a follow-up. If you have further questions, please re-enter the queue. You may submit online questions at any time today using the Q&A box on the webcast. I would like to turn the call over to Mr. Jörg Friedemann, Investor Relations Officer.

Thank you, operator. And our first question comes from the line of Jorge Cude, Morgan Stanley.

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

Hi, Jorge. This is Lago. 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? So today we are operating only with two collateral agreements, which are INSS and CIAPI. INSS for... the pension years and the retirees and CIP for the federal public servants. The two collateral agreements combined, they account for approximately 50% of the target market that we have in Brazil. We have already signed six 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%. And even more is expected to come in 2025. So that's one dimension of expansion. However, the second dimension of expansion is the launch of new products and features. which are still far from being complete. You did point out that we have already launched portability and we did so progressively throughout the second quarter 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 digital players account for more than 50% of the airport of LA. So we are seeing kind of a progressive ramp up to the public payroll loans. 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 to 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 FGTS. And we expect that growth will pick up in the coming quarters.

Thank you, Lago. That was very clear.

And the second question comes from the line of Pedro Leduque from Itaúto.

Hi, everybody. Thank you so much for the question. I would like to pick your brains a little bit on the provision expense side for bad credit. Here, we have seen that it increased a lot during 1Q, and back then we discussed how it was related for greater risk-taking, well-planned, conscious move, and that had brought up those provision expenses. And now in the second quarter, this one affects neutral you're sort of flat, lowering your cost of risk effectively. So I want to get your thoughts around this a little bit, probably go around how those recently originated portfolios have behaved, how you're seeing risk in the coming origination harvests, just to get a sense on the provision side. So that's that. Thank you again.

Hi, Pedro. This is Yusuf. 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. 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, per IFRS 9. And so what's happened this quarter is the credit quality, 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. You know, 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, 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.

Thank you.

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

Hi, guys. Good afternoon. Let me stay on this topic of the provisions because I think that was a big surprise this quarter. You show right on, I think, slide 11 or 12 that your originations went up. So you are originating more credit 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 the NPLs going up. So, yeah, that's my question. If you can give us a little bit more color on why, you know, even if origination is going up, revisions are going down.

Yeah, Mario, thanks for the question, Yusuf, 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, you know, 300 million or so. 400 million of that was growth. So the impact of growth is fully reflected there. And then we had 110 million 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.

Okay, and Yousef, you mentioned that the NPLs continue to behave according to your expectations, but what are your expectations going forward for NPLs? Yeah, 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. There's several dynamics at play. First of all, we continue to increase the relevance and the mix of lending, you know, personal loans, both secure and unsecured as a percentage of total receivables. 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, you know, 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. 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 growth. the NPV of that full customer relationship over its lifetime. including future cross-sell opportunities, including principality increases, et cetera, 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. You can also just think of it through the lens of In Brazil, for example, we have about 60% of the total adult population. When you look at the proportion of customers who have NewBank as their primary banking provider, 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 digits, secured loans even lower in the small single digit range. And so we still see a lot of opportunity to grow those market shares on the basis of the customer base we already have.

Okay, so then to summarize, basically you're saying you expect NBLs 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 expecting or should we go back to the 20 to 30 basis points per quarter?

Right. So in terms of what we saw this quarter, the 70 basis points on 90 plus that you point out, the way I would think about it is if you go back one 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. you know, into the next bucket of delinquency. So 90 basis points increase in 15 to 90 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. So I think that's just more than anything seasonality.

Okay. Thank you very much.

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

Hello. Thanks very much for taking the question. We've spoken in the past about moving up market initiatives like Ultravioleta. But the message here feels almost one of moving down market. taking on more risk if you look at the purchase volumes um analysis by cohort that you show it it seems to point to maybe lower purchase volumes um for newer customers so what is the thinking on the the shift up market is is that still going to come is that push back what what's happening there so joff i think uh

I'll try to try and meet and let my colleagues add as well. But no, 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 a tremendous opportunity in consumer credit in Brazil as it accounts for a fairly relevant share. 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. 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 acquired high income customers over the past now two years. If you define high income as a customer in Brazil who earns more than 12,000 reais, 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 ultraviolet which is our no higher tier has increased in steel from a relatively low base, but we are fairly encouraged on our drive to go into high income. And we think that is fairly compatible and addictive to what we are doing in my thing.

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

So our overall principality is about 60%. 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 principality and share of wallets within the high income customers. And we can, as we, as we track that, or PBR, has increased quarter after quarter within the higher income segments in Brazil.

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

And our next question comes from the line of Yudi Fernandes, JP Morgan.

JP Morgan, congrats everybody for the quarter. I have a question. I think it was Lago mentioning in the beginning of the call that he expects interesting 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? Because you continue to make good returns on fixed financing, boletos, and credit cards, as you always mention. This is a good risk-adjusted product. So basically, you know, confirming that we should see some stabilization on that EIA for credit cards. And if you ask, why could we see this stabilization? Thank you, guys.

So, Yuri, thanks for the question. And I think you were 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 first extremely hard to draw high condition outlooks for innovative products. So this is an innovation that we like to believe that we helped to introduce in Brazil. And you're absolutely right that we are very pleased with the unit economics of this product with the customer adoption. We just feel that the adoption curve that we have experienced over the past four 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.

No, super clear. So 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. That's correct. Perfect. Thank you, Lago. Thanks, Yuri.

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

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 MPLs 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. 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?

Thanks for the question. So, you know, as a, as a reminder, we, we we, thinking about macro and credit outlook, we try to refrain from 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, et cetera. And so we feel like our philosophy continues to be one of demanding a lot of resilience from whatever growth we underwrite. We always take the stance that the future will be worse than the past, and whatever we underwrite needs to be able to withstand a significant amount of deterioration. 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, you know, when you back out the expansions and you look at 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.

Okay, no, that's fair. Thanks, Yusuf, for that. And maybe a follow up. The risk adjusted NIM, right, slide 24, you know, 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?

Yeah, good question. So, you know, 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, you know, 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 in NPS. 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.

Perfect. Thanks, Yusuf.

The one thing that I would add to what Yusuf mentioned is that I would also point out that we have a gigantic opportunity to continue to optimize our balance sheet. 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. That will just be an additional tailwind to this trend that Yousef was alluding to.

Yeah, very clear. Thank you, Lago.

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

Hi, everyone. I have a question regarding open banking. We have been seeing some important changes recently, such as the removal of the requirement for clients to grant access for a limited period. As far as I understand as well, we've been seeing also important discussions about the granularity of the data that needs to be shared, whether NU 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. I think that this has been an issue for you 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 us know if these changes could be material for new. Thanks.

Hi, Osman. 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 UK. 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 liability. 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 concepts 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 one third of all of the constants in Brazil. We ended the second quarter of 2024 with about 50 million customers, 50 million constants. 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 change in the next six to eight 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 credit assets, both unsecured and secure. to also exchange liabilities, i.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 the Brazilian Central Bank has been fostering among the industry.

Rosamond and David here. I would just add that the agenda is very ambitious in 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 bit challenging. So there's been a couple of phases that have been harder for a lot of players to really integrate. So there's been a couple of bumps in the road, I think, in terms of the timeline and how it's been executed. 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 in competition in financial services that ultimately consumers, society, government, and regulators are very much aligned in making it work. So While it's been a bit of a bumpy road or bumpier, I think that people expected that there is very clear line of sight into creating pretty significant changes in the Brazilian market.

Great. Thanks a lot, Lago and Davi.

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 next. Can you hear me? Yes. Can you hear me?

Okay. Sorry, guys. I have one question about Nu 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 NU as S1 and not S3 as it is today?

Thiago, hi, this is Lago. Those are great questions. 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 allows 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.e., we can take deposits, we can issue credit cards, 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 cap or in terms of no reporting requirements? The answer is zero additional disclosure required. So we don't see any material change if and when we were to pursue this path in Brazil. 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 zero, no implication whatsoever. We may have to do certain additional reports, analysis, and disclosure requirements that may increase marginally our compliance cost, but those are completely immaterial given our overall regulation. Now, more importantly than that, 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 challenges, opportunities, and concerns that our growth

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

Perfect. Can you hear me?

Yes.

Yes. Yes. Perfect. Thank you. Thank you for the opportunity. Just wanted to ask a bit on Mexico. The information we saw from your information in 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 3.3 billion in deposits, which is impressive. How is the credit part of that deployment going? Any news from the regulator? Any more color on Mexico would be greatly appreciated. Thank you.

Sure. Thank you for the question. So we're very excited with what we're seeing in Mexico. The deposit 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 and their savings. The average cost of funding in banks in Mexico is 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 behaviors, they 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. The $3.3 billion in deposits 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 sheets 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 re-accelerated credit over the last quarter, and we think that that continues to grow. We're close to 8 million customers in Mexico, which really positions us already as one of the leading financial institutions in Mexico. And as you know, we've asked for a banking license. We apply, uh, last year, we've received a couple of back and forth from the regulator. Everything else so far is going as expected. And, uh, we hopefully that that process continues to go well and we can get that banking license, uh, you know, over the next, over the next month or so. So, um, so, so far we feel very good with the opportunity market, very large market, 120 million people, higher GDP per capita than Brazil. Only 12% credit card penetration that hasn't really moved in over three 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 invest heavily in growth in this market.

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?

The way we do credit is a dynamic decision. It literally is a weekly decision. We look at data actively, really daily data activity. We look at the market, we see a performance of our different cohorts, and we accelerate on one end or we decelerate on another 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 launched a new model, we integrated a new data source, we're testing a new algorithm. And so in Mexico, that's what's happening. I think right now, if you look at some of the numbers on Q2, we We're going through a bit of an acceleration phase. We see good opportunities to growth. But if we might have paused a bit, if we see something that works in a certain area, we might accelerate a little bit more if we get more comfortable. So these are very much dynamic decisions. But in general, we see a market that is really wide open. And the methodology that we've really perfected in – or we're in the process of perfecting in Brazil around low growth – beginning with the unbanked population with low credit limits, and low and grow it, get to know the customer for the first 15, 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, a market that has little access to credit. So we're very optimistic about that opportunity.

And just to add a little bit more color on the credit quality issue, trends we've been seeing. When you look at the trajectory since we introduced Quenta 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. 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. And so you add that to the fact that the data we get on the Quinta actually helps us underwrite better. You add that to the fact that we now have more experience in the market, more test results, more 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 you know, credit quality indicators, either the ones we disclosed as SOFIPO or otherwise in Mexico, there's significant improvement year over year. And I would say, you know, credit quality has been lately behaving better than our own expectations. So as David said, we continue to be very optimistic, very excited about prospects for growth in Mexico.

Thank you, Tim.

And our next question comes from the line of Craig Mortar from FT Partners.

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 non-traditional competition, say from like MercadoLibre, who's being aggressive in the consumer finance space. Thanks.

Okay, 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 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. Historically, the IBB interest-bearing balance as a percentage of the total receivables of credit cards in Brazil has been below those of the other Latin 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, IBB 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 without. 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

Okay, so we are now concluding today's call. On behalf of Novodis and of our investor relations team, I want to thank you very much for your time and participation in our earnest 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. So please do not hesitate to reach out to our team if you have any further questions. Thank you and have a good night.

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